美國再保險集團 (RGA) 2017 Q2 法說會逐字稿

Good day, everyone, and welcome to the Reinsurance Group of America's Second Quarter 2017 Results Conference Call.

Today's call is being recorded.

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

Please go ahead, Mr. Larson.

Thank you.

Good morning, everyone, and welcome to RGA's second quarter 2017 conference call.

Joining me here in St.

Louis this morning is Anna Manning, RGA's President and CEO.

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'll be happy to take your questions.

To help you better understand RGA's business, we'll 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, premiums 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 after-tax adjusted 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 net income to adjusted operating 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 it over to Anna for her comments.

Thank you, Todd, and good morning.

As indicated in the earnings release last night, we reported adjusted operating earnings per share of $2.95 compared to $2.80 a year ago.

This was a very strong quarter as all key segments reported solid to strong results.

Premium growth remained strong at 6% and 7% in constant currencies.

This quarter's results included $0.10 per share benefit from a tax-related adjustment for the settlement of tax positions.

While the negative effect of foreign currency translation was equal to $0.06 per share in the quarter.

We had particularly favorable results in Asia, where we saw continued strong top line growth as well as favorable underwriting earning -- results.

As we indicated at our Investor Day in May, we feel that we are well positioned in Asia with leadership positions in virtually all our markets.

RGA is the leader in product development and underwriting services.

This expertise is highly valued by our clients and is a key factor contributing to our success and to our ability to maintain the positive momentum from this part of our business.

Our Australian operations had another profitable quarter with favorable group underwriting results and individual disability claims experience that was close to expectations.

Our EMEA region reported strong overall results, despite the currency headwinds.

The Traditional business delivered strong top line and bottom line results.

Underwriting results were in line with expectations and our 18% premium growth in constant currencies reflects treaty wins in a number of countries in the region.

In North America, U.S. individual mortality was modestly favorable in the quarter, while Canadian individual mortality was basically in line with expectations.

Our U.S. financial reinsurance line had a good quarter, supported by strong new business volumes.

And we closed 2 nice in-force asset intensive transactions in the quarter deploying in excess of $150 million in capital.

The transactions pipeline remains active.

In sum, this was another strong quarter for RGA, providing further evidence that we are successfully executing on our strategy.

Looking forward, we are well positioned in our markets, we have a proven approach, the capabilities to execute and we remain optimistic about our ability to continue to deliver attractive financial results.

And with that, let me turn it back over to Todd.

Thanks, Anna.

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

Starting with investments.

The average investment yield, excluding spread business, was down 11 basis points to 4.6% from the second quarter of 2016, reflecting the impact of lower yields on new money and reinvested assets.

Both periods benefited from above-average variable income.

The average investment yield was 19 basis points higher than the first quarter yield, due primarily to a higher level of variable investment income in the current quarter.

As mentioned at Investor Day, we deployed an excess of $150 million of capital on 2 asset intensive transactions this quarter.

With our continued international growth, particularly in Asia, we also increased our capital deployment into our core organic businesses.

The results, in effect, has our excess capital position at approximately $1 billion at the end of the second quarter, which leaves us well positioned to pursue future deployment opportunities as we go forward.

As indicated in the earnings release and in line with our balanced approach to capital management, we increased our dividend by 22%.

The tax rate on adjusted pretax operating income of 31% was lower than expected in the quarter.

This is a reflection of tax basis differences in foreign jurisdictions and the geographic composition of our earnings.

Additionally, there was a 10% -- a $0.10 per share tax benefit related to the settlement of tax positions that Anna mentioned previously.

Turning to our segment results, and I'll start with the U.S. segment.

The U.S. and Latin America Traditional business reported pretax adjusted operating income of $91.2 million versus $112.3 million a year ago.

We consider this to be a solid result.

We had favorable individual mortality claims experience, which was primarily offset by unfavorable experience in group.

Also we had above-average variable income in this segment this year's quarter and in the year-ago quarter as well.

But this year, it was largely offset by higher lapse experience.

