美國再保險集團 (RGA) 2014 Q2 法說會逐字稿

Good day and welcome to the Reinsurance Group of America second-quarter 2014 results conference call.

Today's call is being recorded.

At this time, I would like to introduce the President and Chief Executive Officer, Mr. Grieg 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 second-quarter 2014 conference call.

Both Grieg, our CEO, and I will be addressing the call this morning.

We will discuss the second-quarter results after a quick reminder about forward-looking information and non-GAAP financial measures.

Following our prepared remarks we will be happy to take some questions.

To help 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 the 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 we issued yesterday.

In addition, during the course of the call we will make comments on pretax and aftertax 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 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 the call over to Grieg.

Thank you, Jack, and good morning everyone.

Thanks for joining us this morning.

I'll provide some general comments on the quarter.

Jack will go over the financial results and then we'll open it up for Q&A.

Our second-quarter results were strong, benefiting from an increase in the diversity of our sources of income, as our international and our global financial solutions businesses continued their recent momentum.

The US individual mortality business was back in line.

Operating earnings per share were $2.23, and operating ROE exceeded 12%.

Premium growth was a solid 7% in both the current quarter and year to date, and our new business activity was strong.

Overall, underwriting experience was in line with expectations.

While we continue to have some normal short-term claims volatility in individual segments, the diversification benefits of our wide geographic base and product suite provide relative stability.

Australian operation had another quarter with bottom line and reserve development were generally in line with assumptions we laid out a year ago.

On the capital management front, we continued buying back shares in the second quarter, bringing the year-to-date total to about 2.3 million shares for a total cost of $177 million.

We are also pleased to report a 10% increase in our shareholder dividend, and continued growth in book value per share, which excluding AOCI, increased over 5% so far this year and has increased 11% since the second quarter of last year.

From an overall macro standpoint, the outlook remains good as we continue to see good demand for our solutions on a global basis; recognizing that we have a robust product suite, we're leveraging our capabilities across our global platform and we have strong positions in most key markets.

We have good balance across our range of businesses and geographies as more developed markets provide us with solid profit streams and excess capital generation, while other markets offer more vibrant opportunities due to market growth, regulatory change, or demographic influence.

US individual mortality environment is unchanged.

That is to say, competitive but rational.

And we continue to find ways to be additive to clients in the marketplace.

Our new business activity was solid in the second quarter.

Currently, GFS in Asia-Pacific exhibits strong market demand, matching up well with our capabilities and our market position.

So we remain optimistic as we look forward, but we remain diligent in focusing our incremental capital and our efforts on the areas with the highest potential.

We continue to evaluate a range of opportunities to deploy excess capital and our organic growth is currently very healthy.

We still face some headwinds with interest rates being the most obvious but we hope to see moderation of that trend.

With that, I'll turn it back over to Jack to discuss our financial and our segment results.

Okay.

Thanks.

We reported operating income of $155 million this quarter or $2.23 per diluted share, versus a loss a year ago when we took a significant charge in Australia.

Overall, the effect of foreign currency fluctuations was minimal relative to the second quarter of 2013.

Net premium growth was again solid at 7% in the US -- I'm sorry, in US dollars, and 8% in original currencies for both the quarter and year-to-date periods.

Our average investment portfolio yield was 4.79% this period, a slight increase over year-ago quarter and versus the first quarter of 2014.

New money investment rates averaged a little more than 4% for the quarter.

While these yields are in line with our expectations as of the beginning of the year, rates have obviously moved back somewhat, so we could face some slight downward pressure on portfolio yields as the year goes on.

We repurchased about 800,000 shares this quarter for roughly $64 million.

We estimate our current excess capital position to be a little north of $500 million currently, and we continue to evaluate the most efficient and effective uses for that capital.

Now turning to our segment results.

The US and Latin America traditional subsegment reported pretax operating income of $89 million which was up slightly from $87 million last year.

Individual mortality claims experience was much improved versus the first quarter and back in line with our expectation, but the segment was a little below expectation as our group operation was off somewhat and we had some client reporting adjustments in the individual mortality business that went against us as well.

