美國再保險集團 (RGA) 2012 Q1 法說會逐字稿

Good day and welcome to the Reinsurance Group of America First Quarter 2012 Results Conference Call.

Today's call is being recorded.

And at this time, I would like to introduce 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 to everyone and welcome to our RGA's First Quarter 2012 Conference Call.

Joining me this morning is Greig Woodring, our CEO.

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

Following Greig's prepared remarks, we'll open the line for the questions.

To help you better understand RGA's business, we make certain statements and discuss certain subjects in this call that 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 the expected results.

A 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'll make comments on pre tax and after tax operating income, which is considered a non-GAAP financial measure under SEC guidelines.

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 the quarterly financial supplement for more information on this measure and reconciliations of operating income to net income for our 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 the Greg for his comments.

Thank you, Jack.

Good morning, everyone, thanks for joining us.

We are pleased to report a good first quarter with operating income per share of $1.52.

Our Canadian business continued its trend of producing strong results.

And we are also happy with the results out of Asia-Pacific and our US asset intensive business.

These results were partially offset by elevated critical illness and mortality claims in the UK, and slightly higher than expected individual mortality claims in the US.

Our effective tax rate this quarter was 32%, slightly below our anticipated rate for the full year of 33%.

We continued to feel some downward pressure on earnings as result of the ongoing low interest rate environment

Investment income was down $30 million, or 8% quarter-over-quarter, including a $49 million decrease in the fair value option contract supporting equity indexed annuities.

Excluding those contracts, investment income was up 6%.

The average portfolio yield dropped to 5.05% from 5.35% in the first quarter of 2011, and 5.19% in the fourth quarter of last year.

Book value per share increased to $80.44, including AOCI, and to $58.57 without it.

The Company's capitalization and investment portfolios remain strong.

Turning now to our segment results; our US Traditional business reported pre-tax operating income of $63 million, down a little from $66 million last year.

The Group Disability business performed as expected but individual mortality claims came in a bit higher than expected.

We view the higher claims as a typical fluctuation, falling in that 1% to 2% volatility range, coupled with the seasonality effect we generally experience during the first quarter of each year.

We typically see relatively higher claims and lower premiums in the first quarter, due to seasonality effects associated with higher death rates during the winter months.

Premiums were up 9% quarter-over-quarter, with help from an in force transaction and sold growth in our Group and Health Related businesses.

We are pleased to report that we retained our number one position in the US for recurring new business during 2011, with a market share of 22.4%.

That is according to an SOA, Society of Actuaries, that has sponsored a reinsurance market study.

And in addition, we remained one of the top reinsurers, in terms of in force, with a market share of 19%.

Our US Asset Intensive results were strong this quarter and pre-tax operating income rose 17% to over $24 million.

Favorable equity market conditions have benefited equity indexed and variable annuity reinsurance in four of the last five quarters, now.

Our Financial Reinsurance business continues to produce strong fee income, and added $6.5 million of pre-tax operating income in this quarter, compared with $6.2 million a year ago.

Turning to Canada; pre-tax operating income rose sharply to $47 million, an 83% increase over the first quarter of 2011, with both periods benefiting from the continuing mortality improvements.

Premiums met expectations and were up slightly over a very strong first quarter of 2011.

Just like the US, our Canadian operation retained its leading position for recurring new business in 2011.

The SOA survey showed a number one market share of 32.6% in Canada.

Turning our international operations, first in Asia-Pacific, similar to the Canada, this segment is off to a strong start, with pre-tax operating income rising over 20% to $27 million this quarter, reflecting favorable mortality experience.

All markets contributed to the better than expected results of this period.

Disability claims in Australia, which you may recall were elevated in the fourth quarter of 2011, were in line with expectations this period.

Net premiums in this segment were a bit behind expectations, totalling $325 million, a 4% increase over the prior year quarter.

That sort of fluctuation in premium flows can result from timing and reporting practices of seeding companies.