Premiums totaled $1.3 billion, up 2% from the prior year's quarter, somewhat lighter than recent quarters due to a decline in group premiums this quarter and the negative effect of the higher lapses.

Our asset-intensive business reported pretax adjusted operating income of $49.9 million this quarter, resulting from continued favorable investment spreads, which were somewhat offset by unfavorable experience on payout annuities.

The new block transaction had a modestly positive influence for the quarter, but the full run rate impact will not occur until the investment portfolio repositioning is complete.

Our financial reinsurance line reported pretax adjusted operating income of $20 million this period, an increase versus a year ago from strong new business activity.

Our Canada Traditional Segment reported pretax adjusted operating income of $31.2 million, down from $40.9 million in the prior year period.

This quarter, we experienced mortality that was basically in line with expectations, while the prior year period results reflected favorable mortality experience.

Premiums totaled $221.4 million in translated U.S. dollars, down from a year-ago due to the loss of one creditor treaty.

Adjusted for this one-off treaty on a constant currency premium basis, our growth would have been 4%.

Canada's Financial Solutions business, which includes longevity and fee-based transactions, reported pretax adjusted operating income of $4.4 million this period versus $2.1 million a year ago, reflecting favorable longevity experience.

Switching to Europe, Middle East and Africa.

Our Traditional business reported pretax adjusted operating income of $11.4 million, up from $6.8 million last year.

The experience this quarter was in line with expectations, while the prior year period had unfavorable claims experience.

Traditional premiums rose by 15% or 18% in constant currencies, reflecting the positive impact of new treaties across a number of geographies.

EMEA's Financial Solutions business, which includes asset intensive, longevity and fee-based transactions continues to perform well.

Reported pretax adjusted operating income was $26.5 million compared to last year's $26.1 million.

Longevity experience continues to be favorable.

Currency had a negative impact of $3 million.

Turning to our Asia Pacific Traditional business.

Pretax adjusted operating income totaled $53.3 million compared to $34.5 million in the prior year period, reflecting strong top line growth in favorable underwriting experience across most markets and profitable results in Australia.

Asia Pacific Traditional premiums were up 18%, reflecting very strong growth across the region, particularly in Hong Kong and healthy growth in Japan, offset by a reduction of premiums in Australia.

Asia Pacific premiums, excluding Australia, rose by 37%.

We did have some additional catch-up premiums in the quarter similar to what we saw in the first quarter.

We will put the normalized age-specific premium, excluding Australia, closer to 20%.

Our Asia Pacific Financial Solutions business reported pretax adjusted operating income of $2.6 million versus a pretax operating loss of $6 million in the year-ago quarter.

The runoff treaty mentioned in previous quarters performed better than expected this quarter and we expect better results to continue through the second half.

Versus an original projection of a loss of $10 million to $14 million for the full year, we now expect that full year loss in the range of $3 million to $5 million.

That said, because the lapses were lower this quarter, the time frame for the complete runoff of this treaty has been extended somewhat into 2018 and there could still be some negative volatility results from quarter-to-quarter.

The Corporate segment reported pre-ax adjusted operating loss of $9.5 million compared with $12.8 million a year ago, reflecting lower incentive compensation and other general expenses and the reversal of a tax-related interest expense item from the resolution of uncertain tax positions.

The tax weighted interest item was equal to approximately $10 million pretax.

We had a similar interest expense reversal a year ago that was equal to $15.4 million pretax.

Overall, it was a very solid quarter.

The bottom line number was particularly strong with all key segments performing well.

With that, we thank you and appreciate your support and interest in RGA, and we'll open the call for questions.

(Operator Instructions) We'll take our first question from Jimmy Bhullar of JPMorgan.

First, I just have a question on what you're seeing in terms of competitor behavior on pricing, terms and conditions in the U.S. life insurance market?

And then secondly, on your tax rate, it's been lower than expected in each of the past 2 quarters even if you adjust for some of the noise and stuff.

And I think you mentioned it's the geographic makeup of income.

But is your expectation for the whole year different than before?

