美國再保險集團 (RGA) 2016 Q1 法說會逐字稿

Good day, everyone, and welcome to the Reinsurance Group of America first-quarter 2016 results conference call.

Today's call is being recorded.

At this time, I'd like to introduce Chief Executive Officer, Mr. Greig Woodring; and Chief Financial Officer, Mr. Jack Lay.

Please go ahead, Mr. Lay.

Okay.

thank you.

Good morning to everyone, and welcome to RGA's first-quarter 2016 conference call.

Joining me in St.

Louis this morning's Greig Woodring, who is RGA's Chief Executive Officer; as well as Anna Manning, our President; and Todd Larson, who as you know will become the CFO of RGA as of May 1.

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 your questions.

As we have previously commented, investors should not expect any dramatic changes in strategy in one direction or another, in the shorter term.

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 a pre-tax 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 the press release and quarterly financial supplement for more information on this measure, and reconciliations of operating earnings 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'll turn the call over to Greig for his comments.

Thanks, Jack.

Last night we reported EPS of $1.85 compared to $1.77, one year ago.

We consider this to be a solid result as there were no major surprises, and it was nice to have a more typical result from our US traditional segment.

While EPS were slightly below our expectations, the shortfall primarily can be attributable to normal volatility and claims in segments that have had a string of favorable quarters recently, namely, traditional segment in Canada and in the UK.

Our corporate expenses were also a little higher than expected, but that's not to be -- not expected to be repeated.

We also continue to face a headwind with respect to currency, given the strong US dollar.

And the negative effect was equal to $0.10 compared to the prior-year first quarter.

Otherwise, EPS would've been up 10% over a year ago.

We often point to our global model and earnings diversity as key strength, and quarter one was another good example of that.

Certain segments were particularly strong, others particularly less favorable.

The end result was a balanced mix and solid results overall.

Asia-Pacific was a standout this quarter, with Australia and Japan leading the way.

Our US individual mortality business was in line with expectations.

And our US group business rebounded, also went back in line, including the group disability component.

Finally, our GFS business continued to prove strong results overall, across the various geographies.

Moving on to the top line, our premium growth in constant currency was strong, and our new business activity remains good.

First-quarter premiums reported were up 7%, while in constant currency that rate of increase was 10%.

Thus, continued to demonstrate that we can achieve strong growth through a combination of organic and transactional opportunities.

We did not close any major in-force transactions in the quarter.

This is not a total surprise.

We had strong fourth-quarter experience, as sellers were often motivated to close deals by year-end.

So the first quarter often starts somewhat slowly.

However, the pipeline is good.

We are active in discussions, and the environment continues to remain favorable.

Looking forward, we continue to be optimistic about our global positioning, market opportunities, and ability to execute.

We see solid organic growth potential, as well as abundant opportunities for transactions.

We are off to a solid start in 2016, and remain confident that we can continue to deliver strong financial results.

The management transition is going smoothly, as you might expect.

Both Anna and Todd are long-serving executives at RGA.

Both are highly capable, and both are highly credible within the Company.

With that, let me turn it back to Jack.

Okay, thanks, Greig.

I will now provide some information on our investment results, capital management, and additional details on segment level results.

The average investment yield of 4.46%, excluding spread businesses, was down 32 basis points over the first quarter of 2015, and down 50 basis points over the fourth quarter yield, due primarily to higher prepayment and variable investment income in the prior period and higher investment income associated with a block transaction in the fourth quarter of 2015, which included investment income that was retroactive to the beginning of the year.

For instance, the combined effects of prepayments and variable investment income reduced the yield approximately 23 basis points from the fourth-quarter yield.

And the effects of the block transaction I mentioned represented another 27 basis points of yield differential.

The new money yield this quarter was approximately 4%, roughly the same as a year ago.

We repurchased $105 million of our shares and closed on a few small in-force transactions, none of which were particularly material.

Currently we have just under $300 million remaining in our share repurchase authorization that we -- that was announced earlier this year.

The current excess capital position is approximately $500 million at the end of the first quarter.

Now turning to our segment results, the US and Latin America traditional business reported pre-tax operating income of $53 million versus $23 million a year ago.

Current period results were generally in line with our expectations, whereas last year's quarter reflected particularly poor mortality.

I would point out that there was one extra day in this year's quarter due to 2016 being a leap year, which typically means we would have an increase of about $10 million in reported claims for the quarter.

Frequency was slightly worse than expected, while severity was slightly better.

There were no major surprises or particular issues of concern in terms of the individual mortality claims.

