美國再保險集團 (RGA) 2010 Q1 法說會逐字稿

Good day and welcome to the Reinsurance Group of America first quarter 2010 conference call.

Today's call is being recorded.

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

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

Jack Lay.

Please go ahead, Mr.

Lay.

Okay.

Thank you, and good morning to everyone joining us for RGA's first quarter 2010 conference call.

Greig Woodring will briefly comment on our results we released yesterday, and then we will respond to questions from our participants.

I will turn the call over to Greig for a quick -- or after a quick reminder related to forward-looking information and our use of non-GAAP financial measures.

We will make certain statements and discuss certain subjects during the call that will contain forward-looking information, including among other things, investment performance, statements relating to projections of revenue or earnings, and future 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 the 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 the various business segments.

With that, I will turn the call over to Greig.

Good morning.

Thank you for joining us.

I will provide some brief comments on our first quarter results, and then we'll open the line for your questions.

Our first quarter results are mixed.

We continue to shore up on the balance sheet as our investment portfolio continued to increase in value and asset impairments were limited.

The capital base increased to its highest level yet.

Our first quarter consolidated operating income totaled $93 million or $1.25 per diluted share, significant increases on both counts over a difficult 1Q '09 but below what we expected.

The primary source of our current period shortfall was adverse mortality experienced in the US traditional market.

I will address specific aspects of this business in a moment.

Foreign currency fluctuations added $0.08 per share compared to first quarter '09, and an increase in the Company's tax provision, took away $0.07 per share.

We expect the tax provision increase to reverse later in the year.

Consolidated net income increased to $122.4 million or $1.64.

Again, significantly surpassing a difficult first quarter '09.

Recall that first quarter '09 reflected substantial realized and unrealized losses from investments and derivatives.

Consolidated net premiums, including $74 million from the ReliaStar group Insurance acquisition, were at expected levels and totaled $1.6 billion during the quarter, an increase of 13%on an original currency basis and 21% on a reported US dollar basis over first quarter '09.

Net investment income was strong compared to 1Q '09, and our unrealized gain position continued to rise along with the overall strength of our investment portfolio.

Likewise, our capital and liquidity positions are at all-time highs.

Impairment losses reflected in income were just $6.3 million this quarter, down substantially from $41.5 million in last year's first quarter.

Our traditional US business reported pretax operating income of $61 million, compared to $72.6 million in the first quarter of '09.

Both periods reflected higher than expected claims, as did first quarter of '08.

Premiums were up 15% for the quarter, including the ReliaStar business and 6% without it.

2009, the US traditional business generated a 13% return.

Based upon models of our issue year cohorts we expect that to fall a bit as -- this year and bottom out as the business begins a slow rise upward.

For 2010, we expect to see low double digits returns on US mortality business and returns around 13% per RGA as a whole.

This quarter, much like the first quarter of the past couple of years, continued -- contained a seasonality effect of high claims flows with our lowest quarterly premium flows.

Although better than the first quarter of the past two years, this quarter's claims were 1% to 2% higher than expected in the US.

We continually reassess mortality trends, which has implications for pricing of new business and for long-term profitability.

Our current pricing always takes into account the most current information and targets the long-term return of at least 13%.

Our US asset intensive business reported another strong quarter as the broader capital markets continued its rebound.

$16.5 million of pretax operating income this quarter was just ahead of the expected run rate of $15 million to $16 million per quarter.

Turning to Canada, pretax operating income for the quarter totaled $16 million, compared to $17.8 million last year, and decrease was due to somewhat higher than expected claims experience in the current period.

Premiums were strong this quarter, increasing 27% on a Canadian dollar basis.

We continue to see a strong flow of credit life business.

In total, our North American operations included roughly $20 million of higher than expected claims this quarter.

This equates to about 2% of total claims, which is not an unusual fluctuation.

Our international operations again reported solid results this quarter.

Asia Pacific reported a strong pretax operating result of $26.6 million, compared to $7.1 million in the prior year period, due to better than expected claims, primarily in Australia and Hong Kong.

Original currency net premiums were slightly lower than last year, but higher by 17% in translated US dollars.

As mentioned last quarter, growth rates in South Korea and Japan will be lower this year as a result of several large treaties reaching the end of their life cycles, but we expect growth rates to pick back up in these markets in 2011.

