美國再保險集團 (RGA) 2015 Q1 法說會逐字稿

Good day, and welcome to the Reinsurance Group of America first-quarter 2015 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 to everyone.

Welcome to RGA's first-quarter 2015 conference call.

Joining me in St.

Louis this morning is Greig Woodring, our Chief Executive Officer.

Greig and I will discuss the first-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 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 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 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 the press release and quarterly financial settlement for more information on this measure, and reconciliations of operating income to net income for our various business segments.

These documents and additional 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, and good morning, everyone.

Thanks for joining us this morning.

I will provide some general overview comments on the quarter, Jack will go over the financial results, and then we will open it up for Q&A.

Operating EPS was $1.77 per diluted share compared to $1.61, so an improvement versus a year ago, but modestly below our expectations, as our US mortality business was unusually weak, and our Asia-Pacific business was unusually strong.

We experienced adverse mortality results in our North American operations again this year, noting that we had unfavorable results a year ago.

It is not uncommon for us to have some volatility in claims in the short-term, and Q1 tends to have some seasonal effect from winter weather in the northern hemisphere, but the experience this year was admittedly more extreme.

I'll expand on the claims shortly, but otherwise, there were many positives to report as our global operating model and diversified sources of earnings again served us well.

And our international and Global Financial Solutions, or GFS, segment continued the pattern of strong results and overcame the currency headwind that we anticipated.

As indicated, our Asia-Pacific business was unusually strong, as the results were favorable across the region, including an unusually strong result from the Australian operation.

Please -- premium growth adjusted for foreign currency in the US mortality retro session transaction we executed in the fourth quarter of 2014 was 6%, as several areas showed solid progress.

Moving back to mortality results, I'd like to provide some additional details and color.

Underwriting experience was about $60 million worse than expected in the US; whereas last year, the higher claims were concentrated in large claims, particularly in our facultative book.

This year, it was a much broader issue with an increase in both frequency or claim counts and severity, or average claim size, with the automatic impact business underperforming.

The one common denominator this year was age, and almost all of the higher claims came from older age individuals, pretty much irrespective of the year in which the policies were issued.

Our experience is similar to industry data that we have seen in terms of a material increase in mortality overall, and the higher percentage coming from those over age 65.

Further, the flu season was particularly difficult in many areas this year, and there's ample historical evidence of a direct and indirect influence of the flu on overall mortality rates from a wide variety of illnesses, including the obvious respiratory illnesses such as pneumonia to the less obvious such as cardiovascular, with the elderly typically affected disproportionately from this influence.

In Canada, our underwriting results were $11 million worse than expectations, and another in a string of tough quarters, as there was a combined effect of higher-than-expected claims, large claims, and some increase in the frequency of smaller claims.

We continue to analyze the claims data, especially relative to the more recent trends, but the results aren't conclusive, and we suspect the biggest influence from flu-related seasonality.

At this point, we would expect the mortality fluctuations to smooth out going forward.

On a capital management front, we were aggressive in the quarter in terms of share repurchases, noting that our excess capital position coming into the year was very strong.

We hope to continue to take a balanced approach to capital usage, as we are funding solid organic growth and we continue to look at in force blocks.

We will return capital to shareholders through repurchases and dividends as appropriate.

Pipeline of potential in force blocks in the market remains ample.

The size and timing of any such deals reaching execution is always a bit uncertain.

As we look forward, we remain optimistic, given a constructive overall environment and RGA's ability to take advantage of opportunities, given our client solution mentality and strong balance sheet.

Our new business activity is strong, notably in EMEA, Asia, and through our GFS unit.

And we would expect our North American underwriting results to normalize.

While we have started the year slightly behind our expectations, our intermediate term financial expectations have not changed.

And we note that 2014 started out in a similar manner, and we ultimately delivered strong results.

With that, I will turn it back over to Jack to discuss the financial and segment results.

Okay, thanks, Greig.