We expect it to even out over the course of the 2012.

Next in Europe and South Africa, pre-tax operating income was $4.6 million, down from the $22 million last year, primarily due to poor experience with the critical illness business in the UK.

Additionally, the UK's mortality results were worse than expected.

Collectively, the rest of the markets in this segment performed well this quarter.

The critical illness claims in the UK were certainly higher than we anticipated, though critical illness experience can be volatile, just like mortality over short-term horizons.

Despite the performance of this quarter, this business has performed well over time.

And we expect future results to be in the line with long-term projections.

Reported premiums were $293 million, a 9% increase over last year.

Original currency premiums were up 13% over the first quarter of 2011.

So overall, we're pleased to report another good quarter, with annualized operating return on equity of 10.6%.

Our first quarter ROEs are typically more modest due to the seasonality of claims.

For the trailing 12 months, operating ROE was 12%.

Our balance sheet and capitalization remain strong.

And we estimate our excess capital position to be around $400 million, reflecting the new DAC accounting guidelines.

Underwriting earnings continued to be the principal driver of RGA's success and we look forward to continued top and bottom line growth for the remainder of 2012.

We are excited about the opportunities we are seeing in various markets around the world, and are well-positioned to take advantage of those opportunities.

We thank you and appreciate your support and interest in RGA.

And with that, we'll take any questions that you may have.

Thank you.

(Operator Instructions).

We'll go first to Jimmy Bhullar with JPMorgan.

Hi, good morning, I had a few questions.

The first one on potential opportunities you see, either from solvency to another accounting/regulatory changes over the coming years?

Then secondly, if you could talk a little bit more about what drove the spike in the claims in the Europe.

Is it because of the economy?

Or is it something else?

And what the chances are that it will sustain?

And the last question that I just had -- US premium growth was a little stronger than I would have expected, and I think you had a transaction that you signed in the quarter.

If you could talk a little bit about the transaction and what you expect for the premium growth in the US over the course of 2012?

Thanks.

The potential opportunities look strong, at this point.

We are seeing quit a bit of activity with respect to the solvency two type opportunities.

We don't really know who is going to transact or when.

There is still a little bit of time between now and the solvency two.

The overall activity level is high in the organization right now.

We'll take that as a positive sign and we'll see how that goes.

In terms of claims, the claims in Europe were mostly -- adverse claims mostly in the UK was high.

The rest of the Europe was fine, in terms of claims.

The UK claims, just like the US claims, they tend to bounce around.

If you remember, the UK had a very good year last year, and last couple of years, in particular, the critical illness claims have been very well behaved.

So this quarter we are treating as an anomaly, at this point.

In terms of premiums, the premium was a little bit high in the US, and a little bit light in Asia, compared to what we would expect for the full year.

It is always important not to get too hung up on one quarter's results, they do tend to fluctuate a bit on the premium reported side as well, and we can only smooth that out to some extent, by accruing things we know about, and we can't accrue things we don't know about.

In terms of the -- we did do an in force transaction in the US that will add a reasonable amount to our premium totals for the year.

That is prorated.

It wasn't a cause of any especially unusual numbers for the quarter.

And we do expect the premium account for the US to be somewhere up in the 5% range for the course of the year.

Okay, thank you.

We'll take our next question from Andrew Kligerman with UBS.

Good morning.

On the corporate outline area, it looked like investment income came up pretty light relative to what I would have anticipated, maybe $7 million, $8 million, $10 million shy.

Can you talk about the outlook for investment income there and what we can expect?

And then I have a quick follow-up.

Andrew, this is Jack.

Let me take a crack at that.

The investment income was a little bit light.

We allocated investment income based upon the net capital need of the various subsidiaries.

And that could fluctuate a little bit.

We made the same observation.

Through our allocation methodology, we ended a little bit lighter than we would have expected in corporate for the first quarter.

