Apr 27, 2010
Executives
Greig Woodring - President and CEO Jack Lay - SEVP and CFO
Analysts
Jeff Schuman - KBW Mark Finkelstein - Macquarie John Nadel - Sterne Agee Jimmy Bhullar - JPMorgan Steven Schwartz - Raymond James & Associates
Operator
Good day and welcome to the Reinsurance Group of America first quarter 2010 conference call. Today's call is being recorded.
At this time, I would like to introduce the President and Chief Executive Officer, Mr. Greig Woodring; and Senior Executive Vice President and Chief Financial Officer, Mr.
Jack Lay. Please go ahead, Mr.
Lay.
Jack Lay
Okay. Thank you and good morning to everyone, joining us for RGA's first quarter 2010 conference call.
Greig Woodring, will briefly comment on our results we released yesterday and then we'll respond to questions from our participants. I'll turn the call over to Greig after a quick reminder related to forward-looking information and our use of non-GAAP financial measures.
We'll make certain statements and discuss certain subjects during the call that will contain forward-looking information including among other things, investment performance, statements relating to projections of revenue or earnings and future performance and growth potential of RGA and its subsidiaries. You are cautioned that actual results could differ materially from expected results.
A list of important factors that could cause actual results to differ materially from the expected results is included in the earnings release issued yesterday. In addition, during the course of the call, we'll make comments about our results based upon operating income both on a pretax and after-tax basis.
Under SEC regulations; operating income is considered a non-GAAP financial measure. We believe this measure better reflects the ongoing profitability and underlying trends of our continuing operations.
Please refer to the tables in our press release for more information on this measure and reconciliations of operating income to net income for the various business segments. With that, I'll turn the call over to Greig.
Greig Woodring
Good morning. Thank you for joining us.
I will provide some brief comments on our first quarter results and then we will open the line for your questions. Our first quarter results are mixed, we continue to show up on the balance sheet as our investment portfolio continues to increase in value and asset impairments were limited.
The capital base increased to its highest level yet. Our first quarter consolidated operating income totaled $93 million or $1.25 per diluted share significant increases on both counts over difficult 1Q '09 but below what we expected.
The primary source of our current period shortfall was adverse mortality experience in our US traditional market. I will address specific aspects of this business in a moment.
Foreign currency fluctuations added $0.08 per share compared to first quarter '09 and an increase in the company's tax provision took away $0.07 per share. We expect the tax provision increase to reverse later in the year.
Consolidated net income increased to $122.4 million, or $1.64 again significantly surpassing a difficult first quarter '09. Recall that the first quarter '09 reflected substantial realized and unrealized losses from investments and derivatives.
Consolidated net premiums including $74 million from the ReliaStar Group Insurance acquisition, were at expected levels and totaled $1.6 billion during the quarter an increase of 13% on an original currency basis and 21% on a reported US dollar basis over first quarter '09. Net investment income was strong compared to 1Q '09 and our unrealized gain position continued to rise along with the overall strength of our investment portfolio.
Likewise our capital and liquidity positions are at all time highs. Impairment losses reflected an income were just $6.3 million this quarter down substantially from $41.5 million in last year's first quarter.
Out traditional US business reported pre-tax operating income of $61 million compared to $72.6 million in the first quarter of '09. Both periods reflected higher than expected claims as did the first quarter of '08.
Premiums were up 15% for the quarter including the ReliaStar business at 6% (inaudible). 2009 the US traditional business generated a 13% return based upon models of our issue year cohorts we expect that to fall a bit in this year and bottom out as the business begins the slow rise upward.
For 2010 we expect to see low double-digits returns on US mortality business and returns around 13% for RGA as a whole. This quarter much like the first quarter of the past couple of years contained the seasonality effect of high claims close with our lowest quarterly premium loans although better in the first quarter of the past two years this quarter's claims were 1% to 2% higher than expected in the US.
We continually reassess mortality trends, which has implications for pricing of new business and for long-term profitability. Our current pricing always takes into account the most current information and targets the long-term return of at least 13%.
Our US asset intensive business reported another strong quarter as the broader capital markets continued its rebound. $16.5 million of pretax operating income this quarter was just ahead of the expected run rate of $15 million to $16 million per quarter.
Turning to Canada, pretax operating income for the quarter totaled $16 million compared to $17.8 million last year and decrease was due to somewhat higher than expected claims experienced in the current period. Premiums were strong this quarter increasing 27% on a Canadian dollar basis.
We continue to see a strong flow of credit like businesses. In total, our North American operations included roughly $20 million of higher than expected claims this quarter.
