美國再保險集團 (RGA) 2013 Q3 法說會逐字稿

Good day and welcome to the Reinsurance Group of America third-quarter 2013 results 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 Senior Executive Vice President and Chief Financial Officer, Mr. Jack Lay.

Please go ahead, Mr. Lay.

Okay, thank you.

Good morning and welcome to RGA's third-quarter 2013 conference call.

Joining me this morning are Greig Woodring, our CEO, and Alain Neemeh, Head of RGA's Canada and Australia operations.

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

Following Greg's prepared remarks, we will open the line for your questions.

To help you better understand RGA's business we will make certain statements and discuss certain subjects during 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 expected results.

A list of important factors that would cause or 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 on a pretax and after-tax basis for operating income, which is considered a non-GAAP financial measure under SEC regulations.

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 supplements 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 rgare.com.

With that I will turn the call over to Greig.

Thank you, Jack.

Good morning, everyone, and thanks for joining us this morning.

We are pleased to report a strong quarter, one that was favorable in most respects and one in which we had good stability across our diverse regions and lines of business.

Mortality and morbidity claims experience was in line overall, including a few regions which had very good experience, including the UK.

Our global financial solutions business had another strong quarter benefiting from higher spreads and ongoing transaction activity, while our large block acquisition from 2012 has continued to produce strong results.

Finally, there was incremental benefit from the effect of share repurchases and from a lower tax rate.

The net result was an annualized ROE of 13% despite negative currency effects again this quarter.

The operating EPS comparison of $2.14 versus $1.35 a year ago reflects strength this quarter versus a depressed result a year ago.

Premiums were up 9% in original currencies quarter over quarter and 6% in translated US dollars.

Book value per share, excluding AOCI, is up 5% this year despite the significant charge in Australia last quarter.

Our average investment portfolio yield of 4.75% was roughly even with the most recent quarter, but down 23 basis points from last year's third quarter.

The ongoing execution of our capital management strategy continues to enhance key profitability and return measures.

We have opportunistically repurchased shares throughout the first three quarters of this year, buying back an additional $31 million in shares during the quarter for a year-to-date total of $261 million, or 4.2 million shares.

We still have about $139 million available under our current repurchase authorization.

Our excess capital position increased to approximately $600 million, reflecting buybacks and our recent $400 million senior note offering.

We will continue to evaluate the most efficient uses for that capital.

Turning now to our third-quarter segment results.

Our US Traditional business had a good quarter, producing pretax operating income of $90 million.

That is a 24% increase.

All products outperformed the prior-year period due to improved claims experience, particularly our group insurance line.

US Traditional premiums grew 6%, reflecting primarily growth in our individual health and group reinsurance businesses.

Individual mortality premium growth of 4% was on the high end and we expect some moderation of this rate going forward absent acquired blocks.

US Asset Intensive subsegment reported another strong quarter, exceeding its expected run rate as it has all year.

Pretax operating income totaled $38 million versus $27 million last year.

Improved investment yields boosted results in our fixed and equity indexed annuity businesses.

Fixed annuity reinsurance, which includes the large block we acquired last year, performed better than expected due primarily to our further opportunistic repositioning of the investment portfolio.

Our US Financial Reinsurance operation reported $12 million of pretax operating income this quarter, driven by a 35% increase in fee income.

Canada results were better than last year's third quarter with pretax operating income totaling $36 million, reflecting improved claims experience from a year ago, and a relatively weaker Canadian dollar reduced pretax operating income by about $2 million.

Premiums grew 4% quarter over quarter, a total of $236 million, net of a $10 million foreign currency headwind.

Premium growth was 8% on an original currency basis.

In Asia-Pacific, pretax operating income was $13 million this quarter with good results in all Asian markets and breakeven results in Australia.

Nearly every country in this segment reported stable claims experience with particularly strong performance in Japan.

Segment-wide net premiums increased 4% to $343 million, including a foreign currency drag of about $33 million.

On a local currency basis Asia-Pacific premiums were up 14%, a solid growth rate.

