美國再保險集團 (RGA) 2017 Q3 法說會逐字稿

Good day, and welcome to the Reinsurance Group of America Third Quarter 2017 Results 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 Third Quarter 2017 Conference Call.

Joining me here in St.

Louis this morning is Anna Manning, RGA's President and Chief Executive Officer.

Anna and I will discuss the third 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 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 the call 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 $3.44 compared to $2.46 a year ago.

This was a very strong quarter for us with especially strong performance in our U.S. business.

Premium growth remained robust at 11% or 10% in constant currencies.

We continue to benefit from the geographic and product diversity within our business.

And this quarter's results included a $0.02 per share positive effect of foreign currency translation, noting that we have been facing considerable currency headwinds since 2014.

Highlighting this quarter are the very strong U.S. results both in the Traditional and Financial Solutions segments.

Our individual mortality claims experience was particularly good this quarter with claim levels well below our expectations.

In addition, variable investment income was above the average run rate contributing to the robust earnings in both the Traditional and Financial Solutions segments.

The 11% growth in premiums in this quarter reflects good continuing momentum in both our Asia Pacific and EMEA segments across a number of individual countries and markets.

In Asia, our leadership in product development and underwriting services positions us well to continue to support our clients in meeting the growing demand for protection products in that region.

In Europe, we continue to grow our business across the region both organically and through smaller in-force transactions.

Our pipeline for in-force and other transactions remains active, and we continue to be optimistic about our ability to deploy capital over time.

This was an excellent quarter for RGA.

Looking ahead, we are very well positioned in our markets.

We have a proven approach with demonstrated capabilities and a long track record of execution.

We remain optimistic about our ability to continue to deliver attractive financial results.

With that, let me turn it back over to Todd.

Thank you, 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 our spread business, was up 38 basis points to 4.81% compared to the third quarter of 2016, reflecting strong variable investment income.

The average investment yield was 21 basis points higher than this year's second quarter yield due to higher variable investment income.

Variable investment income this quarter was above the run rate, reflecting higher investment gains and distributions on certain longer-term alternative investments as well as higher bond and commercial loan prepayments.

While alternative investments are relatively small portion of the overall investment portfolio, we do expect to achieve a meaningful total return on these assets over time.

The pattern for realizing these returns can be volatile from quarter-to-quarter and the timing is difficult to predict.

In this quarter, the total amount of variable investment income above the run rate was approximately $24 million for the overall company with most of this showing up in the U.S. Traditional and Financial Solutions segments.

In addition to deploying capital to support growth, we repurchased approximately 27 million of shares in the quarter.

Our excess capital position is approximately $1 billion at the end of the quarter, which leaves us well positioned to pursue further deployment opportunities.

The tax rate on pretax adjusted operating income of 33% was within our expectations for the quarter.

Turning to our segments.

For the U.S. segment, the U.S. and Latin America Traditional business reported pretax adjusted operating income of $162 million versus $80.5 million a year ago.

This was driven by favorable mortality claims and a higher level of variable investment income.

The favorable claims experience reflected a lower number and a lower average size of large claims with the overall experience approximately $45 million better than expectations.

Compared to an ongoing run rate, variable investment income added approximately $20 million in the quarter.

Premiums grew by 4% quarter-over-quarter.

Our Asset-Intensive business reported pretax adjusted operating income of $72.6 million this quarter, reflecting favorable experience on payout annuities, above-average variable investment income from prepayments and favorable equity markets.

Our Financial Reinsurance line reported pretax adjusted operating income of $22 million this period, an increase versus a year ago due to the strong recent new business activity this year.

Our Canada Traditional segment reported pretax adjusted operating income of $27.4 million, down from $30.6 million in the prior year period.

This quarter, we had moderately unfavorable mortality experience with the prior period results reflecting experience that was basically in line with expectations.

Premiums were down from a year ago due to the loss of a creditor treaty that we've previously mentioned.

