美國再保險集團 (RGA) 2016 Q2 法說會逐字稿

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

Today's conference is being recorded.

At this time I'd like to introduce Mr. Greig Woodring, Chief Executive Officer; Mr. Todd Larson, Senior Executive Vice President and Chief Financial Officer; and Ms. Anna Manning, President.

Mr. Larson, please go ahead, sir.

Thank you. Good morning, everyone, and welcome to RGA's second quarter 2016 conference call. Joining me in St. Louise this morning is Greig Woodring, RGA's Chief Executive Officer, as well as Anna Manning, our President.

Greig, Anna, and I 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 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 related 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 pre-tax and after-tax 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, Todd. As indicated in the earnings release last night, we reported operating EPS of $2.80 compared to $1.94 a year ago. This result showed strength across most segments and geographies, with strong top line growth and favorable investment results. Further, we achieved these results in spite of a challenging overall environment, highlighting the resilience of our operating model and our ability to capitalize on opportunities in a strong market position. This quarter's results included $0.12 per share benefit for a tax related adjustment related to the expected settlement of several tax positions, while the negative effect of foreign currency translation was equal to $0.04 in the quarter.

Highlights of the quarter include particularly strong results in our US and our Canadian traditional segments, the US nontraditional segment, and the Asia-Pacific traditional segment. Our variable investment income was higher than an average run rate. We had several gains from longer-term alternative investments. Reported premium growth was 10%, 12% on a constant currency basis, due to both solid organic growth as well as the additive effective of more recent in-force transactions.

In the US traditional business, the strong results reflected higher variable investment income and contributions from recent in-force transactions, while mortality experience was in line with expectations. In Canada, the positive results were driven primarily by favorable mortality. Our Asia-Pacific operations exhibited a strong top line from new business, and Australia was modestly profitable. In EMEA, our nontraditional business had a solid quarter, while the traditional operation was below expectations due to some unfavorable mortality and morbidity.

While we did not execute on any major transactions during the quarter, we did close on a number of smaller block transactions and our overall pipeline activity remains very good. With the recent debt offerings, we have abundant capital to execute on a range of opportunities should they develop. With strong results in the second quarter after a solid first quarter, our year-to-date EPS and our operating EPS exceed the year-ago period by a considerable amount despite ongoing headwinds from lower interest rates and the strong dollar. The negative effects of foreign currency translation equal $0.14 year to date per diluted share.

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

Turning to investments. The average investment yield of 4.71%, which excludes our spread business, was down 17 basis points from the second quarter of 2015, reflecting the ongoing negative effect of lower yields on new money and reinvested assets. Both periods had above-average levels of variable investment income. The average investment yield this quarter was 25 basis points higher than the first quarter yield, due primarily to the fact that variable investment income was below average in the first quarter and above average this quarter. However, approximately in line, year to date.

The higher variable investment income this quarter reflected investment gains on certain long-term alternative investments that were above the recent run rate and by their nature generate returns that are lumpy in terms of quarter-to-quarter results. Alternative investments are not a very large portion of the overall portfolio, and the longer-term nature of these investments is such that there is typically variability in returns from quarter to quarter, and this quarter's impact was greater than most. Approximately $0.10 for the overall company, with most of this showing up in the US traditional segment.

The company realized investment gains in the quarter primarily due to some portfolio repositioning, while impairments were minimal for the quarter. We repurchased 11 million of our shares, leaving us roughly $280 million remaining in our share repurchase authorization that we announced earlier this year. We deployed capital into numerous smaller transactions during the quarter, and our excess capital position is approximately $1 billion at the end of the quarter, which reflects the proceeds from the recent debt offerings. In addition, our Board of Directors approved an increase to our quarterly dividend of 11% to $0.41 per share from $0.37 per share.

Now turning to our segment results, the US and Latin America traditional business reported pre-tax operating income of $112.3 million versus $79.4 million a year ago. This quarter's earnings benefited from higher than normal variable investment income and the effect of recent in-force transactions. Current period mortality results were in line with our expectations, whereas last year's quarter reflected poor mortality experience.