In Australia, as you know, we undertook a comprehensive analysis of our group claims liabilities in the second quarter, which led to a substantial addition to the related liabilities at that time.

The group claims liabilities will run off over the next several years and we believe the adjustments reflected last quarter and stabilized that situation.

There were no changes to the assumptions embedded in those group claims adjustments and this quarter's breakeven performance in that business was in line with expectations.

Likewise, the individual business produced breakeven results this quarter, also in line with our most recent expectations.

We continue to believe that we are out in front of the industry issue in Australia and are now seeing more evidence of negative effects reported by others.

In the meantime, we continue to manage to our situation by taking action where we can on pricing and also by working with our clients and industry participants to affect change in the fundamental risk profile of the market.

Any significant changes will take some time to implement.

Outside of Australia we remain optimistic about the growth opportunities in the Asian life reinsurance space and expect that area to continue adding significant value to the RGA enterprise.

In our Europe and South Africa segment results were much like those in Asia, with overall stable claims experience and good premium growth.

Segment pretax operating income increased to $40 million, driven by favorable mortality and morbidity experience in the UK, this segment's largest operation, and a new global financial solutions transaction in continental Europe.

The new transaction was signed in the third quarter, but included a retroactive origination date of January 1 and totaled about $11 million pretax through September.

Net premiums grew to $330 million, an increase of 9% quarter over quarter in reported US dollars and a 12% increase in original currencies.

Our corporate segment reported a pretax operating loss of about $3 million this period versus $6 million last year, reflecting slightly favorable overhead costs and capital charges from internal allocation.

Our tax rate of 32.5% was below expectations due to various tax benefits and adjustments, but we continue to expect the normalized rate of 33% to 34% in future quarters.

In conclusion, we are pleased with our third-quarter results -- good top- and bottom-line performance across all operating segments, providing good momentum heading into the fourth quarter.

We are equally pleased to report an operating return on equity of 13% this quarter.

We added it to our capital base by issuing $400 million in senior notes, taking advantage of favorable market conditions.

Our excess capital is now in the neighborhood of $600 million and we continue to evaluate the most effective uses for that capital.

We repurchased $31 million in shares this quarter, all below book.

Excluding AOCI, we are encouraged by improving results in our high-growth areas in Asia and Europe and look forward to capitalizing on what we believe to be excellent opportunities in those markets going forward.

We thank you and appreciate your support and interest in RGA, and we will now take your questions.

(Operator Instructions) Jimmy Bhullar, JPMorgan.

Good morning.

I had a couple of questions, the first one on the Asia business.

If you could talk about how the claims trends have been in Australia thus far.

I realize it is a short period, but over the last few months versus what you had -- versus the expectations embedded in your charge last quarter.

Then related to that, if you look at the earnings outside of Australia then was that a normal period?

So as we think about what your non-Australia business earns, is this what we should be expecting going forward?

Then, secondly, Europe had very strong results.

What level or what were the main drivers of that?

It seems like the fee income was pretty high and you had good mortality/morbidity, but the main drivers of that.

And how much do you think this quarter's earnings are inflated versus what you would expect in a normal quarter?

Jimmy, it is Alain Neemeh.

I will take the Australia question first.

I think it is fair to say Australian claims were high, but we expected them to be high, and so essentially they are in line with what we expected when we set up the provisions at the end of last quarter.

In terms of the other two areas, Jimmy, I think the commentary is similar for both of them.

The earnings in Asia outside Australia and for Europe were probably a little bit to the good because of good experience.

In Europe, we additionally had that one fee income transaction that was backdated to the beginning of the year and so we have a little bit of extra fee income in the quarter.

But that happens quite often with our business.

Then is breakeven a fair assumption for future periods outside -- in Australia?

Certainly when we look at 2014 that would be the case.

Then if I could ask one more on just -- what is your outlook for buybacks?

You bought a little bit of stock in the third quarter.

You still have $139 million, I think, remaining on your authorization.

How should we think about the timing of when you complete that?

Jimmy, this is Jack.

We do have that much still available.