Our Europe and South Africa segment reported pretax operating income of $10.2 million for the current quarter, versus $8.1 million for last year.

Original currency net premiums increased 14%, and on a US dollar basis premiums were up 26%.

Our UK operations reported strong results due to favorable claims experience, offset in part by adverse claims experience in South Africa.

We expect European marketplace to be a strong source of near-term growth for our international operations.

In summary, we off to a slow start on the earnings front, much like each of the past two years.

We generated a consolidated annualized operating in equity in excess 10% for the quarter and 13% over the past 12 months despite the sub par mortality in this quarter.

We will continue to analyze US claims experience, the largest factor in our results, and believe we have a good understanding of what to expect going forward.

Our newly acquired group reinsurance business is off to a solid start.

We are well capitalized with a solid balance sheet, which will allow us to take advantage of opportunities of M&A activity picks up on the direct side.

We appreciate your support and interest in RGA and we'll now open up for questions.

Thank you.

(Operator instructions.) And our first question comes from Jeff Schuman with KBW.

Good morning.

Greig, I was wondering if you could help us to a little bit better understand what you are trying to tell us about the US traditional business.

Both in the press release and in your comments, you have talked about ongoing analysis and talked about the analysis informing your pricing and so forth.

But I guess it's not clear whether you are telling us that recent analysis of these quarters results is are suggesting that some of the business isn't earning as well as had been expected previously, or whether things are still tracking pretty much as expected, but just once again we have just seen some quarterly volatility.

In other words, there something other than the usual volatility that we should be aware of here?

Yes, Jeff, we know which years of our business have the tightest margins, which have the best margins.

As business moves forward, each of those years contributes to the current year's earnings in a different weighting, if you will.

And so we know how the progression of returns should go.

And it moves very -- in a stately fashion through the course of time.

We -- so we have been expecting that, based on our models, that returns would be marginally marching down, because of the most competitive years from '98 to 2003 having a bigger impact, and will bottom out about last year.

Last year we earned 13% on that business.

We expect to come reasonably close to that this year.

Maybe a little south of it.

And then marginally increase each year going forward.

This year, like the last couple of years, we've had extra claims in the first quarter.

We have a high degree of confidence in our annual mortality rate assumptions that we expect for the year.

We tend to pick up a little bit of seasonality in the winter months in both the fourth quarter and the first quarter.

That's unfortunately been the pattern in the last couple of years as well, and you notice that last year and the year before, frankly, we started off this way.

Actually a little worse in each of those two years.

And rebounded by the end of the year in the individual markets.

So in other words, this is something that we have unfortunately come to expect a bit of and anticipate a bit in our quarterly forecasts.

Okay.

So to put it another way, you don't see the business fundamentally different than you did when you set the guidance range for 2010?

Is that correct?

That's right.

That's right.

Okay.

Okay.

And once again, who knows what kind of random variations we'll get, but there's nothing to preclude the possibility at this point that you could see recovery in this calendar year as you have in the last couple of calendar years.

Is that fair?

Well, that's certainly what we hope.

You can always have a fluctuation that doesn't recover in a given year.

Sure.

But we don't expect that this is anything other than the same sort of event we saw in 2008 and 2007.

Now, there is no law that says the first quarter has to be bad, because we have had good first quarters, but it seems to be more often than not, our most difficult quarter.

Okay.

And then one other item, if I may.

If we look in the corporate segment, the interest expense was significantly lower this quarter, and it wasn't clear to me why that was the case.

Why was that lower?

Yes, part of that is the short-term rates, but there's also several million dollars of interest -- this is Jack, by the way -- of interest expense associated with FIN 48, that is with our broader tax provision.

So I don't have the exact number at my fingertips, but that did drive down interest expense several million dollars.

Okay.

But that would -- this would not be sort of the run rate; is that correct?

That's right.

That's right.

Okay.

Fair enough.

Thanks, guys.

Our next question comes from Mark Finkelstein with Macquarie.

Hi, good morning.

Okay.

I think I understand the comments regarding the '98 to '03 vintage years.

I guess I would just ask the question, is -- are you still comfortable with the guidance range that you put out at the beginning of the year?

Mark, this is Jack.

I -- probably this is a good point to remind everybody that we don't update guidance.

We typically at the beginning of the year issue guidance, and then it is what it is.

I think I would echo Greig's comments that we started the last couple of years with a difficult first quarter, and essentially came in right at or very close to guidance.