We reported operating income of $122 million this quarter, or $1.77 per diluted share, a 10% increase over $1.61 per share a year ago.

Reported net premiums were [off] 4% quarter-over-quarter, including the effects of the fourth-quarter retrocession agreement and foreign currency headwinds.

Premiums were up 6% when adjusting for those items.

Adverse currency movements reduced current period operating income by about $0.11 per diluted share compared to the prior year.

Turning to our investment results, our average investment portfolio yield, excluding the spread business, was 4.78% this period, down 16 basis points versus last year's -- or versus the fourth-quarter, when the yield was boosted by variable items such as bond and mortgage loan repayment.

The portfolio yield was slightly above the first quarter of 2014, and our new money yield remained at roughly 4%.

There was no substantial impact from mortgage loan prepayments and bond prepayments in this quarter.

Our capital management strategy continues to play out well for our shareholders.

We paid out over $250 million of excess capital this quarter in the form of stock buybacks and shareholder dividends, and deployed another $200 million to support the acquisition of Aurora National, which closed on April 1.

Following the Aurora transaction, we estimate our current excess capital position to be around $800 million, and will continue to consider optimal deployment strategies.

We would not expect to continue to buy back our equity shares throughout the remainder of the year at a pace similar to that of the first quarter.

Now turning to our segment results, the US and Latin America Traditional subsegment reported pretax operating income of $20 million, well below the $48 million reported in last year's first quarter, reflecting the core mortality that Greig mentioned.

Premiums were down 2%, due primarily to the effect of the retrocession transaction in the fourth quarter of 2014.

Absent that, premiums would've been up 7%, reflecting stable ongoing new business and the positive impact of the Voya transaction.

Our asset-intensive business in the US reported pretax operating income of $40 million, in line with last year's $41 million.

Both periods benefited from favorable net investment spreads, and have been -- that have been sustained despite lower rates, noting the investment prepayments this quarter were modest.

We believe that $40 million is a good run rate for quarterly pretax operating income going forward.

Our financial reinsurance line reported pretax operating income of $12 million, also in line with last year's first quarter.

Given the growth in our global GFS business, we are providing traditional and nontraditional breakdowns in terms of our results for our international segments going forward.

Our Canadian segment reported pretax operating income of $21 million, about $800,000 below the prior year quarter, primarily due to higher individual mortality claims and a relatively weaker Canadian dollar, which adversely affected the current results -- current quarter results by about $2.4 million.

Segment-wide premiums increased 8% quarter-over-quarter in local currency, and decreased 4% in translated US dollars.

The Traditional business posted pretax operating income of $17 million this quarter compared to $22 million last quarter -- in last year's first quarter, reflecting a higher frequency of mortality claims, particularly on policies under $1 million.

Nontraditional business in Canada, which includes longevity and fee-based transactions, reported an increase in pretax operating income to $4 million this quarter from less than $1 million a year ago, including the effects of the longevity transaction we announced in early March, which was retroactive to the beginning of this year.

In our Europe, Middle East and Africa segment, pretax operating income increased significantly to $29 million from $14 million a year ago, due in part to the addition of transactions booked in 2014, improved mortality in the UK, and favorable longevity experience this period.

Total EMEA reported premiums were 12% lower this quarter and totaled $300 million, including foreign currency drag of about $32 million.

Traditional EMEA business reported pretax operating income of $10 million this quarter versus a loss of $2 million in last year's first-quarter, attributable to a swing from unfavorable mortality experienced in the UK in 2014 to in-line experience across the region in the current quarter.

Nontraditional EMEA business, which includes asset-intensive longevity and fee-based transactions, performed well this quarter, posting a 16% increase in pretax operating income to $19 million versus $16 million a year ago, reflecting favorable longevity claims experience, and new transactions added in 2014 and in this quarter.

Momentum is strong in the subsegment.

For risk management purposes, we executed a longevity retrocession transaction during the quarter that reduced premiums by about $22 million.