Canada's Financial Solutions business, which includes longevity and fee-based transactions, reported pretax adjusted operating income of $4.5 million this period versus $1.2 million a year ago, reflecting favorable longevity experience this period.

Switching to Europe, Middle East and Africa.

Our Traditional business reported pretax adjusted operating income of $15.4 million, up from $8.5 million last year.

Experience this quarter was favorable overall with the prior year period showing unfavorable claims experience.

Traditional premiums rose by 25% or 22% in constant currencies, driven by new business across a number of geographies.

EMEA's Financial Solutions business, which includes Asset-Intensive, longevity and fee-based transactions, reported pretax operating income of $29.7 million compared to last year's $33.9 million.

Longevity experience continues to be favorable with last year's results also reflecting favorable Asset-Intensive experience.

Turning to our Asia Pacific Traditional business.

Pretax adjusted operating income totaled $26.6 million compared to $19.8 million in the prior year period.

Our results this quarter in Asia were slightly below expectations.

The year-ago quarter for Asia, excluding Australia, was particularly strong.

In Australia, we recorded a small loss compared to a much larger loss in the year-ago period.

This quarter, our individual disability business in Australia performed in line with our expectations.

Asia Pacific Traditional premiums were up 33%, reflecting continued strong growth across the region, particularly in Hong Kong and Southeast Asia.

Our Asia Pacific Financial Solutions business reported pretax adjusted operating loss of $0.2 million versus a pretax adjusted operating income of $2.3 million in the year-ago quarter.

The loss reflects experience from the runoff treaty that we've mentioned in previous quarters.

The performance was basically in line with our expectations this quarter.

The Corporate segment reported a pretax adjusted operating loss of $21.7 million compared with $19 million a year ago with results for the current quarter that are relatively in line with our expectations.

Overall, it was a very strong quarter for us.

Our adjusted operating return on equity over the last 12 months is approximately 12%, an increase versus that for the full year of 2016.

With that, we'd like to thank you, and we appreciate your support and interest in RGA.

And we'll open the call for questions.

(Operator Instructions) We'll go first to Jimmy Bhullar of JPMorgan.

I had a few questions.

First, on growth in international markets, I think premiums in Asia grew close to 30%, Europe around 17% ex currency.

What's driving the momentum in each of those regions?

And to what extent do you think that it can continue over the next year or so?

Yes, I'll start out, Jimmy, this is Todd.

Yes, I'll start with Asia.

Yes, we continue to see very good growth in Asia across the region, especially as I mentioned in Hong Kong and Southeast Asia.

And it's really a lot of it relates to some product development activities that we've had out of Hong Kong and other parts of the region that have generated some nice new business activity on a treaty basis there.

And during, I think we mentioned in the first and second quarter, we did have some catch-up on some treaty reporting that sort of probably increased the year-over-year growth rate.

So that was more elevated than what we would expect going forward.

So even though we were above the 30% this quarter, I think probably a more realistic ongoing premium increase rate is probably closer to 20% range going forward, excluding Australia, just looking at the Asia region itself.

And then switching over to Europe, there again we continue to see some nice growth both organically across the region as well as we did a couple of small in-force transactions that added nicely to the premium growth rate quarter-over-quarter.

Okay.

And then how much of a negative impact do you expect on your Financial Reinsurance business from a move towards Principles-Based Reserving?

Jimmy, we expect a modest impact.

Recall that the movement to Principle-Based Reserving is only on new business.

It doesn't impact the in-force business.

And our Financial Reinsurance solutions are both focused on reserve redundancies as well as capital redundancies.

So overall, we believe that we'll see a modest decrease.

But I don't think it will be a material impact.

Okay.

And then just lastly, if you could comment on the deal pipeline and how that looks and just competition for block transactions in both the life space as well as the annuity market.

Sure.

I would say that not much has changed since the last quarter or for that matter, since the prior couple of quarters.

The pipeline remains active.