Or do you expect the tax rate to revert back to the 34% to 35% you had mentioned in the past?

Jimmy, I'll take the U.S. competition question and Todd will take that tax question.

We're not seeing any major movement in the competitive environment in the U.S. Individual Mortality market.

We did see our new business market share increase to 19% last year.

We believe reflecting shifts and some quota shares awarded that, again, we believe in part because of the expertise and service we provide to our clients and also reflecting our efforts around innovation with respect to underwriting programs.

The U.S. individual market -- Individual Mortality market is still the world's largest and we have a good, strong, solid position in that market.

Todd, maybe on the tax question?

Yes, Jimmy.

Yes, the tax rate is coming a little bit lower than what we would have expected coming into the year for the reasons that we had mentioned.

So for the second half of the year, we wouldn't be surprised if, I think, the tax rate came in a little bit lower than what we had originally expected, maybe more in the range of 33% to 34%.

Okay.

And then on the Financial Reinsurance business, the earnings grew at a pretty strong rate and you mentioned new business activity.

To what extent do you expect to be -- earnings to sustain in the roughly $20 million level that you saw in 2Q?

So as far as the earnings level, I would suspect the -- it should stay relatively stable for the next few quarters on that.

And then just lastly on that business, do you see much of a headwind over the next few years as -- like just because of a move towards principles of days reserving?

Would that reduce demand for a financial reinsurance deal?

Maybe I'll take that one, Todd.

Jimmy, the way I describe the environment for Fin Re transactions, I would say that the pipeline is active and competition is crowded.

But again, our position is good and we have experienced and dedicated resources focusing on these opportunities.

Now specifically to your question about PBR, yes, we expect some modest reduction in opportunities, but the Fin Re business that we have isn't just on the AXXX, XXX reserve financing, it's also on risk-based capital, opportunities and some more traditional Fin Re structures.

So I would say our expectation is a modest impact and not material.

Our next question today comes from Humphrey Lee with Dowling & Partners.

Just on the U.S. and Latin America Traditional performance.

So you mentioned individual was favorable and group was less favorable.

So maybe on the group side, let's start with what product lines was that?

And then how much was the favorable and the unfavorable variance for the individual and group, respectively?

Yes.

On the U.S. mortality business, I would say we had favorable mortality experience, probably in the neighborhood of $7-or-so million.

And that's about what we were off on the group side for the quarter.

I guess, I would add for year-to-date, the group line is about -- right about where we would expect for the full year.

It's just off a little bit for the quarter.

And that's both -- we have some life business in that line as well as some medical and health business as well as some disability income.

But -- so in terms of the product lines that was on the performance, it's just spread across the business lines that you mentioned?

It was primarily the nonlife pieces.

Okay.

All right.

And then in terms of the pipeline that Anna just mentioned earlier.

Is there -- I just have a question there, is it more concentrated into the asset-intensive business?

Or do you see an increase in kind of more traditional mortality business as well?

So the good news, Humphrey, is that, for the first time in over a decade, we saw session rates in the U.S. increase last year.

Session rates increased roughly 2.5%, which means that total sessions are in the neighborhood of 28%.

Now I think that's a good thing for us.

We saw client retention levels move both up and down.

But on balance, it was this net positive to reinsurers.

I would say that in terms of opportunities, clients are starting to reward reinsurers who bring them new ideas and services.

They're rewarding them for things like improvements to risk selection and improvements in the underwriting process.

These are areas of strength for us.

We've been at this and we've been very good at it for many, many years.

We work hard at it and we see the results in our market share, which I mentioned earlier increased to 19% last year.

Our next question comes from John Nadel with Credit Suisse.

I have a couple.

Todd, I think you mentioned in the press release, you mentioned that variable investment income was a bigger contributor this quarter.

I'm sorry, if I missed it.

But did you quantify about what that was?

And whether pre-tax earnings or per share?

I don't think we quantified it in the press release.

But for the quarter, it's in the neighborhood of $10 million pretax.

Okay.