Turning to Asia-Pacific, results were very strong this quarter, with good performance -- good operating performance in Hong Kong and Southeast Asia, Japan, as well as good results in Australia.

Pretax operating income totaled $63 million, where we will have our prior-year total of approximately $25 million.

Segment-wide premiums were flat quarter-over-quarter at $382 million, but rose 10% when adjusting for the adverse currency effect of $37 million.

Traditional business in Asia-Pacific reported pretax operating income of $53 million this quarter versus $19 million a year ago.

A significant portion of that increase, roughly $20 million, was due to unusually strong individual and group lump sum results in Australia this period, noting that the first quarter is typically strong there.

And while we are pleased with the results this quarter, we would expect some degree of volatility from quarter-to-quarter in that operation.

Beyond Australia, we had another quarter where we saw good results across the region, particularly in Hong Kong and Japan.

Our nontraditional Asia-Pacific business includes asset-intensive business, fee-based transactions, and various other transactions, and also performed well this quarter, increasing pretax operating income from $6 million to $10 million this quarter.

Our Corporate segment reported pretax -- a pretax operating loss of $6 million this quarter, which was better than the expected range of roughly $8 million to $10 million of loss each quarter, primarily due to lower general expense levels.

Now we thank you, and appreciate your support and interest in RGA.

And with that, we will open the call for questions.

(Operator Instructions).

Jimmy Bhullar, JPMorgan.

I had a couple of questions.

The first, can you comment on claims trends in the US business through the quarter?

So, is there a possibility that the flu-related claims, some of them flow into the second quarter as well?

And then secondly, on buybacks, you obviously -- you bought back almost [4%] of your shares outstanding the first quarter.

So I'm just trying to get an idea on, are you expecting to do more buybacks throughout the year?

I realize you can't sustain this pace.

But absent any deals, would you remain active on buybacks?

And then, lastly, just a question on the expected tax rate.

I think it was 32.5% in the first quarter.

To what extent was this influenced by, like, just higher proportion of earnings from foreign markets?

Or has anything changed in terms of your expectations for the tax rate?

Yes, Jimmy, I'll answer the first one and let Jack do the next two.

The claims through the quarter were pretty strong flow all through the quarter, right up to the end, from the beginning to the end.

Yes, I think he was questioning the second quarter.

And we were -- it's (multiple speakers) --

No, like it's not something that you saw a lot in the first quarter and then all of a sudden died down, or early in the quarter and died down.

So there's a chance that you see some flow over into second quarter and (multiple speakers) --.

Yes.

It didn't die down in March, no.

You're right.

Okay.

Okay.

Jimmy, I'll take the other two questions.

In terms of buybacks, yes, we were very aggressive in the first quarter.

I'm sure you're aware we've gotten an authorization to buy back [$300 million] of shares this year.

And we wouldn't expect to be as aggressive going forward as the [$230 million] in shares that we repurchased from the first quarter.

Now a lot depends going forward on what the other options are in terms of deployment of excess capital.

And we've got an interesting pipeline.

It's hard to tell what will be executed and when, or even if we will execute on some of the items in the pipeline.

So we have to kind of weigh that.

We were aggressive in the first quarter in part because we started the year with over $1 billion of excess capital.

And a lot of that accrued in the fourth quarter last year when we did the embedded value transaction and the retrocession transaction.

So, I guess suffice it to say that we will be less aggressive, or at least plan to be less aggressive going forward, even though it's kind of hard to peg exactly what the target would be for total buybacks during the year at this point.

A lot will depend on other opportunities for deployment.

In terms of the tax rate, your comment is accurate.

But really the low rate this quarter relates to a higher percentage of earnings in some of our international businesses.

So that's really what drove the lower rate.

So it really depends on the pattern of earnings going forward, but expect something, all things being equal, in a 33% to 34% range in terms of an effective tax rate for the year.

But, as I said, it remains to be seen in terms of where the results emanate and whether the foreign operations throw off a little bit more than expected in terms of income.

Okay.