There are a number of opportunities.

Competition is always strong for these blocks.

We haven't changed how we approach the opportunities.

We try and pick our spots.

We try and look for opportunities where our strengths may give us an edge.

And we saw the results of that, I think, in the second quarter with the announcement of the 2 transactions, the 2 Asset-Intensive transactions.

In-force blocks is part of our business and will continue to be lumpy.

I think you may get tired of hearing me repeat this as we go forward.

So overall, I'd say, Jimmy, not much movement.

Things look good and competition is always strong for these opportunities.

We'll go next to Humphrey Lee of Dowling & Partners.

Just to follow up on the premiums growth in Asia.

My understanding is that in terms of the product development, there are some new products that are more Solvency II-friendly and kind of fits to your European client that sell the business in Asia.

I was just wondering, first of all, so the growth is kind of supported by a market growth?

Or are you just taking market share?

And then second of all, are those products that you developed easily replicable by your competitors?

Okay, a few questions there.

I'll start with the growth.

There is very healthy growth in the underlying insurance market.

And we're seeing the benefits of that growth.

I think we've spoken in prior quarters about some additional product development efforts we've had, where we've combined capital solutions along with product development for protection products.

And what I mean by capital solutions, these are solutions that help manage the inefficiencies in the local capital framework.

And I would say some of the premium growth you're seeing in that region in the Traditional business segment does reflect the success we've been having combining those 2 core capabilities we have.

And our clients are then reaping the benefits through this underlying growth in the insurance business.

Got it.

And then just in terms of the U.S. mortality, so you definitely have very favorable results in this quarter.

My understanding is it's largely because of you have a lower number of large cases.

When you compare that to in the first quarter, wherein you have that kind of additional 20 large cases, so kind of looking at year-to-date, where would that put you in terms of your kind of large case experience relative to your expectation?

Yes.

So I'd say this quarter, pretty much everything aligned in our favor.

So as Todd mentioned in his prepared remarks, we had a lower number of large claims and we also saw that this average size of those large claims were below our expectations.

But then on the non-large claims, we also saw that the number of non-large claims came in below our expectations.

So as I said, this was a quarter where pretty much everything lined up.

Now your question on a year-to-date basis, how are we doing on large claims, I would say that we're slightly ahead when you take a look at all 3 quarters combined.

Just slightly ahead.

So you mean you are a little bit above your expectation or a little bit better than your expectation?

Sorry, what I mean by slightly ahead is that claims are lower than our expectations.

So it's a positive financial benefit.

And I would also add that the experience this quarter was pretty broad-based.

It was spread across all of our issue age brackets, and especially in the older ages, people in their 80s and above.

And it was also across our issue eras.

And particularly in the '99-'04 block, I would say this was a very strong quarter for us for claims.

We'll go next to Erik Bass of Autonomous Research.

Just wanted to ask in Australia, we're seeing a lot of discussion about banks and others potentially selling their life insurance businesses.

I'm just wondering if you see any opportunity in these transactions.

And maybe more broadly, what are the implications for the reinsurance market?

I think that the opportunities for RGA to participate would be more in potential support.

Recall that they're selling the franchise.

So these would be operations and these would be direct life insurance operations.

That's not something that we are interested in acquiring.

However, if there are opportunities within the business that's being picked up, and this would also apply in many other markets, we certainly are interested and we would certainly pursue.

Now your second question about what might this mean for reinsurance, I think what we're seeing is a general change from bank-owned insurance to more professional insurance organizations coming in.

And I think that, that could be a net positive for reinsurers.

Okay, that's helpful.

And then maybe if you could just comment a little bit more about the organic and inorganic growth opportunities in EMEA, I guess, both in the Traditional and Financial Solutions businesses, where there's been some block activity, but you're seeing strong premium growth there as well.

Yes.

So EMEA, let me start with Financial Solutions-type Solvency II opportunities in EMEA.