The group business saw a rebound in bottom-line results.

And results were in line overall, including the disability business.

Premium growth was strong in the US traditional, up 11% quarter over quarter, and totaling $1.2 billion.

Without the effect of new block transactions, premiums were up about 7%.

Our asset-intensive business reported pre-tax operating income of $45 million this quarter which was towards the lower end of our expected range.

There was not one major item that was responsible; but, rather, a combination of several factors, including lower prepayment fees and mildly negative effect from lower equity markets.

Our financial reinsurance line reported pre-tax operating income of $15.9 million this period versus $12 million last year, as recent new business activity drove for that result.

Our Canadian traditional segment reported $19 million in pre-tax operating income, up $17 million reported in last year's quarter.

While better than the prior-year quarter, the mortality experience was modestly unfavorable, and foreign currency was a meaningful negative totaling $4 million.

Premiums totaled $216 million, and were up 12% quarter-over-quarter in local currency.

In translated US dollars, premiums were up 1% with over $22 million in adverse currency fluctuation.

Non-traditional business in Canada, which includes longevity and fee-based transactions, reported pre-tax operating income of less than $1 million this period versus $4 million a year ago.

This decrease is primarily due to unfavorable experience on longevity treaties this quarter versus very good experience last year.

Switching to Europe, Middle East and Africa, our traditional business reported pre-tax operating losses of $1 million, down from pre-tax operating income of $10 million last year.

This quarter, we had unfavorable mortality across most of the region, but most notably in the UK.

Non-traditional EMEA business, which includes asset-intensive, longevity, and fee-based transactions, performed quite well this quarter, reporting pre-tax operating income of $26 million compared to last year's $19 million.

Higher-than-expected terminations on bulk annuities and better asset-intensive spreads contributed to our solid bottom-line results in the EMEAs segment.

Turning to Asia-Pacific, our Asia-Pacific traditional business, or in our Asia-Pacific traditional business, pre-tax operating income totaled $41 million compared to an unusually strong $53 million in the prior-year period.

Overall positive experience and lower expenses contributed to the solid quarter, with Australia posting a strong result and the rest of Asia doing well overall, led by Japan.

Our non-traditional Asia-Pacific business reported $7 million of pre-tax operating income, down from $10 million a year ago, primarily due to less favorable experience on several treaties.

Our corporate segment pre-tax loss of about $30 million this quarter was higher than the approximate $15 million pre-tax loss run rate we mentioned in the fourth-quarter call.

Last year's first-quarter corporate corporate segment pre-tax loss of $6 million was lower than expected, primarily as a result of some favorable expense accrual adjustments.

This quarter's -- this year's quarterly result includes higher-than-normal general expenses associated with various corporate initiatives not expected to continue throughout the year.

This segment also reflected lower investment income.

The lower investment income was primarily due to an increased investment income allocation to the various segments.

And we estimate a better pre-tax quarterly loss run rate for the corporate segment to be closer to $20 million going forward.

This increase should not result in any significant impact on the consolidated results, as it should largely be offset by additional investment income in the segments.

We feel we are off to a very solid start this year, and like our position in the industry across multiple markets.

As most of you know, I recently announced my intention to retire at the end of 2016, and we have named Todd Larson as our CFO, effective May 1. Todd and I have worked together very closely over the last 20 years.

And he has been heavily involved in all aspects of the financial side of our business, and has spent the last two years as head of our Enterprise Risk Management program.

I felt the timing was right to move forward with this decision, given the Company is on very sound footing at this point.

We have very good momentum.

And we have people like Todd and the broader finance team who are experienced, and ready to step in and continue to move the Company forward.

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

And with that, we'll open the call for any questions.

(Operator Instructions).

Jimmy Bhullar, JPMorgan.

I had a couple of questions.

First on the asset-intensive business, you mentioned the results were slightly weak.

Can you quantify the impact of just the lower surrender fees and the lower prepayment income versus what you would normally see, or what you've normally seen over the past year?

Jimmy, this is Jack.

I'd say the total of those two was roughly $5 million.

I think about a $50 million per-quarter run rate would be close to our expectation at this point.

Okay.

And then on the traditional US business, can you talk about the performance of the 1999 to 2004 block?

And have you, as you've gone a couple of quarters since you adjusted your assumptions for that, have you -- how have you seen the trends emerge in that block?

And has that made -- caused any changes in your views on the profitability of that business?

Jimmy, in terms of the eras, we generally had less favorable experience in the pre-1994 and the 2006 to 2010 eras, and more favorable experience in the 1994 to 2005 eras.