This equates to about 2% of total claims, which is not an unusual fluctuation. Our international operations again reported solid results this quarter Asia-Pacific reported as a strong pretax operating result of $26.6 million compared to $7.1 in the prior year period due to better than expected claims primarily in Australia and Hong Kong.
Original currency net premiums were slightly lower than last year but higher by 17% in translated US dollars. As mentioned last quarter growth rates in South Korea and Japan will be lower this year as a result of several large treaties reaching the end of their life cycles, but we expect growth rates to pick back up in these markets in 2011.
Our Europe and South Africa segment reported pretax operating income of $10.2 million for the current quarter versus $8.1 million for last year. Original currency net premiums increased 14% and on a US dollar basis premiums were up 26%.
Our UK operations reported strong results due to favorable claims experience offset in part by adverse claims experience in South Africa. We expect European marketplace to be a strong source of near term growth for our international operations.
In summary, we're off to a slow start on the earnings front much like each of the past two years. We generated a consolidated annualized operating return on equity an excess of 10% for the quarter and 13% over the past 12 months despite the sub-par mortality in this quarter.
We will continue to annualize US claims experience the largest factor in our results and believe we have a good understanding of what to expect going forward. Our newly acquired group reinsurance business is off to a solid start.
We are well capitalized with the solid balance sheet which will allow us to take advantage of opportunities as M&A activity except on the direct side. We appreciate your support and interest in RGA and we will now open up for questions.
Operator
Thank you, the question-and-answer session will be conducted electronically. (Operator Instructions).
And our first question comes from Jeff Schuman with KBW
Jeff Schuman - KBW
Greig, I was wondering if you could help us to little bit better understand what you are trying to tell us about the US traditional business. It was in the press release and in your comments, you've talked about ongoing analysis and in fact about the analysis kind of informing your pricing and so forth, but I guess its not clear whether you are telling us that recent analysis of these quarter's results is suggesting that, some of the business isn't in earning as well as had been expected previously or whether things are still tracking pretty much as expected, but just once again we've just seen some quarterly volatility.
In other words is there something other than the usual sort of volatility that we should be aware of here?
Greig Woodring
Yeah Jeff, we know which years of our business have the tightest margins, which have the best margins as business moves forward; each of those years contributes to the current year's earnings in a different weighting if you will and so we know how the progression of returns should go, and it moves in a stately fashion through the course of time. So we have been expecting that based on our models that returns would be marginally marching down because of the most competitive years from 98 to 2003 having a bigger impact and we're bottom out about this year.
Last year we earned 13% on that business. We expect to come reasonably close to that this year maybe a little south of it, and then marginally increase each year going forward.
This year like the last couple of years we've had extra claims in the first quarter, we have a high degree of confidence in our annual mortality rate assumptions that we expect for the year, we tend to pick up a little bit of seasonality in the winter months in both the fourth quarter and the first quarter that is unfortunately been the pattern in the last couple of years as well and you noticed that last year and the year before, frankly we started off this way actually little worse than each of those two years and rebounded by the end of the year in the individual markets. So in other words this is something that we have unfortunately come to expect a bit of and anticipate a bit in our quarterly forecasts.
Jeff Schuman - KBW
So to put it in other way, you don't see the business fundamentally different than you did when you set the guidance range for 2010? Is that correct?
Greig Woodring
That's right.
Jeff Schuman - KBW
Once again, who knows what kind of random variations we'll get, but there's nothing to preclude the possibility at this point that you could see recovery in this calendar year as you did in the last couple of calendar years. Is that fair?
Greig Woodring
Well, that's certainly what we hope, you can always have a fluctuation that doesn't recover in a given year, but we don't expect that this is anything other than the same sort of events we saw in 2008 and 2007. Now there is no law that says the first quarter has to be bad because we have had good first quarters, but it seems to be more often than not our most difficult quarter.
Jeff Schuman - KBW
If we look in the corporate segment, the interest expense was significantly lower this quarter, and it wasn't clear to me why that was the case. Why was that lower?
Jack Lay
Part of that is the short-term rate, but there is also several million dollars of interest expense within [48] that is with our broader tax provision. So I don't have the exact number at my finger tips but that did drive down interest expense several million dollars.
Jeff Schuman - KBW
Okay, this would not be sort of the run rate, is that correct?
Jack Lay
That's right.
Operator
Our next question comes from Mark Finkelstein with Macquarie.
Mark Finkelstein - Macquarie
I think I understand the comments regarding the '98 to '03 vintage years. I guess I would just ask the question is, are you still comfortable with the guidance range that you put out at the beginning of the year?
Jack Lay
Mark this is Jack, probably it's a good point to remind everybody that we don't update guidance, we typically to be in the year issue guidance and then it is what it is. I think I would echo Greg's comments that we started last couple of years with the difficult first quarter and essentially came in right at are very close to guidance.