And just to be clear on the buybacks, obviously you won't maintain the pace, but if you don't do any more deals, then it's reasonable to assume that you would do more buybacks throughout this year?

Yes, that's fair.

I mean, if -- to the extent it looks like we will not be executing on deals, we would likely be more aggressive on the buyback front.

Okay.

Thank you.

Eric Bass, Citigroup.

I guess, first, maybe just to follow-up on that last comment.

And should we read anything into kind of how aggressive you were on buybacks this quarter and to your expectation for finding locked deals near-term?

And maybe on your excess capital, I think you had cited sort of $800 million of excess capital, but I think you've also indicated you typically like to hold sort of $300 million to $500 million of excess capital.

But to the extent there were block opportunities available, I guess how much of that $800 million would you be comfortable using?

Well, Eric, we would be comfortable using the lion's share of that $800 million.

In other words, we have a fairly predictable capital-generation strain.

So, to the extent we had opportunities and we are looking at businesses that met our return requirements, we'd be comfortable deploying a considerable amount of that $800 million.

But over time -- you had it right, our target is $300 million to $500 million in terms of excess capital.

Back to your earlier question, I don't think you can read anything into the aggressive nature of the buybacks in the first quarter vis-a-vis our other opportunities because of what I mentioned earlier.

We started the year with a very significant amount of excess capital.

Got it.

And then maybe on Canada, I think in your comments, you indicated that you think most of the elevated claims this quarter were more related to seasonal factors.

But obviously, you've seen some adverse experience over the past couple of quarters.

I guess how are you thinking about kind of the benefits ratio or earnings run rate for this business for the remainder of the year?

And any kind of update on your thinking about what has been the driver of (technical difficulty) large claims over the past year or so?

Yes, Eric, we -- in North America, both US and Canada, we don't really have cause of death information at this point.

We'll get that over the course of probably the next six months or so.

So, all we can say is that the advanced stages of deaths and other things are sort of consistent, the frequency elevation is consistent with a lot of flu claims.

But we really don't know at this point.

In terms of Canada, I think the first quarter was very consistent with first quarter last year in total.

And we would expect that claims in Canada are going to run similar to the claims flow last year.

The elevated claims is not from large claims is not really a lot of numbers, so it's always hard to get a read on that.

And it can bounce around a bit.

But we are -- after several quarters that have been fairly consistent, we are beginning to think that the Canadian flow before that was probably just a good fluctuation, and that last year's level is pretty close to where it should be.

Got it, thank you.

That's helpful.

Sean Dargan, Macquarie.

I wanted to drill down a little bit more on Asia-Pacific.

You said that the results were unusually good, and also that the first quarter is typically seasonally strong in Australia in the Traditional business.

I was wondering if you could quantify the contribution to the total $52.6 million from Australia?

And then also just to clarify, is the total and permanent disability considered a Traditional product?

I'll take that -- this is Jack -- I'll take the first part of that question.

The Australia results were roughly $20 million or so pretax beyond what we would've expected for the first quarter.

And while we don't want to get into what's the actual plan for Australia for the entire year, it is -- we do have a positive plan.

In other words, we do expect positive results there, but only modestly positive.

TPD business is not the source of the upside.

It's not a source of downside either, but it's not a source of upside for the quarter.

Okay.

You've given us some guidance range of how to think of a quarterly run rate and other businesses.

Is there a number you can give us for Asia-Pac Traditional?

Oh, in terms of a run rate for the year?

Yes.

Probably -- I think a good estimate is maybe $60 million-ish for the year.

Does that include -- that's the total Asia-Pac?

Right.

Okay.

And then just a question about how to think of the CDC data.

You know, a lot of investors saw the monthly trends and the elevated deaths relative to the first quarter of last year.

Can you just remind us what the correlation of your results to CDC data is?

And is there a certain standard deviation at which it becomes meaningful?

Always hard to pick, Sean.

Sometimes it's correlated, sometimes it's not correlated.

So, I guess that means it's generally unpredictable.