So you can draw your own conclusion there, but we don't want to get in the position of either affirming or not affirming guidance.

Okay.

And then, I mean was there anything specific in the nature of the claims?

Was it larger claims?

I believe that was kind of an issue over the last several of quarters.

Or anything else that you saw in the numbers?

Well, there was a fair component of large claims.

Pretty much like we've seen in the last period of time, it's not -- it was not unusual.

We did see more deaths of people over age 80 than we would have expected in terms of numbers.

We don't have cause of death, so we don't know whether those are flu-related or seasonal-type claims, but we will find that out as time goes along.

Okay.

And then finally, can you just talk about I guess capital a little bit and any deployment opportunities?

Yes, this is Jack.

We still have some degree of redundant capital, in excess of $0.5 billion currently.

That is certainly available to deploy in terms of block transactions or anything like that, and there are those opportunities out there.

It's always hard to predict the extent to which and the timing of any such deployments.

So that's probably the best I can do there.

Okay.

Thank you.

And we'll go next to John Nadel with Sterne Agee.

Hey, good morning, everybody.

I was hoping we could actually get a little bit more into Mark's second question there on capital and deployment.

Last couple of quarters, Greig, you guys have talked about an active pipeline, but obviously difficulty in predicting what might occur.

Can you give us an update on where you see the opportunities?

Is it still more heavily weighted to financial reinsurance?

Is it -- I think you mentioned in your opening remarks some M&A, maybe on the primary side, where you can have maybe -- play a potential role.

Can you give us a little bit more detail there?

Yes, John.

We're a little leery of trying to say that there's a lot of things in the pipeline that are real promising.

I can say we are very busy right now, but we have, as Jack said, no idea what's going to happen and when.

But there are a lot of things going on in the M&A front, mostly smaller blocks, but we have a very active pricing department, both internationally and domestically at this stage.

They are looking at a lot of different things, and we will see how this year pans out.

But we are very happy with the level of activity at this point.

We'd like to see that translated into some transactions during the course of year -- the year.

Those are somewhat hard to predict.

We saw a lot of financial reinsurance, as you mentioned, towards the end of last year.

We're not seeing a lot right now because it's typical that those things have a closing date typically towards year-end, and we will expect the same level of activity, if not more, actually this year.

So then just last comment, or last question.

I think last quarter you guys had indicated that by the end of 2010, if some of these opportunities don't really pan out, you'll start to consider returning some of that capital to shareholders, either through increased dividend or buyback or both.

Obviously with the weakness in the results this quarter, your stock is already, in my view anyway, I don't necessarily need you to comment, attractive on a relative basis versus a lot of life insurers.

Does that play into your mind-set at all as it relates to how much longer you will wait for something to develop?

John, this is Jack.

We -- as you might expect, we continually assess the capital situation, and our potential opportunities to deploy that capital.

And I think we did make the comment previously, and this does reflect our thinking, that if we go through another year and for any number of reasons don't execute on any meaningful number of call them block opportunities, then at some point, we would think very hard about returning capital in some way if we didn't have, in our view, ways to deploy it at appropriate return.

So that's an ongoing deliberation, and it's influenced by the rate at which we are deploying just in general operations that capital and our views on opportunities going forward in terms of block transactions.

Okay, thanks.

Thank you.

Our intent and expectation is that we will deploy the capital, but if we have to take stock and reassess at some point, we will do so.

Thank you.

And from JPMorgan, we will go next to Jimmy Bhullar.

Hi, thank you.

Good morning.

I had a few questions.

First, on capital, could you quantify how much you believe you have to deploy towards either block transactions or share buybacks if you eventually pursue them?

If not specific, at least give us a range?

And then secondly, on -- I realize we are only one month into the second quarter, but are you able to comment on how the second quarter is progressing in terms of mortality.

And then finally on taxes, if Congress does extend the active financing regulation, I think the charges you took in the first quarter should -- or the higher taxes should reverse.

But if they don't, does the amount in the first quarter reflect the full-year impact already, or would the taxes be elevated through the year then?

Okay, Jimmy.

Let me start with that last one on taxes.

We wouldn't expect a recurrence quarter to quarter, if in fact Congress does not act, but we have been advised to expect Congress to act.

In fact, in May, I think there's a break -- end of May -- and the expectation is that they will act before then.

Of course, there's no guarantees, but that's our expectation.