That should moderate as we refine that allocation methodology over the remainder of the year.

So I guess I would guide you towards -- let's take a step back from investment income and talk about the corporate results.

The results that we reported in the first quarter are expected to be a little bit lighter than we would see in the follow-on quarters, and in fact would expect to see a positive pre-tax income amount in corporate, on average, in the follow-on quarters.

Jack, what kind of what of -- what specifically on the allocation hurt the investment income?

Does that mean that you are going to take it from another area?

And why do you think that you will see a reversal of the negative number to positive in subsequent quarters?

Andrew, it won't be dramatic.

But we had to refine the methodology, just because we had to overlay a new DEC reporting methodology.

And there is an expectation that we'll see an ongoing refinement.

Refinement doesn't imply a big adjustment, it is just a very modest refinement going forward.

If you take a step back and think, not just of investment income, but of the bottom line result, we would expect that to improve.

We have some expenses accruals that hit us a little bit harder in the first quarter, typically.

And we would expect to see a little bit more in investible funds that remain at the corporate level, as opposed to being allocated going forward, as well, as we continue to generate cash.

Got it.

On premium, going back to that; Asia up 1%, what kind of dampened Asia?

And what is the strength of Europe and South Africa being up 13%?

I want to get a sense of what is going on and what might change, going forward.

Well, if you remember -- taking the latter question first.

The European segment was up considerably last year and we are still following that momentum forward, as we generate more revenue out of Europe.

It's pretty strong there.

In Asia, we have been experiencing, especially in Korea and Japan, some need to fill up the pipeline.

And that has been dampening the premium growth rates that we are seeing across the rest of the region.

Again, I would caution you that one quarter doesn't necessarily tell the story.

These results do bounce around a bit.

You think that the pipeline numbers could come through in a bigger way in Asia, Korea, down the road?

Not necessarily next quarter -- ?

Yes, I would expect the growth rate to pick up in the Asia.

Andrew, this is Jack, maybe to pick up on that, we may want to refer you back to the guidance we issued in January of this year.

Because, as Greig mentioned, quarter-to-quarter, we can see the top line.

There is some volatility and it will move around a little bit.

But the guidance that we had issued a couple of months or so ago, three months ago, I should say, really did contemplate what we expect in each of those segments, relative to any in force deals that had been signed, and so on and so forth.

I would refer you back to that guidance we issued in January.

We'll take our next question from Nigel Dally.

Great, thank you, good morning.

Excess capital, you mentioned it was down to $400 million from what I think was $500 million last quarter.

In your comments you mentioned DAC, not sure why DAC has any impact on capital, so add some color there.

And secondly in Japan, we've heard some companies talk about reinsurance transactions for supplemental insurance.

Can you comment on whether that's expected to emerge into a larger market?

And what does that potentially mean for RGA?

This is Jack.

Let me handle the question on the excess capital.

It's gotten a little murkier because of the DAC adjustment.

As you may recall, we were sitting at roughly --our expectation was, we were at about $500 million of excess capital at the end of the year.

Then we overlaid a financial reporting adjustment for DAC for that did take about $300 million out of capital.

That doesn't mean that that impacts our excess capital by $300 million, but it does affect the capital models that the rating agencies use.

In fact, we are going to meet with the two of the three agencies that do give us a rating within the next several weeks and get a little more clarification of their views on how the DAC -- the change in DAC reporting affects their view of excess capital, and in particular, how it affects their capital models.

While we had indicated about $500 million of excess capital at the end of year, it feels like, just because of that DAC reporting change, that number in the $300 million to $400 million range now.

I guess I'm not sure of how that works out, because the statuary surplus, I would have thought, wouldn't change as a result of any GAAP accounting changes.

These are coming through the leverage ratio?

Or does the DAC really impact the means in which you calculate the excess capital.

Keep in the mind that the rating agencies don't necessarily default solely to statutory surplus.