But when you have something that's a pervasive effect, then it becomes a little bit more predictable.

But it's really hard to take a subset of population, especially something as different as insurance populations are, compared to the CDC data, and draw hard and fast conclusions from it.

Okay, thank you.

Humphrey Lee, Dowling & Partners.

Just wanted to follow-up on the overall US mortality.

Was there like a -- what is the distribution between the -- kind of RGA's legacy business versus the Voya acquired block and the Aurora block in terms of performance?

Actually the excess mortality was split evenly over all of our segments.

Say, the [9904] block, the blocks before that and the blocks after that.

And it -- they all were just about the same.

Okay, got it.

And then in terms of the Canada performance, you'd mentioned that it's still not really a particular trend that you can point to.

But is there any sense of kind of, I guess, general kind of across vintages?

Or -- and then also kind of across kind of parties or the type of products?

No, we've looked very carefully at individual clients, individual eras.

It really is a large case phenomena that large debt claims basically rose to a new level last year from a very modest level, and there's not a lot of claims there.

So it isn't anything you can draw statistically relevant conclusions about in any of the subsegments or individual cells at this point.

And we've looked and continue to look in our Canadian business at things like that.

But at this point, are pretty much reaching the conclusion that it's just sort of spread across the business.

Okay.

Thank you.

And then lastly on -- thank you for kind of breaking down the Traditional and nontraditional business in international segments.

Looking at the results in Canada and Asia-Pacific, there seem to be some one-off transactions that helped the bottom line.

Other than in Canada for the longevity transactions, any kind of specifically like the one-off transactions that helped the numbers in the quarter?

And how should we think about your run rate earnings based on the book of business that you have right now?

Yes, Humphrey, let me take the first part of that.

This is Jack.

No, there weren't any -- there's a -- there weren't any particular transactions, significant transactions, that kind of skewed the results to any meaningful degree in most of the segments.

A little bit more so in Canada just because we don't have much in the nontraditional segment.

But if you look at some of the others, EMEA, we announced transactions last year that had some impact.

But in terms of relatively new transactions this quarter, there were really none that disproportionally had an impact on the nontraditional business.

So basically the earnings power of this quarter would be a decent run rate?

Yes, it is.

Now there's more volatility in that subsegment just because it's not as large.

But, no, I think that's safe to say.

Okay.

Thank you.

Ryan Krueger, KBW.

Jack, I wanted to follow-up on your response to Sean's question, because perhaps I misheard you.

But did you say $60 million for full-year Asia-Pacific Traditional earnings?

Because I think you did $53 million in the quarter.

So I just wanted to follow-up on that.

Oh, yes, that's right.

So that would suggest very minimal earnings for the next three quarters of the year in that business?

No, I'm not trying to project -- not necessarily trying to project for the year.

$60 million to $70 million is a reasonable projection; perhaps $60 million to $80 million for the total Traditional portion of that segment.

But we did have significant upside, as we mentioned, in the first quarter.

So, we are certainly not guiding to try to indicate that that's a run rate in terms of what (multiple speakers) --.

Oh, the $60 million to $80 million would've been what you expected coming into the year, but then this was much better than expected?

Correct.

Correct.

And we stated that in the release it was unusually strong in terms of Asia-Pacific in the first quarter.

Understood.

And then can you remind us how much earnings you expect the Aurora deal to generate, and if it will be immediate or if it will be some sort of ramp-up period?

Aurora likely would be in the $30 million range annually.

And there will be a little bit of a ramp-up.

I think we mentioned that there was no impact in the first quarter, but it is effective as of the beginning of the second quarter.

Okay.

And that will be split partially in asset-intensive and partially in life, is that correct?

That's right.

Okay.

All right, thank you.

Steven Schwartz, Raymond James.

Ryan just asked a bunch but I do have one question.

Back in Australia, historically, the guidance had been following the bigger reserve increases that breakeven, that basically a deficiency reserve was taken.