Premium growth was a strong -- up 12% quarter over quarter, totaling $1.3 billion, reflecting a consistent level of ongoing organic growth, the effect of recent in-force transactions, and some lumpy effects from client reporting and new treaties. Our asset intensive business reported pre-tax operating income of $54.3 million this quarter, which was ahead of expectations. Strong results this period reflect favorable investment spreads and the effect of a new, smaller in-force block.

Our financial reinsurance line continued to perform well, reporting pre-tax operating income of $14.9 million this period, up slightly from $14.6 million last year. Our Canadian traditional segment reported pre-tax operating income of $40.9 million, up from $23.8 million in the prior-year period. Results were strong this quarter, reflecting favorable mortality experience. Premiums totaled $240.1 million, up 7% in US dollar terms, with $11.6 million in adverse foreign currency fluctuation. Nontraditional business in Canada, which includes longevity and fee-based transactions, reported pre-tax operating income of $2.1 million this period versus $3.1 million a year ago.

Switching to Europe, Middle East, and Africa. Our traditional business reported pre-tax operating income of $6.8 million, down from $9.2 million last year. As Greig had indicated, this quarter's result reflect unfavorable mortality and morbidity, most notably in the UK and South Africa. Overall claims experience was in line with expectations in last year's quarter.

Nontraditional EMEA business, which includes asset intensive, longevity, and fee-based transactions performed well this quarter, reporting pre-tax operating income of $26.1 million compared to last year's $31.8 million. EMEA's asset intensive and longevity continues to perform well, with last year's second quarter experience particularly favorable.

Turning to our Asia-Pacific traditional business, pre-tax operating income totaled $34.5 million compared to $4.3 million in the prior-year period. Overall positive performance, particularly in Hong Kong, contributed to this solid quarter, whereas last year's quarter reflected poor results in Australia. Our nontraditional Asia-Pacific business reported a pre-tax operating loss of $6 million, versus pre-tax operating income of $0.7 million a year ago, primarily due to less favorable experience on a few treaties.

The corporate segment reported pre-tax operating loss of $12.8 million compared to a pre-tax operating loss of $9.9 million in last year's quarter. This quarter's results were better than expected -- better than the expected loss run rate of $20 million, primarily due to a reduction in interest expense that related to the previously mentioned tax adjustment from the effective settlement of uncertain tax positions.

In summary, this was a very good quarter for us, as we produced strong results across most segments, geographies, and product lines. Our top line results were strong and reflective of solid organic growth and in-force transactions, and our investment results were favorable. We're well-positioned financially as we move forward in an environment that has some level of challenges and uncertainties but also considerable opportunities.

Now I would like to turn it over to Anna.

Thank you, Todd. RGA's unique ability to create solutions for our clients keeps us well positioned for continued success. In this quarter, we executed on a number of new treaties and transactions, including a financial reinsurance treaty that is in compliance with Actuarial Guideline 48, commonly referred to as AG 48, as well as a couple of solvency II compliant transactions in Europe.

The recent Brexit vote has added additional uncertainty to the overall environment in Europe, but at this point there is little noticeable effect on our business or client decision making other than currency effects. We will anticipate and adapt to changes in regulations or environment as the issue continues to develop.

We see solid organic growth opportunities overall, as well as abundant opportunities for transactions. Our transaction deal pipeline is strong, and we are actively pursuing multiple opportunities across our geographic markets. As we have previously commented, investors should not expect any dramatic changes in strategy or direction in the shorter term, as we continue to be optimistic about our global positioning, the market opportunities, and on our ability to execute. We have had a good first half to the year, and we remain confident that we can continue to deliver strong financial results.

We thank you and appreciate your support and interest in RGA, and operator, we will open up the call for questions.

(Operator Instructions)

Jimmy Bhullar, JPMorgan.

I had a few questions. First, on the -- if you could talk about the results in the 1999 to 2004 traditional US book, how that did versus your expectations? And also on Australia, I think you mentioned it generated a small profit. But you if you could give us some more details on those two blocks?

