美國再保險集團 (RGA) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Reinsurance Group of America first quarter 2011 conference call.

Today's call is being recorded.

At this time I'd like to introduce the President and 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.

Good morning and welcome everyone to RGA's first quarter 2011 conference call.

Joining me this morning is Greig Woodring, our CEO.

I'll turn the call over to Greg after a quick reminder about forward-looking information and non-GAAP financial measures.

Following Greig's prepared remarks will open the line for questions.

To help you better understand RGA's business, we will make certain statements and discuss certain subjects during this call which will contain forward looking information.

Including, among other things, investment performance, statements relating to projections of revenue or earnings, and future financial performance and growth potential of RGA and its subsidiaries.

Keep in mind that actual results could differ materially from expected results.

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

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

Please refer to the tables in our press release and quarterly financial supplement for more information on this measure and reconciliations of operating income to net income for the various business segments.

These documents and additional financial information may be found on our Investor Relations website at www.rgare.com.

With that, I'll turn it over to Greig.

Thank you, Jack.

Good morning, everyone, and thanks for joining us.

We're off to a solid start in 2011.

Operating income per share was a $1.61 for the quarter, up 29% over last year.

Despite the unusual seasonality in claims flow and the earthquakes in Japan and New Zealand, annualized operating ROE was 11.5% this quarter and over 13% for the trailing four quarters.

It's not unusual for us to report more modest ROEs in the first quarter, which is typically due to high claims flow.

The first quarter results this year are significantly stronger than we've experienced in the last several years.

Our results continue to depend primarily on our ability to effectively price mortality and morbidity risks, and, to a lesser degree, the effects equity market and interest rate movements.

Top and bottom line, we see continued growth.

Premiums totaled $1.7 billion, up 7% over quarter, and operating income increased to $119 million from $93 million in the first quarter of 2010.

We have established a reserve of $6.5 million, or $0.06 a share, associated with the earthquakes in New Zealand and Japan during the quarter and reflected that amount as additional reserve in our first quarter results.

Additionally approximately $3 million of the operating income increase was a result of currency fluctuations.

Our average investment yield of 5.35% was slightly lower than the yield in the fourth quarter 2010.

Our investment portfolio is appropriately and we experienced very little in the way of impairments this quarter.

Book value per share was $68.06, with AOCI at $55.88 without it.

On the capital front, we redeemed our peer securities and bought back 5.5 million shares this quarter, shedding about $340 million in excess capital in the process.

This capital refinement reduces the current and future drag on EPS and ROE from the overhang and increases the efficiency of our capital base by removing a relatively expensive security, as well as the significant future dilution.

We do not anticipate additional buybacks this year.

Turning now to our segment results.

In our US traditional business, we saw pre-tax operating income of $70 million, up from $61 million the prior year.

As with the past several years, we felt the effects of first quarter seasonality in terms of elevated claims flow coupled with somewhat lower premium flows.

We typically see higher death rates in the winter months, and it's not unusual for us to see claim fluctuations of around 1% or 2% over quarterly periods.

Premiums were up 4% this quarter, totaling $935 million.

We are pleased to report that we not only remained -- retained our number one market share position in the US for recurring business during 2010.

We increased it to 26% from 22% in 2009, according to a Society-of-Actuaries-sponsored reinsurance market survey.

Our US asset intensive business reported another strong quarter across all forms of annuities.

The first quarter pre-tax operating income totaled $21 million, up from $17 million a year ago.

Improving equity market conditions boosted both periods' results.

Our financial reinsurance business also performed well this quarter with strong fee income.

That business reported $6 million in pre-tax operating earnings, up from $3 million a year ago.

Turning to Canada.

Pre-tax operating income from Canada jumped to $26 million, up solidly from $16 million last year.

Production continues to rise, with premiums totalling $215 million this quarter versus $209 million a year ago, aided by foreign currency fluctuations and hindered a bit by the timing of creditor reinsurance flows.

Ignoring currency and creditor business, premiums rose 17% quarter-over-quarter in Canadian dollars, a very strong result.