Is that gone now, Jack, and we are actually seeing earnings coming out of there, and should continue to see earnings coming out of there?

Steven, I just want to make sure I understand the question.

When you say is that gone, what exactly do you mean?

I guess I'm not exactly sure how the accounting would work.

But are we past the period of time, I guess, where you expect earnings to be breakeven?

And what's changed, I guess, is a better way of putting it?

Oh.

Yes, we expect better than a breakeven result.

But we still don't expect profitability up to the level you would've seen from the Australia operation two or three years ago.

So we do expect a positive result, but it's still -- I characterize it as relatively modest.

We still expect some volatility.

And I'll remind you that the group claims IB&R that we set up a couple years ago, a lot of that still exists because it's a longtail business.

So, that situation is still playing out.

Okay.

All right, that's all I have.

Like I said, Ryan asked the others.

Thanks.

Scott Frost, Merrill Lynch.

Thanks for taking my question.

This is regarding the 6 3/4 hybrids that I think float to LIBOR plus 266 in December to call date.

Could you maybe remind us of the NRSRO treatment of that from a capital perspective?

And I have a follow-up.

Well, we think of it more in terms of each of the rating agencies has a different capital treatment of that security.

It's a little more benign in terms --

Right.

What monies bucket is it in?

I think it's in Bucket B.

Okay.

And is it within the S&P -- in S&P, how do they let you treat it?

Yes, S&P as long as we are within the 15% or so cap, treats it as the equivalent to equity capital.

Is that where you are now?

I'm assuming yes.

Is that --

Yes.

That's right.

Okay.

That's correct.

And how should we think of this in terms of how attractive this instrument is in your overall capital structure?

How do you view that?

Well, I guess I would say it is attractive.

Hybrid securities are part of our permanent capitalization, at least that's the way we think of it now.

If you're asking what are we going to do with that security in December, that really remains to be seen at this point.

But I will say hybrids, we view them to be a permanent part of our capital.

Okay.

All right.

Thank you.

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

(Operator Instructions).

We'll take our next question from Dan Bergman with UBS.

There have been some recent press reports about a couple of sizable life blocks potentially coming to market.

The big picture, I just wanted to see if there's any additional color you could provide on the block acquisition pipeline and level of activity in the market?

And whether you've seen any change recently?

And related to that, how you would characterize, I guess, the sweet spot or target size for individual deals you might look to pursue in terms of capital deployed?

Thanks.

Yes, I would say, Dan, our pipelines this year are pretty similar to what they were last year.

We never know when things are going to break through to be executed, but we actually look at things that run a range from small to large.

And while we don't always do headline deals, we consistently are doing transactions of a small nature in virtually every year.

So we would expect that there will be a lot of that.

With the coming solvency to capital regime in Europe, there's a little bit more activity on that front, perhaps, than last year.

And that's increasing.

So we really don't know what we're going to do this year, but we are pretty optimistic, given where things are today.

That's all we can say about it because we really don't know any more.

That is very helpful, thanks.

Switching gears, I believe you said that the consolidated premium growth was 6%, backing out the impact of FX and the retrocession deal.

Is that a reasonable estimate for kind of the current overall organic premium growth rate?

Or are there other adjustments we should be thinking about?

And any sense in general about how organic premium growth, kind of backing out the FX drag, should trend from here?

Yes, this is Jack.

That is a pretty good run rate in terms of how we view, as we enter the year, kind of our expectations in terms of a topline growth rate.

You know, I'll remind you that can be significantly influenced by any kind of block deals that come our way.

But I think that's -- all things equal, that's a reasonable run rate in terms of expectations.

Okay, great.

Thank you.

It appears there are no further questions at this time.

I'd like to turn the conference back to today's speakers for any additional or closing remarks.

Okay.

Well, thanks to everyone who joined us today.

To the extent any other questions come up, feel free to give us a call.

And with that, we will end the first-quarter earnings release conference call.

Thanks again.

This concludes today's call.

Thank you for your participation.