Jimmy, it is Anna. I will take the first question on the US mortality. As we said, claims were in line with expectations. Now in terms of the eras, we generally had less favorable experience in a recent vintage, the 2006 to 2010 vintage, and more favorable experience in the older vintages, the pre-1994. The 1999 to 2004 block in particular was benign. It was essentially on expectations, and this is the second quarter in a row. If you will recall, the first quarter that block also was in line with our expectations.

Jimmy, this is Greig. In terms of Australia, our experience in the second quarter in terms of mortality, morbidity, was weak. Consistent with prior periods, prior years, where we have a struggling second quarter, a good first quarter. A lot of seasonality that goes in the opposite direction of the US, so year to date we are sort of on what we expect.

There was some positive administrative noise that actually helped mitigate a little bit of that experience in the second quarter, but overall we're very pleased with where Australia is. We don't expect it to be anything other than a work in progress still, but we are making good headway.

Then on share buybacks, you did a relatively modest amount of buybacks this quarter. Not sure if that was -- was that because of any specific reason related to deal pipeline or your view on the stock price, or is it some other reason that you had slowed down buybacks dramatically?

Jimmy, this is Todd. As you know, we try to take a balanced approach of balancing the share buyback with business opportunities, et cetera. We did buy a little bit back when the stock dipped down a little bit, but we will continue to manage it overall on a balanced basis.

Lastly on premium growth, I think you reported 10% growth in premiums. Almost 12% ex-currency and double digit growth in the US market. That seems like a very unusually strong number, especially in the US, but wondering if you could give us some details on what drove that and to what extent it is sustainable in the next few quarters.

Jimmy, this is Todd again. We did view it as a very nice, very strong premium quarter. And as you mentioned, it was about 12% ex-currency, but if you look at the in-force block activity, and that is sort-of looking at the business that was reflected this quarter that wasn't there last year at this time.

That was probably about 4% of the overall growth, and then there was some other nice treaty activity that came through, like some -- catch up on some organic treaties. So if you back that away, you get down maybe to the higher single digits, which we view as probably a good way to look at the longer-term run rate at this time.

Just on the buyback comment, the stock is close to its high, so I should we assume it stays close to -- in the high $90s, close to $100, you would be somewhat slow in pursuing buybacks? Or would you still do buybacks regardless if you do not find alternative uses?

Jimmy, we would not hold onto excess capital. We would buy back stock at this level, potentially. Although, obviously we prefer to buy it back when it is cheaper. But we are balancing this with all of the other opportunities we have, but we would not rule anything out.

Ryan Krueger, KBW.

In US traditional, if I normalize for the variable investment -- if I assumed all the variable investment income at the $0.10 of above-normal was -- in that segment, I think it still implies around $100 million or so of earnings in the quarter, which was quite a bit above what it had generally been running at for quite a few quarters now.

I know you commented that mortality was in line with your expectations. I'm just curious, is roughly $100 million the right way to think about what your expectations would be for earnings at this point?

Ryan, this is Greig. I will take that. Yes. Mortality was right around 100% of expected. So it is very close. It wasn't a great quarter in terms of mortality. It was just a good, solid quarter in terms of mortality. We did have some positive experience in Latin America, which is a small piece.

We had decent group results and long-term care results. So you put that all together, it was a pretty good quarter on the traditional side. In terms of a run rate, this is kind of what we would expect if everything works well. We have fallen short of that in the last year or so, but we would expect to get back to a normal rate at some point in the future.

Asia, premium growth picked up pretty substantially. Can you give a little bit more color on that?

Asia premium growth, a lot of it is organic -- most all of it is organic growth. We have gotten good results out of Asia, both in terms of growth and profitability.

We continue to be very optimistic about the prospects in that region of the world, and it is a growing insurance marketplace in addition to a growing middle class part of the world, where insurance is bought more. We're very optimistic about that and happy to see everything chugging along just fine, there.

Humphrey Lee, Dowling & Partners.