I think you had asked about the range of excess capital.

Yes.

It's between $500 million and $600 million right now, and we would never want to run that down so we have literally no excess capital, but, I mean, you can think of the vast majority of that as available for deployment if the opportunities come up.

Okay.

And then any comments on mortality so far this quarter?

Well, we --

Is it too early.

Yes, we know what mortality is, Jimmy, through today, actually, or through yesterday, but we don't like to comment because it's kind of misleading through a short period like that.

Okay.

Thank you.

(Operator Instructions.) And we'll go next to Steven Schwartz with Raymond James & Associates.

Hey, good morning, everybody.

I wanted to follow up and ask a couple of my own.

Jack, I know that you don't like to update your guidance, but I think you kind of did, so I'd like to comment -- I would like you to comment on that.

Your original -- what you said at the end of the fourth quarter is we expect ROE to stay between 13% and 14%, and that would have been like a 630 to 690 time of number on beginning equity.

And the statement now is towards that low end, towards 13% is what you are staying at the quarter.

The way I read that, that would seem to imply that you kind of expect the next three quarters to roll out as you expected at the beginning of the year, and then whether you make up the first quarter or not remains to be seen.

Is that an accurate way of looking at this?

Steven, this is Jack.

That may be implying a level of precision that maybe doesn't exist, as we look forward.

So I wouldn't -- I'm not sure I would put a fine point on 13% versus 13.5% sort of midpoint.

Okay.

I guess maybe another way to say it is in your minds we kind of lump all of those together, and that's really essentially the same thing.

Okay.

Okay.

And if I can go on to some of my own then.

Could you talk -- first, I want to talk about Europe and South Africa.

That's an area that you targeted for near-term growth, offsetting what's going on in Asia, but there was a decline in new business production there year over year.

I was wondering if you could comment on that.

I didn't know if you had given any number for the adverse mortality in Canada, and maybe you can give us a sense of the seasonality.

Is it -- are you up half a point over average in the first and fourth quarters and down half a point versus average in the second and the third quarters, something like that?

Yes, I would say the first and fourth quarters might be up, typically up between 1% and 2%.

1% and 2%?

Yes.

Okay.

In terms of Europe, it's not so much -- maybe a way to put it, rather than targeting that for growth is that our position and the markets are allowing us to grow at a nice rate, and we see opportunities there.

I wouldn't get too concerned about quarterly production numbers, because they tend to reflect reported numbers, and there's a little bit of noise in those numbers all the time.

The fact of the matter is, I think our premiums are up nicely in Europe and South Africa and that reflects the annualized growth quarter -- or year over year in that business.

And that's probably a better way to focus is year over year growth, rather than one quarter's production numbers at a time.

The other one, the Canadian mortality, I'll let you --

Maybe I can handle that.

I think -- we commented that roughly in the North American operations we sustained $20 million or so, best estimate, of additional claims flow.

I would characterize that the Canadian portion of that is around $8 million.

Okay.

That's good.

I will get back if line.

Thanks, guys.

And we'll go next to Eric Berg with Barclays Capital.

Hi.

This is [Sadat Khatkhatay].

I work with Eric Berg.

I had a couple of questions.

The first one being on the US tradition mortality business.

Just to get my understanding correct, Greig, you mentioned in the release that you had competitively priced businesses acting as a damper on the returns for this particular business.

Am I correct to say that this is only '98 to 2003 [because business] as you mentioned earlier, and that this dampening will continue through 2010.

Yes, that business in -- it affects every year from now until, oh, probably, 30, 40 years from now.

If you remember, the discussions we had in those years -- you may not have been around.

I don't know.

But the -- we were always talking about how competitive the market place was.

We were talking about market shares for us of 12%, 13% in those days, compared to 20%, 22% these days.

We were struggling in that market to capture 5% and 10% shares at times of reinsurance treaties.

So it was very competitive, difficult time.

We have known that all along.

It's been part of our '06, '07, '05, '04 -- all of those years have been part of their history as well.

And so it will continue to play out, and that's the way it goes.

We don't have, like the property casualty industry, big ups and downs in claims, where you swing from positive results to negative results.

But you have periods of time where you are more competitive, and periods of time where you are less competitive and margins are a little bit wider.

So we blend all of those together in each year's experience.

Okay.

Is it fair to say then that the under pricing [of probably the competitiveness] was, is it taking place at the insurance company level or was it at the reinsurance company level?