Premiums grew 5% quarter over quarter with all traditional products contributing to the growth.

Our Asset-Intensive business in the US reported pretax operating income of $44 million, above the recent range, as favorable spread performance continued and relatively stronger equity markets provided a boost.

Our financial reinsurance line continued to report strong fee income growth, up 14% in the quarter and 30% for the year, due to the continued build-up of treaties and a fairly high level of activity this quarter in particular.

Canada had a challenging quarter and posted pretax operating income of $31 million as we again experienced an above-average number of large claims, although at a reduced level compared to the first quarter.

Claims experience did improve in June and we continue to think this is just normal volatility as there was no pattern that suggested any systemic underlying trend.

Additionally, a relatively stronger US dollar versus the Canadian dollar lowered pretax operating income by about $2 million.

Premiums were up 6% quarter over quarter, reflecting a significant adverse currency effect, whereas local currency premiums increased 13% over last year.

In Europe, the Middle East, and Africa segment, pretax operating income totaled $45 million, above our expectations, with very favorable claims experience in the UK this quarter being the primary driver, and collective strength across most of the other markets in the segment as well.

The EMEA premium growth was 17% including a foreign currency tailwind of $21 million.

In original currencies, premiums were up 9%.

In Asia-Pacific, pretax operating income totaled $29 million versus a significant loss last year.

The results were stronger than expected due to ongoing underlying growth across most markets, along with a boost from higher fee income associated with a transaction in Japan which contributed about $11.5 million pretax.

That transaction involved a conversion and reinstatement of an existing treaty.

Net premiums totaled $394 million, up 11% in translated currencies and 14% in original currencies.

We saw good premium growth segment wide, particularly in Korea and Japan, as these two markets our second and third largest markets in the region respectively have overcome some previous headwinds and have reaccelerated their growth.

Segment premium growth also reflected premiums in Australia that were flat versus a year ago including the net effect of some run-off treaties, premium rate increases, and other adjustments.

As Grieg said, Australia had a small gain for the quarter, just above break even as we continue to work through a fairly fluid process including the consideration of renewals and related repricing and other ongoing actions and effects in response of the evolving market conditions there.

In this quarter we executed a treaty recapture and various other transactions, significantly affected several income statement line items including other revenue, claims and other policyholder benefits and policy acquisition costs.

Our corporate segment reported a pretax operating loss of $14 million this period, compared to $7.5 million last year.

The current period includes about $5 million of interest expense associated with the senior note offering last September and some modestly higher corporate expenses for incentive accruals.

In terms of run rate, we would expect a pretax run rate of roughly $10 million to $12 million in terms of losses each quarter from that segment, although it can be somewhat lumpy.

Company's effective tax rate on operating income was 34.6% for the quarter and 33% on a year-to-date basis.

Our best estimate of the effective tax rate on operating income is approximately 33% to 34% going forward.

This change relative to our previous expected range is primarily due to the ongoing changes in the mix of income in terms of which countries are generating net income and some of those countries have lower corporate tax rate.

In summary, we're pleased with the strong overall quarter, recognize the $0.11 per share lift from the fee transaction in Japan.

Individual mortality experience in the US rebounded from the first quarter and underwriting results were much improved in the UK and across Europe.

Our capital management efforts have been meaningful, noting the 4% reduction in average shares outstanding and 10% dividend increase that we announced in the press release.

We thank you and appreciate your support, and with that we will take questions.

Thank you.

(Operator Instructions)

We'll take our first question from Jimmy Bhullar with JPMorgan.

Hi.

Good morning.

First, just on the capital deployment, I think you bought back about $177 million in stock this year, so more than what we would have assumed.

What are your expectations for buybacks in the second half of the year?

And any views on when you expect to complete your remaining program of $123 million, whether it's this year or next year.

And then on Australia, if you could comment on how much of the block is running off versus what you've been able to reprice.

Seems like you might have been able to reprice more and the premium decline in that business might be lower than what would have thought when you took the charge initially.

Jimmy, this is Jack.

Let me take the question on capital deployment.

Yes, we have accelerated a little bit, if you take a look at the first two quarters of this year, our buyback program.