So that includes that 1994 to 2004.

This is counter to what we saw in the first three quarters of 2005.

And again, it reflects the volatility of this business over the shorter term.

So this quarter, that era, the 1999 to 2004, performed well.

Then just lastly, what are you seeing in terms of the deal pipeline?

I realize you didn't do anything this year, just given the time of year, but how is the deal pipeline overall?

We think the deal pipeline, Jimmy, is satisfactory.

We wouldn't call it bursting at the seams; nor would we call it weak.

It's very good.

And we expect that a lot of the things that are in the pipeline will work their way through during the course of 2016.

Okay, thank you.

Erik Bass, Citi.

Just wanted to start with US traditional and the mortality results there.

And, one, just wanted to clarify -- I think you said that claims were probably about $10 million higher this quarter because of the extra day.

But then in general, just wanted to get a sense, how do you think about the magnitude of seasonality in terms of your expected results?

And how much of a market differential would you typically expect in the first quarter versus the remainder of the year?

Eric, this is Greig.

I'll take that.

The US traditional claims, we would expect $10 million more because of the extra day, given a leap year.

In fact, claims came out just slightly below our internal expectation.

But, admittedly, we did have a pretty high expectation.

We have a fairly high seasonality component to our own internal plans and guidelines.

We would've said claims are little bit better than expected in the first quarter.

But it's kind of hard to see that because we have a very high seasonality in our own internal models.

Got it.

Any way you can sort of quantify what the difference would be between, say, first and second quarter, just in terms of your own assumptions?

Eric, this is Jack.

We build in roughly $30 million or so of additional claims in the first quarter compared to the follow-on three quarters.

So, hopefully, that helps.

That's perfect, thanks.

Then in Asia, can you provide any more detail on the strong results and expectations there?

And is there any seasonality in that business?

Or is has it just been fluctuations that the first quarter has been strong the past couple of years?

Yes, the Asia business has been strong consistently through the last couple of years, and we had another result like that.

Australia is a different matter.

Australia has pronounced seasonality in that business.

If you recall, we had a very strong fourth quarter.

We had now a very strong first quarter.

That has been the pattern in the last couple of years.

We also had weaker second and third quarters, and particularly the second quarter has been quite weak.

So there's pronounced seasonality in Australia, so we were not too overly excited about Australia.

We are happy that we had great results in Australia in the first quarter.

But we do expect that part of that will be seasonality when we look back on it.

Got it, thank you.

Kenneth Lee, RBC Capital Markets.

I had a question in terms of the potential block acquisition.

Could you remind us if you guys have any preferences for specific businesses or products?

Or could you tell us which particular areas are you seeing more activity?

Ken, obviously we like mortality blocks that -- that is our sweet spot.

We also like longevity business, asset-intensive business.

We like opportunities where we have a differentiator, whether it is a differentiator because of a skill, or a capability, a relationship.

I would suggest to you that we like all the business we currently have on our balance sheet, but particularly like mortality business because of our strengths and capabilities and our expertise.

Got you.

Great.

Just had one more question in terms of the elevated claims within the UK, any details in terms of whether it was frequency, severity, and whether this is above normal seasonal trends in the first quarter?

Thanks.

I'm sure we know that, Ken.

The claims were a little high on the life side and on the critical illness side.

But also as Jack noted, the experience on the annuities and essentially longevity risk was also good, which reflects seasonality going the other way.

The UK was, in balance, negatively affected by the mortality rates, but we did have some counter-seasonality on the longevity side.

Okay.

Thank you.

Michael Kovac, Goldman Sachs.

One on the non-traditional business in the US and Latin America: can you help us understand some of the volatility that emerged, below the line, that drove the difference in the net loss this quarter?

It looked like the first net loss that I'd seen there.

Can you walk us through some of the pieces that led to it?

Michael, this is Jack.

The primary driver there is we have to revalue embedded derivatives that support some of the business that's written on a modco basis.

And that revaluation, on a net basis, was about $40 million.

On a gross basis, just in terms of the revenue line, it was about $92 million, as I recall.

But that's something that because there is a portfolio that doesn't reside on our books, we have to reflect some of the changes in the value of that portfolio as relates to credit spreads primarily.

And as a result, that's what drives the below-the-line, so to speak, sort of result.

So when we look forward at that, what should we be looking for?

Is it credit or equity in terms of what would drive a loss in future quarters?

It's primarily credit spreads, not equity portfolios at all.