So you can draw your own conclusion there but we don't want to get in the position of either affirming or not affirming guidance.
Mark Finkelstein - Macquarie
And then, was there anything specific in the nature of the claims or is it larger claims? I believe that was kind of an issue over the last several quarters or anything else that you saw in the numbers?
Greig Woodring
There was a fair component of large claims, pretty much like we've seen in the last period of time that sits, it was not unusual. We did see more debts of people over age 80 than we would have expected in terms of numbers.
We don't have cause of debt so we don't know whether those are flu related or seasonal type claims but we'll find that out as time goes along.
Mark Finkelstein - Macquarie
And then finally, can you just talk about I guess capital a little bit and any deployment opportunities?
Jack Lay
Yeah this is Jack we still have some degree of redundant capital, in excess of $0.5 billion currently. That is certainly available to deploy in terms of block transactions or anything like that and there are those opportunities out there that's always hard to predict the extent to which and the timing of any such deployment, so that's probably best I can do there.
Operator
And we'll go next to John Nadel with Sterne Agee.
John Nadel - Sterne Agee
I was hoping we could actually get a little bit more into Mark's second question there on capital and deployment. Last couple of quarters Greig, you guys have talked about an active pipeline but obviously difficulty in predicting what might occur.
Can you give us sort of an update on where you see the opportunities? Is it still more heavily weighted to financial reinsurance?
I think you mentioned in your opening remarks some M&A, maybe on the primary side, where you can play a potential role. Can you give us a little bit more detail there?
Greig Woodring
Yeah John we are little leery of trying to say that, there is a lot of things in the pipeline that are real promising or I can say we are very busy right now, but we have as Jack said no idea what's going to happen and when. But there are a lot of things going on in the M&A front mostly smaller blocks, but we have a very active pricing department both internationally and domestically at this stage.
They are looking at a lot of different things and we will see how this year pans out. But we are happy with the level of activity at this point; we'd like to see that translated into some transactions during the course of the year.
Those are somewhat hard to predict. We saw a lot of financial reinsurance as you mentioned towards the end of last year.
We are not seeing a lot right now because it's typical that those things have a closing date that typically towards year-end then we will expect the same level of activity, its not more actually this year.
John Nadel - Sterne Agee
So then just last comment or last question. I think last quarter you guys had indicated that by the end of 2010, if some of these opportunities don't really pan out, you'll start to consider returning some of that capital to shareholders, either through increased dividend or buyback or both.
Obviously with the weakness in the results this quarter, your stock is already, in my view anyway, and I don't necessarily need you to comment, attractive on a relative basis versus a lot of life insurance, so does that play into your mind-set at all as it relates to how much longer you will wait for something to develop?
Jack Lay
John, this is Jack. As you might expect we continually assess the capital situation and our potential opportunities to deploy that capital and I think we did make the comment previously and this does reflect our thinking that if we go through another year and for any number of reasons don't execute on any meaningful number of call them block opportunities and at some point we would think very hard about returning capital in someway if we didn't have in our view ways to deploy that appropriate return.
So that's an ongoing deliberation and its influenced by the rate at which we're deploying just in general operations that capital and our views on opportunities going forward in terms of block transactions.
Greig Woodring
Out intent and expectation is that we will deploy the capital, but if we have to take stock and reassess at some point we will do so.
Operator
And from JPMorgan we'll go next to Jimmy Bhullar.
Jimmy Bhullar - JPMorgan
First, on capital, could you quantify how much you believe you have to deploy towards either at block transactions or share buybacks if you eventually pursue like if not specific, then just at least give us a range and then secondly, I realize we're only one month into the second quarter, but are you able to comment on how the second quarter is progressing in terms of mortality. And then finally on taxes, if Congress does extend the active financing legislation, I think the charge that you took in the first quarter or the higher taxes should reverse, but if they don't, does the amount in the first quarter reflect the full year impact already, or would taxes be elevated throughout the year then?
Jack Lay
Let me start with that last one on taxes, we wouldn't expect to recurrence quarter-to-quarter if in fact Congress does not act. But we've been advised that to expect Congress to act in fact in May I think there is a break end of May and the expectation is if they were act before that, of course there is no guarantees but that is our expectation.
I think you would ask about the range of excess capital, it's between $500 million and $600 million right now and we would never want to run that down so that we have literally no excess capital but you can think of the vast majority of that as available for deployment if the opportunities come up.
Jimmy Bhullar - JPMorgan
And then any comments on mortality, so far this quarter?
Greig Woodring
Yes, we know what mortality is Jimmy through today actually or through yesterday. But we don't like to comment because it's kind of misleading to a short period like that.