I think you should anticipate that we will moderate that program in the second half of the year.

It's unlikely we'll continue to buy back at that same rate, particularly since we continue to look at other opportunities to deploy capital into the business.

So we're always trying to weigh the potential for a buyback against deployment into the business, and as I said, we continually have discussions under way in terms of central block transactions.

So long story short, you can expect us to diminish at least somewhat the buyback program in the second half, unless we're really presented with some significant buyback opportunities.

On the Australia situation, on the roll-forward, we've essentially repriced most of the individual life business.

If you remember, the Australia marketplace for us is about equal, more or less equal individual and group business.

The group business is where we set up the big reserve last year, although the individual business was something that was not performing as we would have liked it to as well.

So we put through increases on the individual side and there's been a fair amount of noise on that.

But that's pretty well in hand at this point.

The group side, some of the group business has rolled off.

We extended one treaty for a year beyond where we would have ultimately had to take it but we did it at a very large premium rate increase.

And so there's a little bit of mixed reactions there too.

But business is overall showing Australian premiums pretty much stronger than we would have expected a year ago, but they're all very conscious decisions on our part about when it makes sense based on the conditions and our experience and our understanding of the marketplace.

Okay.

And the last one on Asset Intensive, the earnings in the past couple of quarters have been better than what you had guided to initially.

So is it the business is performing better or is it just the benefit of strong equity markets and has it caused you to review your guidance for that business?

I think it's the -- it's really a little bit of both.

Equity markets have been strong.

We don't have an overwhelming effect of equity influence in our business, but every little bit helps.

And just the general lock-in margins have been pretty good and we've taken opportunities to tweak our business and to ratchet those margins up when they present themselves.

So we continue to work at it.

They're treaties that we can continue to execute on.

Thank you.

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

Hey, good morning.

Couple of quick questions for you.

So it's interesting, you're characterized I think overall on a Company-wide basis that underwriting results were roughly in line with your expectations.

Do I have that right?

Yes, that's right.

Pretty much.

Okay.

So if I think about the EMEA segment, how much favorable relative to your expectations in rough terms was EMEA this quarter?

This is Jack.

That contributed about $12 million to $15 million of favorable variance.

Okay.

So then the offsets are really more in the Canadian, US group.

Anything else?

I think you pegged it pretty well, primarily the Canadian operation and the group part of the US operation.

Okay.

And then, Greig, just -- boy, top line growth was really impressive this quarter.

I guess even year to date it's been pretty good.

Japan and Korea really I guess contributing to the pick-up in Asia-Pacific.

My question -- maybe you can take this more at a regional level.

How sustainable do you think that is as you look out to the market opportunities right now?

I imagine you have a reasonable amount of visibility, at least over the near term.

In particular, the Asian growth, take Australia out of it, it's a little bit of a wild card and a different special situation, of course.

Asia growth has been very strong for several years and it just continues to move along in fine fashion.

Now, what's actually happened and made some things visible is in Korea and Japan as we talked about, we had some treaties that came to their natural end of their life and we had basically holes that we had to refill in the pipeline.

But the underlying growth was pretty good, even in Japan and Korea in the last couple years, if you take where we were in those situations into account.

So we're pretty pleased with that.

We think that the Asia growth is sustainable in the intermediate term.

In Europe, some of the growth is longevity.

Some of it is related to regulatory changes in GFS.

But we're seeing good opportunities in Europe, and overall we're pretty pleased with where growth has been this year.

Okay.

And maybe could you expand a little bit on Japan and Korea?

I know you had a couple of those treaties that had big co-insurance arrangements, is that right, that those products sort of ran and ran out, I suppose.

But what are you seeing driving the growth now?

Is it similar co-insurance-type arrangements or has it been more on the block side?

It's more organic growth.

It's co-insurance.

It's a lot of product development.

There's a lot of high net worth business in Asia.

There's some underwriting-oriented production in some of the markets.

It's a mixture of a lot of different things.

Our Asian teams are very proactive, very creative, and very skilled at assessing and helping customers meet the needs that they have.

Okay.

And then one last one.

Just thinking about the US group side, could you characterize what the weakness was?