Our expectation is that's an amount that starts at zero and ends at zero, and goes all over the place in between.

Okay, great, that's helpful.

Then maybe on the traditional markets, are you seeing anything in the US, or maybe in Europe, from a pricing dynamic standpoint -- and obviously some of your larger competitors are in both P&C and the life business -- are you seeing any pressure on the life side from companies that are maybe seeing pressure on their other businesses, and maybe being more competitive on the life side?

Michael, we see some companies that are a little more aggressive today than we thought they were a little while back.

It's always hard for us to attribute the causes of that.

That's hard for us to read.

The market is overall slightly increased in terms of competition around the globe, but not overly competitive.

We don't feel terrible about the about the status of competition in the marketplace.

That's helpful.

If I could sneak one more in.

As we think about some of the expenses in the quarter, it sounds like the higher corporate expenses you are not expecting to persist at quite the same level.

But when I look at the US and Latin America, expenses were also up roughly 20% or so, year-over-year.

Anything in particular that was driving that expense increase?

No.

And really, if you look back historically, you see some of those sort of aberrations from quarter to quarter.

We can have changes of the variety that you mentioned.

So I wouldn't draw any conclusions there.

I think if you take a look year-to-year, and certainly at the end of this year when you look back, we'll have a fairly trendable sort of expense line in both of those segments.

Great, thanks for the answers.

Humphrey Lee, Dowling & Partners.

I have a question regarding the potential Brexit.

And given your sizable operation in the UK, can you talk about any kind of potential impact, and how it changes your thought for that business segment going forward?

I think the biggest affect you'll probably notice, Humphrey, will be on the currency.

Whatever happens to the Brexit situation, and the consequent effect on the pound sterling will have the biggest effect.

It should not affect business the flow or the experience in terms of mortality or longevity or critical illness, in any way that I can put it.

So, that would be the big effect.

Our assets in pounds sterling we don't think are abnormally at risk.

We really don't see a big effect from Brexit immediately, other than as it affects the macro trends in the economy of the UK.

Got it.

In terms of Australia, so obviously we are definitely seeing the seasonal patterns that you kind of laid out, what we are seeing -- similar to what we've seen in 2015.

But how favorable was it in this current quarter?

We are just south of $20 million in that operation this quarter.

And that's actually less than the first quarter last year, but that's pretty much the way we would size it.

And so if the trend follows that we saw last year, we could give some of that back in the second quarter for the reasons that Greig mentioned in terms of the seasonality there.

But all-in, we expect for the year, Australia to be profitable and to continue building towards the profit levels that we experienced several years ago.

I think last year, on a full-year basis, it was roughly $20 million.

And then on the fourth-quarter call, you talked about you expect something would be a little bit higher than that, but probably in similar level.

So based on what you've seen so far in the first quarter, was that still your thinking right now, related to Australia?

Yes, Humphrey, that's exactly right.

We wouldn't expect to change that projection now.

It remains to be seen just exactly where we'll end up, but no reason to change it based upon the first-quarter results.

Got it, thank you.

Steven Schwartz, Raymond James.

Humphrey just asked a question I wanted to ask on Australia.

Can we touch on Canada for a bit?

It seems kind of odd, unfavorable mortality in both traditional and longevity.

Anything there, or just one of those things?

Steven, on Canada, the mortality was not terrible.

It was off a few million bucks.

That's coming on the heels of three really strong quarters.

But you remember, last year, first quarter in Canada was highly seasonal, too, with a depressed level of earnings in Canada in there.

On the longevity side, it has -- it really is hard to predict on a quarter-to-quarter basis.

Normally, that's a very smooth operation, so we are not talking about a major deviation from expected there, either.

We had some group business that didn't perform as planned in Canada.

And put it all together -- it's just modestly off.

We expect, over the course of the year, those things will even out.

It's not common for us to have every operation actually so close to expected as we had in the first quarter.

We would expect, normally, a lot more variation than we saw this time.

But we do expect some things like that to happen.

And we don't view Canada as anything other than a variation from expected due to random volatility and maybe some seasonality, and not far off, at that.

Okay.

Bigger-picture, Greig, one of the trends we are definitely seeing is more and more companies trying to pioneer something in kind of non-fluid prescription drug underwriting.

Thoughts on that?

Yes, everybody is stretching the amounts a bit.

We're hearing of companies willing to go up to $1 million, without fluids.

It's because of the advent of new information and new data; a little bit of experimentation going on, frankly, at the same time.