As we eat into that authorization we are a little more picky, so to speak, in terms of what price we are willing to pay.

So we will likely be in the market selectively, if we view it to be a good value in terms of taking out some of those shares.

But I think, as you saw this quarter, you could expect somewhat of a deceleration compared to the buyback activity in the first half of the year.

So we will be selective going forward and it is probably unlikely that we would eat through the entire authorization through the remainder of the year.

Okay, thank you.

Sean Dargan, Macquarie.

Thank you.

After completing the $400 million bond offering you have $600 million excess capital relative to, I guess, your target RBC.

As we think about your appetite for acquisitions should we think about it that you are more comfortable maybe adding on to mortality, traditional life type businesses than asset intensive, because there are some payout annuity blocks out there on the market?

Sean, our interest is fairly wide ranging and it is true that we are probably extremely comfortable and conversant with mortality, all the shades and colors of it, but that tends to be a very competitive auction at times.

We have found that the returns on some of those auctions have not been to our suiting.

So at times it might seem like we are looking at things that are not in as sweet a spot as mortality is, but it has to do with the whole range of return characteristics, comfortability with the risks involved in the transaction and so forth.

So we look at a wide range of things.

And a related question; I think in the opening remarks you mentioned that the Hancock acquisition from last year was -- I guess performed well in the third quarter.

Is that trending better than your expectations at the time of the deal?

It is trending probably a little bit better, but it is within the range that we expected when we did the transaction.

Okay, thank you.

Humphrey Lee, UBS.

Good morning, guys.

The tax benefit for this quarter was it FIN 48 related?

No, we didn't really have any reversal of taxes associated with FIN 48 because we didn't during the quarter end up with a release of a tax year.

So, no, we have done nothing with respect to FIN 48.

The lower effective tax rate had more to do with where our profits were emanating and some minor adjustments upon filing the 2012 return.

Okay.

So I think from early this year you mentioned that the expectation is the modest benefit from FIN 48 likely in the fourth quarter this year.

Is this still the expectation?

And also (inaudible) towards the end of the year, do you have a better handle in terms of the potential benefits for the year?

As we sit here today, Humphrey, I would expect that we would not have a FIN 48 release in the fourth quarter of this year.

Okay.

We are not in control of that situation.

All right.

Then just one more.

So for the UK favorable mortality and morbidity, how should we think about it in terms of how much [of a quick guide] for this quarter?

It's about $5 million.

Okay, got it.

Thanks.

Jeff Schuman, KBW.

Thanks, good morning.

Wanted to ask first a couple questions about US financial reinsurance.

You have had good growth there for a few years now; it seems to be accelerating further.

I think at your investor day you talked about 8% to 14% intermediate term growth.

You have gotten a whole lot more than that this year.

Is it really due to just a few transactions or is there some sort of broad trend here for there just to be more industry activity?

Jeff, there is a little bit more industry activity and there is a number of transactions, but it is not dozens.

It is a very discreet number of transactions.

A lot of them are financing of XXX reserves or AXXX reserves.

We have done a few of those sorts of transactions where our risks are very remote tail risk.

Okay.

Then was wondering, the 14% constant currency premium growth in Asia-Pacific, what was driving that this quarter?

I think it was spread across the region pretty well, Jeff.

The last several years we have been refilling pipelines in Korea and Japan as some of our treaties from earlier days, which were sizable, have expired.

And we have pretty much come to the end of that period, so I think we are going to see good premium growth throughout the rest of Asia.

We will also see, though, in addition Australia premiums start to fall off in the future pretty rapidly in coming quarters.

So in this quarter were Australian premiums up or down?

Group premiums were pretty much flat, individual premiums were up about 14%.

And is that the sort of growth you are targeting for individual, or are you trying to kind of manage that more defensively along with the Group?

We are definitely being cautious as we approach the business, but recall that there is a step premium nature to the business.

And so premiums will increase year over year by about 10%, absent any underlying business growth with the treaties that we have in place.

Okay, thank you.

Just one last one; we have seen an industry pickup in fixed and indexed annuity sales.