That's helpful.

Then I just want to think about the couple of blocks that you guys acquired during the quarter and the piece of the profit emergence that you'd kind of expect to see it.

It doesn't appear from our assessment of the Asset Intensive segment this quarter that there really was much, if any, contribution to the earnings from those blocks.

And maybe there's -- but can you give a sense for how many quarters you think it might take to reposition the portfolio and get to sort of a full impact?

Yes.

The amount for the quarter was fairly modest.

But I think over the course of the next few quarters, certainly, we ought to be able to get to where we want that overall transaction to look like.

Okay.

So a few quarters.

So as we enter 2018, you think it's probably at its -- at a targeted level?

We should be pretty close.

Okay.

All right, that's helpful.

And I think you also mentioned earlier that there was maybe a little bit of elevated lapses.

I'm not sure specifically where that was, U.S. Traditional, I believe.

Can you just give a sense for what the characteristic of those lapses was?

Is it clients that are retaining risk that was previously reinsured by RGA?

Or is it clients who are moving risk to one of your competitors?

John, it was lapses of [tree] business that was already on our books.

So it wasn't lapses in respect of either losing business or not winning business.

What I would say is we regularly see fluctuations and lapses in both directions, although this quarter's effect was a little bit heavier.

At this point, I think it's premature to judge whether it's anything other than a fluctuation.

And it's going to take us a little bit of time to get through the data to see if it's concentrated in specific products or if it's concentrated in specific clients or it's more broad based.

And we really need, I think, a few more quarters in order to have the data, the quality of the data in order to come to any observations.

And John, this was on the traditional mortality business.

Okay.

And so I think I understand.

So you're actually referring to true individual policy lapses as opposed to a client.

Exactly.

Okay.

Got it.

And then just interested in whether you're seeing, hearing, have any interest for RGA's sake.

Is there any increase in potential activity in the market around long-term care blocks?

John, I think we've, in the past, we've addressed this and we also, I think, addressed it at Investor Day and I'm going to reiterate, there's no change in position.

We've looked at legacy blocks over the years.

And we haven't found a legacy block where the risks and the conditions are such that we would be comfortable taking on that legacy blocks.

If there are any legacy blocks that have lower risk characteristics or where we could structure a solution, where some of the risk comes across but not all of the risk, those are things that we do explore from time to time.

But it's quite low on our priority list.

As you can imagine, there are other opportunities that have a better fit to our risk appetite and also to our, I would say, priorities.

Yes, I know.

I appreciate that.

I've heard a few companies talk about some increased activity and potential for a risk transfer kind of solution, and I guess I have my doubts.

And I was just wondering whether your company or others maybe are starting to feel like there might be an opportunity there, but I appreciate your response.

Our next question comes from Ryan Krueger with KBW.

On Asia, I was hoping you can help us think a little bit about how far in excess the earnings were this quarter relative to your expectation going forward?

Yes.

This is Todd.

That's a little bit difficult to answer just because some of it relates to some of the statement or client reporting statement true-ups that we talk about and everything.

I would expect that -- and as far as best estimate run rate going forward on a quarterly basis, I would think in terms of probably $30 million to $35 million on the bottom line, pretax.

Got it.

That's for both traditional and nontraditional combined?

That's traditional.

That's traditional, okay.

And then following up on your comments on session rates, Anna.

Why do you think they moved up?

I guess, it seems kind of surprising given that sales remained -- growth isn't very high still in U.S. mortality and capital positions are generally strong at this point?

Ryan, I think it's a combination of a couple of things that I mentioned earlier.

One is retention levels, we did see move.

Now, again, we saw them move both up and down.

But on balance, they did move in a net positive direction for reinsurers and that certainly contributed to the increase in the session rates.

But I will also say that our clients are sharing more risk when we bring them ideas.

And they're sharing more risk around these underwriting solutions, the process improvement, the risk selection.

So I think it's been -- it's a function of those things in addition to there is growth in the underlying market that varies by product.

So depending on which client is in which product line and has what retention levels, that will move the session rate somewhat year-to-year as well.