Just like the US, our Canadian operation enjoys the leading market share for recurring new business according to the Society of Actuaries survey, Canada's market share for new business production was 34% in 2010.

We are reaping the benefits of our ReliaStar acquisition in the Canadian group market, as the combined efforts of our operations in Canada and Minneapolis have led to some recent wins.

Asia-Pacific posted pre-tax operating income of $26 million this quarter, nearly matching the strong $27 million posted in the first quarter of 2010.

This segment reported favorable claims experience in general, offset in part by claims in reserves increasing associated with the Japan and New Zealand earthquakes.

To date we have received about $1.2 million in claims from these events, mostly from New Zealand.

We're working closely with our clients in those regions to gather claims data as it becomes available.

The claims flow in Japan has been slow to develop given the situation, so our estimate for new net claims in this event is necessarily based on high-level assumptions.

Reported premiums were up 9% in Asia to $312 million, but were flat in original currencies, primarily due to non-renewal of a couple of group fees in Australia.

We do expect premium growth to pick up in Australia as the year goes along.

Europe and South Africa also reported pre-tax operating income of $26 million for the current quarter.

A sharp increase over the $10 million reported last year, driven by favorable claims in many of our markets.

Premiums grew 24% to $269 million, with strong contributions from the UK and several other European markets.

Premiums were up 21% in original currencies.

We've built strong operations abroad and now have the benefit of leading market positions in many of our key international markets.

Our fundamentals are strong in these important markets and we intend to capitalize on the opportunities they present for years to come.

So overall, we are pleased with the quarter and the opportunities we see ahead.

We're comfortable with the current form and level of capitalization.

We believe we are well-positioned to capitalize in any suitable in-force blocks and continue to seek out these opportunities.

We expect international expansion and product diversification efforts to reduce volatility in short-term periods, and add significant value to RGA in the long run.

We have already seen these effects We're excited about the remainder of 2011 and look forward to another rewarding year for shareholders.

We appreciate your support and interest in RGA, and will now take any questions you want to ask.

Thank you the question-and-answer session will be conducted electronically.

(Operator Instructions) And will take our first question from Jimmy Bhullar with JPMorgan.

Hi, thank you, good morning.

I had a few questions.

First on the US market, if you could talk about just pricing trends, market trends overall.

It seems like session rates in the US continue to decline, what your view is for growth in that business.

Secondly on just what's driving your premium growth in the Europe division.

I think you were up about 17% in the fourth quarter, 21% in this quarter, ex currency.

And then just finally if you -- it seems like the Australia -- the margins in Asia were obviously pretty good, so if you could comment on the Australia disability block that's experienced high claims in the fourth quarter, how that held up the first quarter?

Yes, Jimmy, first of all the pricing trends in the US market are I would say okay.

They might be getting a little bit more heated competition than we've seen over the last period of time, but not noticeably so.

This session rates are continuing their downward trend, and we don't see anything to turn that around.

We expect that will slowly drift downward some more from here, and that's just a fact of life that companies are retaining more business and reinsuring less business.

We have expectations that our premium growth in the US will be rather slow for the next little while, and we'll supplement that with growth in other places.

As you mentioned, one of those areas of premium growth for us has been Europe.

That's a continuation of a trend that European premium growth, led by the UK, but also Continental Europe has seen good growth, too.

Over the last 18 months or so has continued to increase, and we expect to have pretty good premium flows from those markets during 2011.

In terms of the Australian disability, Australia actually had a quarter that was just a little bit below where we would have expected it to be.

The disability income, we're still managing through that issue.

There's still some claims coming in, but overall Australia had a good quarter outside of that, and putting it together we're pretty close to where we expect to be.

New Zealand actually, even though it's a small market, had a very nice quarter in spite of the earthquake claims.

So adding that to Australia, the Australia/New Zealand operation was a little bit better than the we expected for the quarter, in spite of a couple of things going wrong way on us.

And does the Aegon -- or the Transamerica/Scor deal got announced.