Everybody on the direct side would like to find a way to improve the process of underwriting to make it quicker, more consumer-friendly, and this is all part of it.

I think that the value of reinsurers becomes greater when you move off into the unknown, as companies are starting to do with some of the new underwriting protocols that you see out there.

Okay.

And then, Jack, it sounds like this is your last conference call.

I just want to say, it's a pleasure, and good luck.

Okay.

I appreciate that very much, Steven.

Ryan Krueger, KBW.

I just had a question on US premium growth.

I think you said it was 7%, ex-block transactions, which is pretty strong, given the current environment for mortality business.

So can you give a little bit more color on the underlying dynamics there?

Ryan, this is Jack.

I'll handle that.

It was a little bit stronger when you think of just generic flow at 7%.

Certainly, that's stronger than the more recent trend for that part of the business.

My suspicion is that will trail off somewhat over the following three quarters.

You always have some reporting issues that can move it 1 point or 2 from quarter to quarter.

But I think my takeaway comment is we view that to be -- that 7% to be fairly strong, and not necessarily what we would expect ongoing.

Okay.

That was all I had.

Congrats, as well, Jack.

Thank you.

(Operator Instructions).

Dan Bergman, UBS.

Maybe just to start following up on Ryan's question, if we think about premium growth for the overall Company, I think it was up about 10%, ex-currency, this quarter.

If we wanted to strip out the block deals and kind of think about a comparable organic premium growth rate for the business as a whole, any thoughts on what that would be?

Is something in kind of the mid-single-digit range in the ballpark?

This is Jack.

I'd say a little north of the midpoint of that range.

So, maybe 7%-ish, ex-blocks, which would imply 3% with blocks overlaid.

Great.

And then, similarly, to a comment on with the US maybe being a bit stronger coming down.

Is that a rate that you think is maybe a little bit elevated?

Or is that something you think is maybe more sustainable longer-term, given growth in Asia, et cetera?

In terms of the consolidated growth rate?

Yes.

In terms of that -- yes.

We target high-single-digits, which you can read that to be 7% to 10%.

So, we are hopeful that we could hit double-digits.

But I'd say somewhere midpoint of that range that I just quoted, probably the -- our best estimate.

Great.

Thanks.

And maybe then just switching gears quickly, I just want to see if there is any additional update you can provide on the energy exposure you have, how the investments performed in the quarter in terms of impairments, unrealized loss, et cetera.

Yes.

We had impairments of roughly $35 million during the quarter.

The lion's share of that was associated with the energy component of our portfolio.

So -- and particularly, we had one position that represented probably two-thirds of the energy impairment for the quarter.

So, it was a little lumpy.

And I guess we would characterize that the energy portfolio performed roughly as we would've expected; actually improved a little towards the latter part of the quarter, in terms of spreads on the various positions in the portfolio.

So, we are keeping a careful eye on it for obvious reasons.

But we are not particularly alarmed at this point.

Got it, great.

Thanks so much.

Congratulations, as well.

Thank you.

(Operator Instructions).

Sean Dargan, Macquarie.

The obvious questions have been asked.

But Greig and Jack, now that you are kind of stepping off and the next generation of leadership will take over, there's been a line of questioning today about premium growth.

And it seems to me that there's been some dislocation in the industry.

You have one of the stalwarts, deciding that returns on selling individual life through tight agents are not high enough.

I'm wondering if you think, with technological advances in underwriting, and the ability to distribute life product over the Internet, if there could be a scenario in which you could grow premium by essentially white-labeling direct life insurance through a third party; if you could take a more active role in the underwriting at point of sale.

It turns out, Sean, that we have a lot of tools that are very valuable for anybody looking at underwriting through alternative distribution or through non-specialist distribution.

It's not clear how ultimately we would participate in all this.

It's not in our plans at the moment to white-label anything.

We are supporting our clients who have ventures in this arena.

But I think you make a good point that as things move around like this, RGA is in a position to play in the game wherever the growth is.

And one of the benefits of RGA's platform -- our expertise and our people, frankly -- is that we have the ability to find ways to participate in growth in the industry broadly speaking wherever that may be; either geographically, product-wise, or even process-wise, some of these new innovations on the product side, and reaching middle income people and other target markets that have not historically been reached.

All right, thank you.

And congratulations to Jack, as well.

We have no further questions in queue.

At this time, I will turn the call back to our speakers for any additional or closing remarks.

This is Jack.

With that, we'll end the call, and thanks to everyone who participated today.

Thank you.

Thank you.

And that does conclude today's conference.

Thank you for your participation.