Our next question comes from Erik Bass with Autonomous Research.

I just want to follow up on Asia a little bit.

I was hoping to get a little more detail on the growth drivers this quarter.

And then on the premium side, just the sustainability of some of the growth trends given the catch-up premiums that you mentioned.

Erik, we're pretty active in terms of product development in that region.

So the life and the critical illness products that we designed, they're doing well.

We have some targeted CI products in Hong Kong, especially the current versions that are also doing well.

I would say in Japan, our underwriting programs that are aimed at improving the speed of underwriting and risk selection are doing well.

So in general, that growth is really supported by product and underwriting expertise in services that we provide, coupled with these underwriting process improvements, all of which are helping our clients grow their business in the region and we're reaping the benefits of that growth.

Got it.

So how much of the growth is coming from growth in the primary market versus sort of increased penetration of reinsurance?

I would say that the bigger share is coming from growth in the underlying client market, in their business, and then the rest is coming from increased reinsurance sessions.

And Todd, just to clarify.

On the $30 million to $35 million run rate you're talking about, is there seasonality in that?

I think particularly in the Australia business.

The $30 million, $35 million is excluding Australia.

Australia, so far this year, has done well, but there still could be some volatility there.

So yes, thanks for that.

To clarify, the run rate on the $30 million to $35 million is more on the Traditional Asia business, excluding Australia.

Got it.

And on Australia, it's a thought that it's a breakeven to slightly profitable block at this point on a full calendar year with some fluctuations quarter-to-quarter given seasonality?

We still believe it will be profitable for the year.

And then as we go forward, continue to increase its profitability.

We're still going through the cycle just making sure we're comfortable at the in-force and going through exercising where we can on rate increases, et cetera.

Also, as we mentioned, the individual DI claims activity for the quarter came in about where we expected, so that was good news as well.

But -- so for Australia, again, we do expect profitability.

And hopefully, increasing profitability as we go forward.

Our next question comes from Sean Dargan with Wells Fargo Security.

I have a question about the opportunity in Europe.

I know you've pointed to Solvency IIs as being perhaps a driver in block transactions for years, and now we've seen some activity.

But we've seen some U.S. Asset Intensive blocks around by U.S. -- I'm sorry, by European insurers trade.

And I've read in the press that one European company is looking to do a block transaction for what's being described as traditional savings products.

Can you just tell us what exactly Solvency II is -- means to these European insurers?

And what types of business, is it asset intensive, is it mortality, is it both that they're going to be looking to unload?

Sean, it's the type of product that attracts high amounts of capital.

And the type of characteristics of those products would be, one, long-term guarantees.

So think of anything that has long-term, either mortality guarantee.

There's also heavy capital on any spread-based business.

So these are these asset intensive blocks that you talked about.

In general, I think, Solvency II is providing opportunities.

And you've actually highlighted something that we've been experiencing, and that is those Solvency II opportunities are broader than just our European operations.

I'll also remind you that the Solvency II transitional provisions that apply to the in-force don't apply to new business.

So that's leading to increasing interest for solutions on new business.

And for example, in Asia, we're designing products that are more Solvency II friendly.

We think any activity around capital frameworks, and not just Solvency II frameworks, but there are many countries around the world that are also going through changes in their capital models, we think those all will provide us with opportunities because we'd really do well in that type of environment.

Okay.

And do you see the pipeline in Europe -- I guess, actually moving towards environment where the European insurers are ready to do deals?

Well, I think you've seen a number of those deals already move in the market and others that are publicly available in the market.

So my answer to you would be, yes.

(Operator Instructions) Our next question comes from Kenneth Lee with RBC Capital Markets.

Just a bit of a few housekeeping questions.

First, just checking on that old issue-age block, wondering how it performed in the quarter within the U.S. and Latin America?

Ken, let me answer that by first -- I'd like to caution you on focusing too much on any one quarter's experience.

As you're very familiar, our business moves around quarter-to-quarter.

And so you really need a longer lens to assess performance.