Are you expecting to kind of participate in those increased lows or are we still looking more sort of for one-off transactions like Hancock?

We would look at any flow opportunities that exist in the market.

Those don't always end up in the reinsurance market that we have been in the past on fixed annuity treaties, but it remains to be seen what is available, Jeff.

Okay.

Thanks.

Steven Schwartz, Raymond James & Associates.

Good morning, everybody.

Want to stick with FinRe here, both in the US and international.

First in Europe and South Africa you said there was $11 million.

It sounds like the deal you did maybe was retroactive to January 1.

What should we be thinking about from that deal in the fourth quarter and going forward?

Steven, this is Jack.

As you stated, that was three-quarters of fee revenue, so roughly a third of that would be repeating and that is roughly a three-year deal.

So there is roughly $0.03, $0.035 per share in terms of revenue you would expect to see us reflect each quarter going forward.

Okay, thanks.

And then a question on the US FinRe, Greig, I think you just mentioned that it was mostly XXX and AXXX financings.

Could you maybe talk about what you are doing in this market?

I mean are you providing promissory notes, letters of credit; what are you doing?

We are not trying to take the role of the bank here.

We are working on transactions that get fairly complicated, sometimes with a banking partner as well.

So it gets pretty complicated to structure these, but a lot of them are involved in financing the various types using captives or not.

But it is sort of a wide range of things we would consider.

As I say, most of the real activity in the US has been on the XXX and AXXX front in the last couple years.

Okay, but somehow or other you are interacting with captives set by the primaries?

Yes.

Okay.

Then, if I may, just on Australia a quick one.

I think you put up $274 million of reserves, if I remember correctly, in the second quarter.

I don't know how you say this, but how much did you take down; how much is left?

This is Jack.

Let me comment on that.

We put up additional reserves, but you may want to think in terms of the entire reserves in the $700 million to $800 million range since virtually all of that remains on the balance sheet.

Okay, all right.

Thanks, guys.

Ryan Krueger, Dowling & Partners.

Thanks, good morning.

I had a question on the individual business in Australia.

At your investor conference earlier in the year you had talked about repricing efforts in that business, and I think a fair amount of the business was expected to be repriced by the end of this year.

So I was hoping for an update on how that is going so far.

I think fair to say we are still working through that process.

We are generally in the process now of working through negotiations with clients as to both timing and amount.

I think leave it there.

Okay.

Is this something that will go in-force by year-end and we will get an update next quarter?

I believe so.

Okay, thanks.

Then on the individual mortality growth of 4% in the US, did that include any small block transactions or is that all flow business?

There were some small blocks in there, but nothing significant or noteworthy.

Okay, great.

Thank you.

(Operator Instructions) Tom Gallagher, Credit Suisse.

This is David Motemaden asking a question on behalf of Tom Gallagher.

Just wanted to get an update.

I know in the past you have said that there is a $300 million cushion that you guys would like to have kept at the holdco.

Just wondering if that is still the case given the increase in excess deployable capital?

Well, that $300 million is kind of a rule of thumb that we tend to guide towards and we haven't changed that.

All things being equal, we would prefer to have that sort of a cushion.

Obviously, we have more than that in terms of a cushion currently.

Got it.

In terms of where you view the best opportunities in terms of deals, could you just give us a little color on that and also what your target return is?

Best opportunities seem to be in Europe, sometimes in North America.

There is a fair amount of activity that we are looking at.

The returns that we are targeting are sort of our historical returns, sort of 13% type returns on a GAAP basis.

Got it, thanks.

Then I guess is there -- I know in the past there has not been much interest in any VA risk transfer deals.

Just wondering if that is still the case?

Yes, we are not actively looking for VA at the moment.

We wouldn't rule it out if something really attractive came along, but it is not that we are out looking for it.

Great, thank you.

There are no further questions at this time.

Thanks to everyone for joining us for the call.

And to the extent you have any other questions, feel free to give us a call there.

And with that we will in the third-quarter conference call.

Thank you.

This does end today's presentation.

We thank you all for your participation.