Does that change the dynamics at all in the US?

I don't expect it to change significantly.

We replaced Transamerica, which was always a major competitor, with Scor now, who we presume will continue that operation in somewhat similar fashion.

Okay, thanks.

Mark Finkelstein with Macquarie.

Hi, good morning.

I guess I just want to follow up on the group -- or the growth question firstly.

I guess in the US market, growth is round 3.5% or 3.6%, I think your guidance was 5% to 7% for the full year.

Based on what you're seeing, do you see a challenge to hitting 5% to 7% level, or do you characterize this is just a little bit of a softer quarter?

Yes, Mark, I think this is a softer quarter.

Both in the USA and Canada in the first quarter of last year, we a little bit of extra premium from some reporting that came through.

So, I never get too concerned about numbers that show up over one particular quarter.

I don't expect that 5% to 7% is a number we want to change, we'll still be in that sort of range.

Probably towards the low end of it for just US life business, but it will be somewhere around there, will be my guess.

Okay, and I guess out of curiosity, a follow-up to Jimmy's question.

You mentioned that pricing was getting a little bit more heated.

Is there anything you can say about where that's coming from or the nature?

Is it kind of the top three competitors?

Is it new entrants?

What are you seeing?

It's not predictable anywhere.

It's just a general sense that maybe the pricing environment is starting to get a little bit more heated than it had been, but it's not reflecting a fact that there is somebody that's doing something crazy in the marketplace.

Okay.

It's no one in particular

Okay.

And I feel like I ask this question every other quarter, but asset intensive earnings?

Are those sustainable at this level?

I know that the spread was a little bit high, but do you view this as a sustainable quarter?

Yes, it's not far from a sustainable quarter.

Of course that business does depend on the macro environment a bit, and so all things being equal, if the economy continues to improve, it would be sustainable at this level or close to it.

Okay, then just finally, the tax rate was a little lower this quarter.

Was there any prior-year adjustments or anything we should look at in terms of the tax rate?

Yes, this is Jack.

No there really weren't any prior adjustments.

A lot depends on where the earnings originate, so that tends to-- [bearing down the size with] a little bit lower rate, that tends to drive down a little bit.

The comparison's a little difficult because last year, you may recall, we had the active financing exception issue that tended to add to the tax provision.

Okay, thank you.

Stephen Schwartz with Raymond James and Associates

Hello.

Good morning, everybody, just a few as well.

Greig, you refer to seasonal mortality.

What I'm inferring from this is that what you thought was adverse mortality last year's first quarter, your earlier first quarter, you're now kind of saying it really wasn't, and this is kind of the right rate.

Would that be an accurate statement?

Well, not quite.

The mortality is always higher in both the fourth quarter and the first quarter.

In the fourth quarter you don't notice it so much, because it's also by far our biggest premium quarter, and the first quarter is our lightest premium quarter so it stands out a little bit more.

Last year's first quarter had that seasonality, but it also was -- it was worse than we would expect it even adjusted for seasonality.

This year was a lot better.

This was closer to where we would expect the first quarter, but still a little bit off.

All right.

Very good.

Jack, would you happen to know --?

If I could say one more thing, Steven.

As our book of business gets older, that is to say, people age, the seasonality for people in their 70s and 80s is worse than seasonality of course for people in their 40s and 50s.

So, we could be seeing a trend that seasonality will get worse as things go on, but it's hard to make that -- draw that conclusion.

Okay.

That's interesting.

Jack, if you would, I think you -- I think that Greig said that the effective yield on the portfolio was 5.35%.

Jack, any sense of where new rate money rates were in the quarter?

Yes, they were between 4.5% and 5% in terms of the credit quality that we invest in and the duration.

Okay .

I think the rest has been asked.

Thanks,

Now we'll go to Sterne Agee's John Nadel.

Hi, this is Dennis Zavolock calling in for John Nadel.

I just have one quick question.

I believe most have been answered.