Was it a matter of incident, severity, combination of the two?

Any particular products in particular there?

Yes, it was on the health side this time.

The group business runs about four sub-businesses.

There's one particular business that was sort of off track a bit.

The group business has performed very well for us over the course of time, but there's a lot of variability in that and the thing about the group business is it's very short-term fixable.

So when things get out of whack, they'll come back into whack as soon as we get through repricing or if it's just a fluctuation, we'll note that too.

We don't see anything alarming in this.

This is not a business that we've had bad experience on over an extended period of time.

It's just not very good this quarter.

Last year it was frankly the group life business that was the weakest of the four businesses.

And so the others were pretty strong.

Thanks very much for the answers.

Next we'll hear from Ryan Krueger with KBW.

Hey, good morning.

I wanted to follow up on the EMEA underwriting answer I guess.

If I subtract $50 million or so of outperformance on underwriting that would still suggest about a $30 million quarterly run rate for that, for the EMEA segment, which is quite a bit above where it's been the last few years.

So I just wanted to confirm that or is there -- or maybe there was something other than underwriting that drove strong results in the quarter.

Ryan, this is Jack.

My response on the question, I may have misunderstood, related to the UK part of EMEA.

So we did have some other positive influences in terms of mortality variances segment wide.

Maybe that's why you're having trouble reconciling.

Got you.

Could you quantify how much the other areas outside the UK contributed relative to expectations?

I'm going from recollection.

It was north of $5 million, probably $5 million to $8 million.

Okay.

That's helpful.

Thanks.

And then it seemed like you may have, in your answer to the buyback outlook, I don't know if I'm interpreting this correctly, but sounded like you might be a bit more optimistic about block opportunities going forward.

Was that the case?

Well, that may be putting too fine a point on it.

Since we've already bought back about $177 million, you can look at it as we kind of front-end loaded some of that buyback activity, and so maybe we're a little more circumspect with respect to other opportunities to deploy.

I don't want to make it sound like we're about to execute on some major transactions.

That would be nice and it may happen.

But I wouldn't look at it like that.

I would look at it like we have been able to accelerate some of the buyback, the deployment into buyback opportunities and so it's just unlikely we'll maintain that pace.

Okay.

Got it.

Thanks a lot.

Next we'll hear from Steven Schwartz from Raymond James.

Good morning, everybody.

Just some follow-ups if I could.

First, on the US group, Greig, you said it was health business.

Were you referring to major medical or were you referring to something along the lines of vision or dental?

No, major medical.

And we've had this before already with one Company.

Is this the Hepatitis C drugs?

I don't know the answer to that.

Okay.

And then what else I want to ask.

Oh, Canada.

You noted it was challenging.

You said that operations or that experience improved in June.

Was June back to normal or was it just better than the last five months, previous five months?

I don't believe June was quite back to normal, but particularly the last couple weeks of June brought it back close to normal.

Okay.

And then one more, if I could.

We always ask this.

Jack, Asset Intensive, what would you consider a normalized run rate there?

Probably about $40 million pretax I think is -- it's going to depending on what the markets do, waiver a little bit, but I think that's a good run rate estimate right now.

Excellent.

And one more, if I may.

Just back on Japan and the activity there, would that be with domestic companies or would that be primarily with foreign companies?

It's with both.

With both.

Okay.

Thanks, guys.

Moving on, we'll hear from Humphrey Lee with UBS.

Good morning.

About the Royal London transaction, I think the press release talked about the earnings contribution for the quarter was pretty minimal.

Just wondering where you are in terms of portfolio repositioning and when do you expect to achieve core earnings power for the block?

Humphrey, this is Jack.

We've essentially repositioned that portfolio already.

That's been accomplished.

So we are -- we would expect going forward to be more run rate in terms of earnings on that transaction.

Okay.

Got it.

And then in terms of the premium growth in US and Latin America traditional, I think in the press release you mentioned growth in all product lines.

Any particular product lines being a major contributors for the quarter?

There was nothing out of the ordinary.

A better way to answer that is it was pretty well spread across all the lines within that operating segment.

Okay.