In fact, two of them use our GAAP reporting as a major basis for how they model the extent to which -- our capital requirements.

I wouldn't think of it -- you are right, it doesn't affect the statutory reporting.

I wouldn't think of it, simply because of that, as not having any affect on the capital models that the rating agencies use.

Okay.

Nigel, with respect to the supplemental insurance -- we do quote on supplemental insurance and reinsure a bit of it in Japan.

It is a very small piece of the overall picture in Japan for us.

Okay, very good, thanks.

We'll take our next question from Steven Schwartz with Raymond James and Associates.

Good morning, everybody.

Before I start, I do want to follow-up on one comment.

Greig, with regards -- I think it was a follow-up to Jimmy Bhullar's question, with regards to the block of business, you said it didn't add much, and then I think you said that you saw US premium up 5% on the year.

I just want to corroborate that, that is a bit lower than what we were told in the March.

Well, refer back to the March comment -- I think we said 5% to 7% or something.

The point was like 6.7%.

I think we would still be the same.

And what I was trying to say -- clearly, when we added that block in the beginning of the year, we did -- it did boost the revenue a bit, but it's pro rata.

In other words, every quarter going forward will have the same boost.

Right, just so I'm clear, did the March know about -- did the March number that you gave know about this deal?

Yes.

That was contemplated in the deal.

If I may, on my own -- just some numbers, I think -- I do want to follow-up though on the corporate and other, the allocation to investment income was low.

I don't think you told Andrew, Jack, where that money went and where it would come back from.

In terms of any refinement of the allocation, like what segments would be affected?

Yes.

Because they sit on the largest portfolio, the US mortality -- or Traditional segment would, to the extent that there are any refinements, that would be affected the most, and the others to a lesser degree.

And maybe I'm putting too fine a point on this.

I don't want to make it sound like we're going to have significant refinements or adjustments.

I was just commenting that has been an ongoing process because of the change in DAC reporting, and so we may see a little bit of impact on the corporate line going forward.

Then on the US Asset Intensive, you have a couple of things running there.

Obviously, you have the weird GAAP accounting for the indexed annuities and then you have a benefit from the, I assume, the equity market being up 12%.

Any idea what a more normal run rate would have been for the quarter for Asset Intensive?

Steven, are you talking operating income?

I think it was -- I'm not looking at the model, but I think it was $24 million, you said you benefit from strong equity markets, which I would assume would be some kind of DAC and/or SOP03-1 adjustment.

A more normalized run rate would be in the $16 million to $17 million range.

$16 million to $17 million?

Okay.

If I may, one more and then I'll get back in line.

Anything to take away from the -- I think there was sharp drops in new businesses assumed, both in Europe, South Africa and Asia.

I know those numbers can get really weird, is there anything -- is there a take-away from that this quarter?

I don't think so.

Steven.

Thanks, I'll get back in the line.

We'll take our next question from the John Nadel with Sterne Agee.

Good morning, everyone, I have a couple of quick ones.

Greig or Jack, could you size for us, maybe in dollars, the shortfall in UK mortality and in UK critical illness?

And remind us how big those two books of business are?

John, this is Jack.

Let me take a crack at that.

And maybe I'll express it in the terms of cents per share and you can do with that whatever you want.

But I would say that negative mortality, it total, for ESA was about -- or had an impact of about $0.12 per share.

And you can think of that -- a negative impact of $0.12 per share.

And you can think of that as -- about two-thirds of that impact related to critical illness claims and development, and the remainder was on the mortality side.

That's helpful.

Then in thinking about the financial reinsurance, I know it's a very small portion of your overall earnings.

If I think back to your investor day, it appears to me that you are calling for about $50 million to $55 million of pre-tax income from this segment in 2012, with a solid growth rate thereafter.

Clearly, analyzing 1Q results doesn't get anywhere close to that.

What is built into your expectations, specifically for that segment?

And how do you look upon that guide for 2012 for the full year?

Does 1Q results change your view?