On the capital side, with the $1 billion of excess capital, and you mentioned the pipeline is still attractive, but given your capital position right now, does it change how you think about the sweet spots in terms of deal size that you would pursue?

Humphrey, hello. It is Anna. With respect to our pipelines, it is always difficult to handicap where and when wins will occur.

We're certainly seeing in a lot of activity, activity in respect to life longevity and annuity blocks in sizes small, medium, and large and geographies, North America, Europe, and UK. We didn't close on a large transaction in this quarter, but as mentioned, we did close on a number of smaller and medium-size transactions, and we're actively working on a number of these opportunities. So we take a pretty patient view of these.

We want to make sure that the deals that we do are attractive deals, that they meet our return expectations, and if we don't, we will walk away from them. So, that causes our deal success rate to be lumpy. If you look at our historic -- over the last four or five years, I think we have done a very good job in balancing capital deployment back into the business as well as repayments through dividends and share repurchases.

But given your capital position right now, would you be open to doing transactions that is a little bit bigger than you historically have done?

We consider our sweet spot transactions in the, let's say, $100 million to $250 million capital deployment. And I think those are -- there are a number of those that are in the pipeline that could be very attractive for us.

In terms of the Asia-Pacific nontraditional business, I know you mentioned there are some -- kind of a little bit of an underperformance, but I was hoping you can provide a little bit of color of what happened there and how should we think about it for the rest of the year?

This is Todd. Most of that performance in the nontraditional Asia-Pacific statement relates to a particular treaty that we have had for some time now that actually performed quite well over that period of time that we have had it, but it is starting to turn around and be into more of a runoff mode, so we do expect to see a little bit more in loss going forward on that, but we think it is very manageable. And it is starting to be in the runoff mode.

So since it is in runoff mode, would it put you in a position of having a negative number in the near future?

We would expect there will be some negative results for the next -- at least the next couple of quarters, if not a little bit beyond that.

Yarin Kinar, Deutsche Bank.

Could you give us a number for how much capital you deployed through transactions this last quarter?

It was fairly small, in the less-than-$50-million category.

We should presumably expect additional deals then over the next few quarters. Especially with that $1 billion capital position?

We certainly expect that we will do transactions. Now, a lot of them don't make the radar screen, they end up being small, and we would love to do a bigger transaction that is noticeable, but we will have -- undoubtedly have some activity of some sort or other, yes.

In US traditional, the premium growth there. Was that predominantly from prior transactions?

This is Todd. It was really a combination of good organic growth, as well as some transactional activity. I think if I have it right for the quarter, about, let's call it 4% or so, with some transactions, then we had a little bit more from just reflecting some organic treaties and some of the catch up on those, but it's really a combination of both.

I thought your previous commentary was for overall premiums, not for the US traditional. So I apologize.

It holds true for the US, as well.

Where is the organic growth coming from in US traditional? Just given the mortality market in the US, I wouldn't have expected much growth.

We're talking about 4%, and we get that from just the ongoing mortality market business. Actually the insurance industry is up a little bit now, as millennials are moving into the buying ages, but hard to read that. We're in the early stages of that. We are just seeing a little bit of a pickup in our organic business, so it is not that great, though, of a pickup. But it is a little bit.

Also to clarify, that number also includes some of our group business as well as the long-term care and some of the other product lines that roll up into traditional.

One final question. I think this is the second quarter now that you talk about some elevated claims experience and then more recent blocks in US traditional. Can you offer a little more color as to where the pressure points are coming from or where the elevated claims are coming from in the 2006 to 2010 block?

When I mentioned, earlier, slightly elevated claims, that was essentially one or two extra-large claims. Looking at all of the eras in this period, they were close to or they were in line with expectations, either up a couple of million here or there or down a couple of million, but generally very benign across all of our eras.

So mostly severity driven within a couple of policies?

It is regular volatility. If you think about the business, a couple of extra claims per quarter is really to be expected. That is the nature of our business.

(Operator Instructions)

Dan Bergman, UBS.