They're slower to develop than we had hoped.

Regulators are still hesitant to approve new structures and they're also somewhat unclear about what may be acceptable.

Now we continue to see strong interest in Europe for our solutions and discussions are continuing with our clients.

But as I said, it's taking longer than we would like.

On the annuity business, and in particular the longevity business, we see a strong pipeline for those opportunities, and particularly in the U.K., although there are some on the continent.

So that opportunity set, I would say, is robust.

We'll go next to Kenneth Lee of RBC Capital Markets.

Just want to follow up on the U.S., LatAm favorable mortality.

Was most of this favorable mortality -- was that concentrated mainly from the facultative or the automatic treaty side?

I think, as I said it was broad-based, it was across all of our various subgroups, issue, age, client generally, automatic, facultative.

It was really a quarter where pretty much everything lined up in the same direction.

Okay, great.

And then in terms of the net premium growth, I think in the past, you mentioned a more normalized range of being like in the high single digits.

Obviously, given the recent strength, is that sort of still valid?

Or do you think the recent strength is more sustainable?

This is Todd.

No, we still think that, that range is still appropriate at upper single digit.

We've had some nice quarters here this year.

But again, as I mentioned in Asia, we've had some catch-ups that flowed through.

So we still feel that's an appropriate number for the intermediate future here.

Okay, great.

And just one final question, just stepping back, if I were to look at the businesses in terms of just returns, which geographies are sort of like the most attractive for RGA within the U.S., LatAm versus EMEA versus Asia?

I mean, obviously the growth characteristics are pretty different among them.

But just looking at it from a returns perspective, any key differences?

Well, we start by targeting the same returns for all our new business.

So we do not differentiate based on either geography or risk type.

Now once the business lands on our books and it starts to develop, there will be different pressures and different opportunities, either headwinds and tailwinds.

So if we take a look at some of the various segments, depends on how currency has been doing, it will -- it will depend on how yield environments have been behaving and whether those risks attract large asset accumulations or not.

I think it's pretty difficult to give you a precise answer.

I would echo Anna's comments that we are pricing from what we think is an appropriate return in all the different locations.

And we feel given that we are winning our share of opportunities.

We'll go next to Sean Dargan of Wells Fargo Securities.

I have a question about your competitors, many of whom are also catastrophe reinsurers.

Just going back in time, in years in which they had significant claims to pay on their catastrophe lines of business, did that impact how they came into the life and health market in terms of pricing?

I think that it's hard to draw a direct connection between what was happening and their approach in the market.

We've certainly seen over time competitors either increase their focus in a market or decrease their focus in a market.

Given what's happened in the last few months, I think it's much too early for us to tell if there will be any consequences.

But keep in mind, we don't change our approach simply based on what our competitors are doing.

And so we will continue to use the same approach we've been using, pay the same attention, bring the same focus and we'll have to see how things develop.

Okay, got it.

And then if we take a step back and look at the global life insurance landscape, there seems to be a couple of or at least one foreign, they're non-U.

S.-domiciled company that's going to spin out its U.S. retail operations.

If this does become a trend, is this an opportunity for RGA?

Because it seemed like when Met spun out Brighthouse because a lot of that business was written out of New York, it was not maybe as attractive to reinsure from the point of either MetLife or Brighthouse.

But just wondering if you see an opportunity out there.

I think in the hypothetical, the answer would have to be yes.

But then as you indicated, it would really be situational, it would be specific.

And then it would depend on what business was being spun out.

Although we are a global reinsurance support, many, if not most, of the risks that our clients sell, there are some risks that we have limited appetites for.

So it would have to, I would say, in the hypothetical, yes.

And then we'd have to see what each of the specific situations contained.

Okay.

And so can you maybe just give us a feeling for your risk appetite for variable annuity books at this point?

Certainly.

We've, I think, in the past, we've indicated that we'll look at variable annuity transactions.