John, your question was on financial reinsurance?

Yes.

Part of the confusion may be -- what we're reflecting in financial reinsurance is solely the US based sub-segment, sort to speak.

Yes, I think at Investor Day, we showed you the international for the first time.

Okay.

Sorry, go ahead.

I was just going to say, that is the difference.

My recollection in the Investor Day, presentation we aggregated all the financial reinsurance enterprise-wide, which would include, in particular, the Asia-Pacific financial reinsurance business.

That's why, in trying to come up with a run rate, when you are looking solely at the US sub-segment, there appears to be a disconnects.

We are on track with that with that business.

That was my follow-up.

The only other question that I have for you is, just overall, thinking back to the Investor Day, longer term outlook, very -- expectations for good and continued top and bottom line growth, good ROEs; anything -- I understand we can't trend necessarily anything out of the single quarter's results, but is there anything that you saw this quarter or anything that you see on horizon that alters your outlook, one way or another, in any of your businesses?

John, I would say no.

In fact, we would always like to have a better first quarter and we would like each of the operating businesses to perform better than expected.

But we know that the first quarter is always our difficult quarter.

Having gotten through this quarter with some ups and downs, but pretty much on track for the year, in our opinion, we think everything is pretty much as we portrayed it on Investor Day.

By the way and just as an aside -- I don't know if this has any impact, but on accounting basis, does the fact that it is a leap year and you get an extra day in the first quarter, does that impact your claims at all?

Yes, we have an extra day of claims and no extra day of premiums, that's true.

And actually somebody, I forgot the number now, actually told me how many claims we had in the US on that day in particular.

And it is noticeable number, but that happens every four years.

Understood, thank you.

We'll take our next question from Sarah DeWitt with Barclays.

Hi, good morning.

Could you help us understand what the core number in the first quarter was, ex unusual items?

And you said there was $0.12 of negative mortality from ESA.

And I'm not sure if there was any thing else or any other offsets.

And given that, do you still expect to hit your full year 2012 EPS guidance of $6.70 to $7.30?

I know you have mentioned a number of times that the first quarter is seasonally low.

Thanks.

This is Jack, maybe I can take that.

As we've tried to articulate here, we did have some unusual items, as we always do, going each way.

And we had better than expected mortality and some segments offset in others by worse than expected mortality.

But when you combine it all, the end result was -- I would characterize it as a normal result -- normalized result for the first quarter, recognizing that we do expect higher claims in the first quarter because of seasonality.

And that is our best answer relative to what was the run rate or the normalized result.

We typically don't reiterate guidance, once we've issued it.

We issue it once a year.

And if we were dramatically off that guidance and not expecting to make it up, then we would feel the need to comment.

We don't reiterate the guidance, but as Greig said, the quarter came in roughly right on our plan -- or right at our expectations.

So you could draw your own conclusions relative to what that means to guidance.

Thanks, that's helpful.

And separately, would could you update on what you are seeing, in terms of M&A opportunities?

As well as your appetite for any capital management or share buy backs this year?

Taking the M&A opportunities -- I'll let Jack talk about share buy back afterwards.

In terms of M&A opportunities, when we think of that, we think not only of potential acquisition of reinsurance companies, of which there are very few opportunities, and don't see anything on the scope right at the moment; but also opportunities to acquire or buy blocks of business by the embedded value of blocks of business.

And we're seeing quite a bit of activity on that front.

Much of it is the opportunities that Jimmy referred to earlier, that have to do with [bosul three] or solvency two.

And others just are opportunities that are coming about as companies refine their strategic direction, and look to release blocks of business that are no longer core or strategic, in their opinion.

There seems to be a lot of activity at the moment.

It is too early to tell how it is all going to end up.

This is Jack.

In terms of the capital situation, we obviously, didn't announce any buy backs or anything like that.

We continue to consider both the dividend level, as well as the deployment of capital, whether that's into the business through return of capital in some fashion.