The way we look at that era, and we call it the underperforming era or the 9904 era, or the way we look for that matter at any of our other eras is, we look at them typically with the 5-year or more.

Now you'll recall that we updated our assumptions in 2015.

So when we look at the performance of this 9904 block since that assumption update, that is when we add all the quarters since that update.

What we see is that, that era is tracking very nicely.

Looking at it that way helps to do 2 things: it helps to remove the short-term volatility and it also helps to remove the seasonal effect.

So overall, I would say that, that era business is developing pretty consistent with our views.

Great.

Okay.

That's helpful.

And in terms of the Corp and Other expenses.

In the release, you mentioned there are some reduced comp cost and other general expenses.

Just wondering whether it's a good run rate that we should look forward to in the next coming few quarters?

Yes.

This is Todd.

Yes, we did have some favorable variances on some of the expenses this quarter.

But I think as we've communicated in the past, we still feel probably a good run rate for that Corporate segment is still in that $20 million to $25 million pretax loss per quarter.

Great.

Okay.

And just one final question.

I know that at the recent Investor Day, you guys mentioned that there's relatively low priority given to like variable annuity reinsurance transaction.

Just want to make sure that's still the case.

Yes.

Ken, that is still the case.

Although I would remind you that the large asset intensive deal we just completed in the second quarter did include a small block of variable annuities.

But that block was really the type of variable annuities that we really like.

It had very low guarantees and it had risks that were hedgeable.

Our appetite for the type of variable annuity blocks that are in the market right now, and it's our experience that those blocks generally have both the higher guarantees or designs and features that make hedging really difficult, those blocks don't fit in with what we look for and they're risks that we're really not comfortable taking.

So I'd say that VAs are really not at the top of our priority list.

Our next question comes from Dan Bergman with Citi.

Just following up on an earlier question around the strong organic premium growth you've had recently, both in EMEA and in Asia.

How should we think about the level of capital required to support this outsized growth level?

I guess, any sense you can provide on how you would expect these premium growth and capital needs in these higher-growth regions to trend going forward would be really helpful.

Yes.

We have, as far for the growth, it has attracted a little bit more capital than we have been seeing based on the level of growth over the past period of time.

So -- but it's hard to give you an exact way to sort of quantify that capital as we move forward.

But I mean, but in terms of maybe just -- I think you touched on this a little bit in an earlier question, but in terms of thinking about the kind of double-digit plus premium growth we've seen kind of in the first half of the year in those regions, I mean, I know you mentioned a couple of items that elevated that.

I mean, any sense of kind of where we should expect that to settle out going forward base on the opportunities you're seeing?

I think on the -- for Asia, I think I mentioned in the prepared comments that we thought -- now going forward, probably a better sort of more to the expected growth rate for the Asia premiums will be closer to 20%.

Got it.

And then just switching gears to Australia.

I guess, following the weak individual visibility results there in the second half of last year.

I believe you described kind of a review process for that block to make sure there is nothing more systemic that was pressuring result.

I guess, from where we stand now following to -- as it characterized in a solid quarters in that block in the first half of the year, I wanted to see if there's any update on that review process or if you're ready to draw any conclusions.

And kind of related to that, any update on your price increase action and how far along in that process you are?

That would be really helpful.

Dan, we did take some action.

We closed that treaty to new business, the treaty that was, in large part, contributing to the experience that we had in the second quarter of last year.

We've also been very proactively managing through rate adjustments on all of our treaties, both individual and group.

We looked to see if there were any long-term trends in terms of either the termination levels or the claims levels or the size levels, and we didn't identify anything that was systemic long term.

In fact, as you've noted, the experience has bounced back in line essentially with our claims expectations.

And there appear to be no further questions at this time.

I turn the conference back over to today's host.

Okay.

Well, thank you, everyone, for joining us today, and we appreciate the continued support for RGA.

And if you have any other questions, please feel free to reach out to us here in St.

Louis.

Thank you very much.

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

Thank you for your participation.

You may now disconnect.