It was at the reinsurance level.

Okay.

Finally -- I'm sorry, you were saying?

The reinsurance market was very competitive in those days.

Okay.

My last question is on the Canadian business.

In the release it was mentioned that it was adverse mortality in Canada for this quarter.

Is this adverse mortality been experienced over many quarters?

And if that's the case, is this problem the same as or as different as that being experienced in the traditional US mortality?

No, every market has the different periods of time when it's more competitive and less.

There were years when the Canadian market was quite competitive.

Our experience in mortality business in Canada has been very favorable over the last three or four years in general.

We've had extremely good mortality results, probably substantially better than we would have expected under our typical pricing assumptions during those periods over the last several years.

We've had -- we had a little bit higher mortality last year than we had previously, but probably not to be unexpected, and this quarter was a little bit higher.

Okay.

Thank you.

And we'll go next to Steven Schwartz from Raymond James & Associates.

Hey, guys.

One more, if I may.

Jack, on the asset intensive, I asked at the end of the conference call last quarter about what is the norm there.

I think we all agreed that the norm there was probably about $12 million and another $3 million from financial reinsurance.

Are you suggesting a new norm for asset intensive of $16 million?

No, Steven, I think I would suggest I may have mischaracterized or not done a good job of describing it last quarter.

I think what you see reflected here is our best estimate of the expectation.

Okay.

All right.

That's way wanted to know.

Thanks.

And we'll take a follow-up question from Jeff Schuman with KBW.

Thank you.

I apologize if you spoke to this, but ReliaStar, I think you gave us the premium impact.

Can you give us any sense of just how the business performed otherwise and is everything on track to retaining the key employees and running that business going forward.

Yes, Jeff.

This is Jack.

In terms of the financial results and that sort of thing, while we don't break them out separately, they are at or exceeding --that doesn't mean a whole lot for one quarter, but certainly at or exceeding our expectations in terms of the underlying economics and that sort of thing.

Greig, you may want to comment.

In terms of the people and the integration, Jeff, we are more convinced than ever that this was a good acquisition in terms of the way we see the people operating.

We have kept the staff.

We have come to respect the staff and what they do, and we're very pleased with the start they've gotten off to.

As Jack said, one quarter doesn't mean much.

It could have gone the other way if things had been bad, but it's gone off to a good start, which is nice, and it's a good team.

We are very pleased with that acquisition and expect it will contribute significantly to RGA over time.

The integration is not a real extensive integration, because it's a stand alone unit, but the integration of systems and accounting information and so forth is continuing pretty much as planned.

That's helpful.

Thank you.

And we have a follow-up from Jimmy Bhullar with JPMorgan.

Hi, thanks.

I just had a couple of follow-ups.

First, if you could comment on how pricing trends are in the US business.

Some of your competitors, companies like Hannover, have been pretty active and trying to grow their US presence.

And then secondly, on your Asian -- in your Asian business, the premium growth ex-currency was pretty light, I think down 3.4%.

I'm not sure if that's because of some treaties expiring or there's something else, and if you could just give us an outlook.

Should that get better from here, or is this what it should look like for the rest of the year on a constant currency basis?

No, Jimmy, we expect the Asian business to pick up a bit.

We did mention last quarter as we look out from this point, we are expecting a lull in both Japan and South Korea,as that business has seen the end of some large-producing treaties coming to an end of their natural production.

And so flattening out of premiums a bit in those markets, but we don't expect to see a fall off of the magnitude we saw in the first quarter sustained through the year.

We expect it to pick up.

Okay.

In terms of pricing trends in the US, we still think the pricing environment is still fairly favorable.

The business of volume seeding into the market place is contracting, and we saw that marginally contract in '09 based on official numbers that were published by the Society of Actuaries, Munich Re Survey.

The business that RGA is writing has been pretty stable; however, we basically continue production at about the same levels, and we are very pleased with the pricing levels generally speaking on the business we are taking on.

Okay.

Thank you.

And Mr.

Lay, there are no further questions at this time.

I will turn the call back over to you for any additional or closing remarks, sir.

Okay.

Well, that really pretty much ends our conference call.

Thanks to everyone who participated and listened in today, and to the extent any other questions come up, feel free to call us in St.

Louis.

With, that we will end the call.

Thank you.

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

We thank you for your participation.