We are about where we expected to be.

We didn't expect to take any actions this early in the year.

And we'll continue to monitor the situation, in terms of how much capital we have and how much we think we need and so on and so forth.

And I'll tell you that everything is under consideration.

We consider as we go through, internally, at the management team level and in discussions with our board, we consider everything, in terms of what to do with the excess capital.

No actions to announce here, but we'll continue to review it.

Thanks for the answers.

(Operator Instructions).

We'll go next to Ryan Krueger with Dowling & Partners.

Thanks, good morning.

Just first quickly, on the mortality transaction that you had, can you just quantify the amount of premium that that added in the quarter?

This is Jack.

I think it was about $11 million to $12 million for the quarter.

Great.

And then on the surplus relief transactions that you have done for primary companies in the Japan, I'm just curious, are those primarily fee-based, financial retype deals?

Or is risk transfer involved in those transactions, as well?

Predominantly the former -- predominately surplus relief.

Lastly, you guys mentioned several times the opportunities from solvency two in Europe.

I was curious if you are also seeing any increase to opportunities to deploy capital in the US?

There has been a couple of public blocks available of late and I don't know -- I don't think you have done too many of these in the past.

Would you consider partnering up with another institution on an M&A type deal, as well?

Well, we are always talking about things like that.

And the answer, in short, is yes.

And have several of those discussions under way.

There is opportunities, not only in the Europe, but opportunities in the US, as you mentioned, as well as Asia.

Okay.

Thank you.

We'll take our next question from Sean Dargan with Macquarie.

Thanks.

Just given your update on excess capital, are you still safely above your target cushion?

Yes, we are.

That target cushion -- it is not set in stone, is kind of a -- I wouldn't call it a policy, it is target.

That's the best way to put it.

And that is roughly $300 million.

And as I mentioned, we are $300 million to $400 million in excess right now.

So we are certainly above it.

Your capital generation is on plan as far as you know?

I'm just trying to think of how much you would have available to do block and M&A opportunities?

Well, let me respond to that.

The capital generation is roughly what we have articulated in past.

And our best estimate is a couple hundred million dollars per year.

I don't want you to put too fine a point on the cushion and what we could or couldn't do with that.

That cushion is kind of a long term view of how much excess capital we would, all things being equal, want to have.

But if we had an opportunity and it would involve the deploying some of capital that, theoretically, is part of our cushion, we would certainly consider that, because we can rebuild the cushion.

And there is nothing magic about the $300 million number that we've articulated.

We like to think we got a fairly significant amount of flexibility in terms of capital of deployment, if the right opportunities come along.

Thanks for the answer.

(Operator Instructions).

We'll go next to Jeff Schuman with KBW.

Thanks, good morning.

I want to go first to the Disability business.

To the extent that the results were more inline versus some of the quarters last year, is that reflecting just underlying experience being a bit better?

Or by this point, has the book changed a bit, either with rate increases or some terminations?

It is a little bit of both.

But the experience was good in the quarter.

We were always look to take actions when we can.

And a lot of those contracts, especially the US, renew at the beginning of the year.

So there is an opportunity to reprice the situation.

But again, there is fluctuations in that business quite often and we try not to over react to it.

And then the other thing, to put a little bit of fine point on it, I think you characterize US mortality as being slightly unfavorable to expectations.

But I wasn't sure what you were using as a bogey.

Is it the four quarter average?

Or were you comparing it to a seasonally adjusted first quarter expectation?

Jeff, it was adverse, even compared to a seasonally adjusted.

It was not a good quarter.

But again, those things always smooth out over time.

We are not particularly worried about it, it was just a one quarter thing at this point.

Thank you.

At this time, with no additional questions in the queue, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thanks to everyone who joined us this morning.

We appreciate your interest.

And with that, we will end our first quarter earnings call.

Thank you.

This concludes today's conference, we appreciate your participation.