So kind of like a mixture of both the morbidity product and mortality products were all seeing good growth.

Right, traditional mortality as well as the health and group businesses and so on.

Okay, got it.

Thanks.

Our next question comes from Erik Bass with Citi.

Hi.

Thank you.

As you look out over the next few years, what role do you see alternative capital playing in the life insurance and reinsurance space?

I guess do you see private equity continuing to be a bigger presence in the market?

And could you see the securitization market come back?

And how do you think about the risks or opportunities for RGA related to that?

Well, Erik, yes, I think it's very possible that alternative capital still plays a large role in the coming years.

They've demonstrated an appetite.

I think they're still interested in the marketplace.

There are others looking for run-off solutions.

That provides us with more competition, maybe some more opportunities at times, because of partnership arrangements.

But mostly it's a little bit off to the side of most of the activity we do.

We would view all this as competitive, but not unduly disruptive of our intents in the marketplace.

Thanks.

And anything that you're seeing on kind of the securitization front?

That market's been pretty dormant since the financial crisis but anything kind of percolating there to keep an eye on?

I don't know that there's anything that I can see that's really percolating, but I think there's a little bit of discussion about it.

There's certainly an awareness that the demand for non-correlated assets that can yield some return is high, and so there's a little bit more awareness and thought given to it.

But the securitization efforts take a fair amount of work, so I don't know of anything that's off the ground or too close to the finish line yet, but it could well be that that's something that picks up in the future.

Got it.

Appreciate the thoughts.

Thank you.

At this time we have one question remaining in the queue.

(Operator Instructions).

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

Thanks and good morning.

I guess this is another way to ask the question about the pace of share repurchase, but given commentary at the Investor Day, I was thinking that maybe you would have raised the dividend by more than you did.

Is that just being cautious to conserve cash in case there are any acquisition candidates that pop up over the back half of the year?

Sean, this is Jack.

No, I wouldn't say it's a consideration of cash, because we could have increased the dividend by a larger percentage and it wouldn't really have used up that much cash.

It's more to have a fairly consistent methodology and track record of dividend increases.

In other words, we're proud of a double-digit, although it's low double-digit but it's a 10% sort of increase and would like to think that we can continue to address every year some meaningful increase in the dividend.

So we don't want to get ahead of ourselves in that respect, but it's really not necessarily a cash consideration.

Thanks.

And then in the most recent quarter we've seen an announced acquisition of Protective Life, who is I presume has gone head to head with you on bids for mortality blocks.

Does the new ownership or the presumed new ownership of PL, would that have any impact on the competitive landscape for block acquisitions?

We don't really think so.

We know of course both parties very well and think they're both fine institutions.

This will make an interesting combined company.

But we would view Protective Life as sometimes competitors, sometimes partners, and we've had a good dialogue with them about several opportunities.

And so I'm not so sure that this is anything that's problematic for us.

And in fact, we're hoping it's quite the contrary.

Thank you.

(Operator Instructions)

And we do have a follow-up question from Steven Schwartz with Raymond James.

Thank you.

Just a follow-up to Humphrey Lee's question with regard to the PRT deal in the UK.

Jack, could you go over how that's going to kind of show up in accounting?

We will reflect it as a risk transfer transaction.

Are you asking for a -- without going through line items, are you asking for a run rate on earnings?

No, I'd love it but I wasn't asking for it.

Okay.

I just want to make sure I understood the question.

I guess I was a little bit surprised that it didn't show up as kind of a lump sum in revenue.

Because of the asset transfer.

No, we wouldn't reflect that as revenue.

That's simply an asset transfer.

You'll see it on the balance sheet obviously.

So it's going to come through as premium and loss expense?

Right.

Okay.

That's what I was asking.

All right.

Thanks.

It appears there are no further questions in the queue at this time.

Mr. Lay, I'll turn the conference back over to you for any additional or closing remarks.

Thank you.

Thanks to everyone who joined us this morning for the call.

With that, we'll end the second-quarter results conference call.

And to the extent any other questions come up, feel free to call us here in St.

Louis.

With that, we'll end the call.

Thank you very much.

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

Thank you for your participation.