I'm not sure if you said this, but what is your estimate of current excess capital level, following the capital management activities for the quarter?

This is Jack, I'll take that.

It's in the neighborhood of $300 million currently.

Okay, thank you.

(Operator Instructions) Sean Dargan with Wells Fargo Securities.

Thank you, and good morning.

I have a question about Asia-Pacific.

You sized the losses from Japan and New Zealand earthquakes at $6.5 million, should we expect to see more claims come in the second quarter in Japan?

Sean, no we shouldn't.

That -- well, that's obviously an imprecise estimate.

We would expect that it our best shot what the total claim amount will be.

If it turns out that it $8 million or $10 million, we will see some more, but if it turns out that it's less than that, we will actually see a release, probably not in the second quarter but sometime in the future.

Sean, this is Jack.

There has been very little in the way of claims that have been presented for a variety of reasons, so we're necessarily using fairly high-level assumptions there.

But as Greig said, it is our best estimate.

We wouldn't expect to be off significantly.

Okay, thanks.

And one more question.

Coming back to the Aegon/Scor transaction.

The property went at a fairly significant discount to book value, should we interpret anything about just how we should be valuing US traditional-- that book from that valuation?

Well, everybody's -- Yes, Sean, everybody's book is a little bit different.

It really is difficult.

These are complex in-force block transactions, it is very difficult to read much into that in terms of comparing one operation to another and how the process went for completing that transaction.

So, I would hesitate to make any comments generally.

Okay, thank you.

Michelle Giordano with Neuberger.

Good morning.

I was hoping you could reconcile a couple of comments about the capital position.

Could you just remind us how much of a cushion of capital you want to hold onto?

And then talk a little bit more about your desire to not buy back any more stock the remainder of the year?

And then in the press release you also commented that you're confident in your ability to raise capital for any large-block transactions or acquisitions should they arise.

So, I was just hoping we could just discuss the capital position in a little bit more detail, thank you.

Okay, Michelle, this is Jack.

$300 million is our -- is what we've pegged the amount of cushion that we would like to live with.

And we've arrived at that amount because you can have some volatility that moves the capital base, but also that's, in our view, a relatively minor percentage of our capital.

So, we don't view that to be an exorbitant sort of cushion or anything like that.

That's pretty much what we've pegged.

Okay, fair enough.

Thank you.

Follow-up from Stephen Schwartz with Raymond James and Associates.

Hey again.

I want to follow up on Asia-Pacific, I forgot to ask about this.

Australia kept the premium down, but one of the things that we've been looking for this year is a return to growth in Japan and Korea.

Greig, what are we seeing?

Yes, I think that we are -- we saw, for example, Korea start to rebound last year towards the end of the year.

I think we'll see a lot of new transactions that have been placed starting to report in this year.

Japan is a little bit more difficult story.

I would've said that it would've -- it's starting to turn around.

The last quarter was really good and the last fourth quarter of the year was really good, but I don't know exactly what this location, the earthquake, will have on premium flows and so forth in the 2011.

But I do expect Asia-wide our premiums be nicely growing in 2011.

Okay, thanks.

And no one else is in the queue.

(Operator Instructions) Follow-up from John Nadel.

Hi, just a quick follow-up.

You mentioned earlier about-- you talked a little bit about the top line growth in the US, and it was a bit below your guidance.

So, would you say that for the remainder of the year, this is where we should expect it to be a bit lower than you originally assumed?

No, John, I expect we'll see a little bit of a rebound on it.

I think we're comparing to a quarter that had a pretty good growth rate last year, and I think the US will pretty much be where we expected it to be by the end of the year.

Those things don't move that much on a book as big as our US book, it will come in pretty close to where we expected it to.

Okay, great.

Thank you.

And gentlemen, their appear to be no further questions.

Okay, well thanks to everyone who joined us today.

To the extent that any other issues or questions come up, feel free to give us a call here in St.

Louis.

And with that, we will end the conference call.

Thank you very much.

Ladies and gentlemen, that does conclude our conference all for today.

Thank you for your participation.