And maybe I'll remind you that the transaction we completed in the second quarter included very small block of variable annuities.

But those annuities were pretty vanilla and they had some small average deposits.

We continue to believe that there are some variable annuity blocks with the right characteristics and at the right price that could be attractive to us, especially if we could hedge away much of the risks.

And that all depends on design and the underlying funds.

And if we find these type of blocks, then yes, we will pursue them.

But the big variable annuity blocks in the markets, they generally don't have these characteristics.

So I think, as I mentioned in the second quarter call, we are unlikely to do a very large or even a potentially medium-sized block because it just doesn't fit within our risk framework or our risk appetite.

That's why I would say variable annuities are really not at the top of our list.

We'll go next to Ryan Krueger of KBW Investments.

I guess, one, can you help us think about the kind of Asset-Intensive run rate in the U.S. as we head into '18?

That was obviously very elevated this quarter but benefited from variable investment income.

So if you could help us think about the run rate there.

Yes, we did have the nice Farmers deal last quarter.

It's continuing to ramp up.

But it will be ramped up as hopefully at some point in the next few quarters.

But we still feel that, that $50 million to $55 million quarterly pretax income is about the right place for the run rate right now.

It will bounce around a little bit.

But for the time being, we still think that's probably in the right range.

Okay.

And then I guess for Anna, we've seen, I guess, over the last few years a fair amount of primary companies have taken some reserve charges in their secondary guarantee universal life books.

I know that's a product you've always kind of avoided.

But now that some of these charges have happened, would you have any more appetite if, I guess, the seller prices were more aligned now to do in-force deals in that block of business?

Well, Ryan, you're correct.

We have not participated in the universal life secondary guarantee products.

So we don't reinsure the underlying lapsed guarantee or the market performance risk.

But we have participated and we support our clients on the limited mortality risk on these products.

So we use a simple wire T approach.

We have looked at this product at the other elements, the other risk elements in this product a few times.

And we haven't been able to find a structure at a price that would make us comfortable.

Now if prices move materially, would that opportunity present itself?

It may.

And as we do with many requests from clients who ask us to look at these, we'll look at these.

And perhaps we'll find one or more that work for us.

But again, I wouldn't put these at the top of our list just like the variable annuities, just given the approach we take and how important the aligning the risk elements and risk management are for our business.

We'll go next to Dan Bergman of Citi.

I guess last quarter, there were some pressure from higher lapses in your U.S. business.

So I just wanted to check how that looked this quarter, whether it continued or reverted back to more typical levels.

And then also I believe your U.S. group experience was unfavorable last quarter.

So just on that one, I wanted to see if there's any detail you could give on how group performed in the third quarter.

Yes.

First, on your question on lapses, I think lapses were a little bit higher this quarter but nothing to note.

And then on the U.S. group business, remember this business does bounce around a bit and that we have annual repricing rights on it.

So the third quarter was slightly behind our expectations.

But that follows a first half, where experience was fine.

So on a year-to-date basis, I think that performance is slightly ahead of our expectations, so nothing to note there.

We think that, that business will continue to see quarters where it bounces in each direction.

But overall, it's fine.

That's great.

And then I think you’d mentioned having completed a couple of smaller kind of block or in-force reinsurance deals in the quarter.

So I just wanted to see if you could give any color or details on the type of deals that were done, whether by region or by product.

And any sense you can give in terms of how much capital they may have utilized in aggregate would be helpful.

Yes, we did a few smaller deals.

In the EMEA range, outside of the U.K., we did a single premium transaction there.

And then really, it's just a few small ones here and there.

But it is really a modest amount of capital, I would say it's in the neighborhood of $10 million to $15 million.

It's fairly modest.

And we have no further questions at this time.

Okay.

Well, thank you, everyone, for joining us for the call this morning.

And as always, if you have any other questions, please feel free to contact us here in St.

Louis.

Thank you very much.

That does conclude our conference for today.

We thank you for your participation.