It looked like asset intensive had a pretty strong earnings quarter, and you mentioned you recently added new in-force block there. I just wanted to see if you could provide any additional color on that new block? Maybe what types of policies are in there? And any color, bigger picture maybe, around whether the prior guidance, I believe for a quarterly run rate around $50 million, is still unchanged?

This is Todd. On the second half of that, I think we still view the $50 million run rate as about the right number to be thinking about.

With respect to the first part of the question, we did a follow-up block of deferred annuities in that quarter.

Maybe switching gears to a little more of a bigger picture question. Given it sounds like a consolidated premium growth run rate might be somewhere in the high single digits, and then maybe layer on some further benefit from capital deployment where the buybacks are block deals, I just wanted to see if you thought there might be upside potential to the current 5% to 8% medium-term EPS growth guidance? Particularly if or when FX and interest rate headwinds recede? Any thought about how -- color on how we should think about that would be really helpful.

Certainly, when the US dollar turns around and goes a different direction, we will pick it up, but we don't really think that we are going to break out of that 5% to 8% on a regular basis at the moment. It would be nice to see that happen, but right now we are basically comfortable talking about our premium growth rate in that range.

I guess is the best way to think about it that, even though the premium growth were maybe a little bit higher than that EPS -- the comparable EPS guidance, that it is kind of interest rates and FX that would put you back into that range? Is there anything else I am missing, or are those the main moving pieces?

No, those are the main pieces.

(Operator Instructions)

Michael Kovac, Goldman Sachs.

Just wanted to ask, first, a high-level question. As we see a lot of uncertainty in the market today and low interest rates, solvency II and the Brexit, just in terms of deals that you are seeing in the market today. Is there any shift as to maybe a couple of years ago, deals that companies were maybe waiting for higher interest rates to get out of that, potentially RGA seeing more attractive either deals come to market than they did in the past or more attractive pricing on the deals that come to market?

I do not think there has been a wholesale shift in the type. There might be a small trend into longer-term type of business coming to market compared to perhaps the last few years, but nothing material.

That's helpful. As we think about the target ROEs on the new deals versus the ROE for the current in-force block, can you help us size those? I think in the past, you had sort of targeted somewhere around 13%, I believe, on new deals. Is that still accurate today, or do you feel like there is potential for that to be either higher or lower?

That has been our historic target, and we don't see a change in the near term to that target. We are happy with deals in that range.

One last follow up, what are you seeing in terms of the competitive dynamics in the marketplace? Obviously some consolidation in a lot of your largest competitors in Europe, any shift in that?

No, again, it has been the same level of competition I would say in the last couple of quarters, and generally the same competitors that we see on the various opportunities. So not a material shift that we can perceive.

Kenneth Lee, RBC Capital Markets.

Just want to ask a question about the premium growth, just from a different angle. In terms of the high single-digit run rate going forward, how much would that be from, let's say, annual step-wise premium increases from like the YRT business for example, versus either rate increases. And does that high single digit include any kind of assumptions for new business?

The increasing premiums on YRT scales add a little bit to the premium growth, and it varies by market, so in Canada it might be a little bit higher than it is in the US, which is still higher than it is in other places. We're talking about a minimal add-on percent or so to the base. Most of that just comes from new production. That is new risks accepted either through block transfers or through organic new policy issues.

One more question, in terms of the variable investment income. Would it be fair to say that most of those gains you reported this quarter were maybe from the private equity kind of asset class versus hedge funds, and looking forward, is the expectation that variable investment income overall would be lower this year versus let's say last year?

For this quarter, the variable investment income, a good chunk of it came from realization from some joint partnerships that we were in, and as we mentioned, it will be lumpy from quarter to quarter, but we did have -- it was actually a couple of partnerships that we realized some gains on, and the way the accounting works on those, it came through investment income this quarter.

We have no further questions at this time. I will turn the call back over to our speakers for any additional or closing remarks.

This is Todd. Thank you, everyone, for joining us on our second quarter call. We very much appreciate it, and if there's any other questions, please feel free to contact us. Thank you very much.

Thank you. That does conclude today's conference.

Thank you for your participation. You may now disconnect.