Operator
(Operator Instructions). And we'll go next to Steven Schwartz with Raymond James & Associates
Steven Schwartz - Raymond James & Associates
I wanted to follow-up and then ask a couple of my own, Jack. I know that you don't like to update your guidance, but I think you kind of did, so I would like you to comment on that.
Your original, what you said at the end of the fourth quarter is we expect ROE to stay between 13% and 14%, and that would have been like a 630 to 690 type of number on beginning equity and the statement now is towards that low end, towards 13% is what you are staying at the quarter. The way I read that, that would seem to imply that you kind of expect the next three quarters to roll out as you expected at the beginning of the year and then whether you make up the first quarter or not remains to be seen.
Is that an accurate way of looking at this?
Jack Lay
Steven this is Jack, that maybe implying a level of precession that may be doesn't exist as we look forward. I am not sure I'll put a fine point on 13% versus 13.5% sort of mid-point.
I guess maybe there's another way to say this, in our minds that we kind of lump all those together and that's really essentially the same thing.
Steven Schwartz - Raymond James & Associates
If I can go on to some of my own and could you talk first, I want to talk about Europe and South Africa. That's an area that you've targeted for near term growth, offsetting what's going on in Asia, but there was a decline in new business production there year-over-year.
I was wondering if you can comment on that. I didn't know if you'd given any number for the adverse mortality in Canada, and maybe you can give us a sense of the seasonality.
Are you up half a point over average in the first and fourth quarters and down half a point versus average in the second and third quarters, something like that?
Greig Woodring
Yeah I would say the first and fourth quarters might be up typically between 1% and 2%.
Steven Schwartz - Raymond James & Associates
1% and 2%.
Greig Woodring
In terms of Europe its not so much, there maybe a way to put it rather than targeting that for growth is that our position in the markets are allowing us to grow at a nice rate we see opportunities there, I wouldn't get too concerned about our quarterly production numbers because they tend to reflect reported numbers and there is a little bit of noise in those numbers all the time. The fact the matter is I think our premiums are up nicely in Europe and South Africa and that reflects the annualized growth year-over-year in that business and that's probably a better way to focus on year-over-year growth rather than one quarter's production numbers at a time.
Jack Lay
Maybe I can handle that. We commented that roughly North American operations we sustain $20 million or so best estimate of additional claims flow, I would characterize that Canadian portion of that is around $8 million.
Operator
And we'll go next to Eric Berg with Barclays Capital.
Unidentified Analyst
[Siddharth Patel] I had a couple of questions, the first one being on the US traditional mortality business. Just to get my understanding correct, Greig, you mentioned in the release that the competitively priced business is acting as a damper on the returns for this particular business.
Am I correct to say that, this is only '98 to 2003 because book-in-business as you mentioned earlier and that this downfall will continue in 2010?
Greig Woodring
Yes, that business in effects every year from now until probably 30, 40 years from now. If you remember the discussions we had in those years you might have been round.
We were always talking about how competitive the marketplace was. We were talking about market shares for us of 12%, 13% in those days compared to 20%, 22% these days.
We were struggling in that market to capture 5% and 10% shares at times of reinsurance treaty. So it was a very competitive difficult time we've known that a lot has been part of our '06-'07, '05-'04 all those years has been part of their history as well and so it will continue to play out and that's the way it goes.
We don't have like property casualty industry, big ups and downs in claims where you swing from positive results to negative results but you have periods of time where you are more competitive and periods of time where you are less competitive and margins are a little bit wider. So we blend all those together in each year's experience.
Unidentified Analyst
Is it fair to say that then the under pricing are probably the competitiveness was, is it taking place at the insurance company level or was it at the reinsurance company level?
Greig Woodring
Is that the reinsurance level? Reinsurance market was very competitive in those days.
Unidentified Analyst
My last question is on the Canadian business. In the release it was mentioned that it was adverse mortality in Canada for this quarter.
Is this adverse mortality been experienced over many quarters and if that's the case, is this problem the same as or different from that being experienced in the traditional US mortality business?
Greig Woodring
No. Every market always has its different periods of time when it's more competitive and less.
There were years were the Canadian market was quite competitive. Our experience in mortality business in Canada has been very favorable over the last three or four years in general.
We've had extremely good mortality results probably substantially better than we would have expected under typical pricing assumptions during this period over the last several years. We've had a little bit higher mortality last year than we had previously with probably not to be unexpected and this quarter was a little bit higher.
Operator
And we'll go next to Steven Schwartz from Raymond James & Associates.
Steven Schwartz - Raymond James & Associates
Jack, on the asset intensive, I asked at the end of the conference call last quarter, about, what is the norm there? I think we all agreed that the norm there was probably about $12 million and other $3 million from financial reinsurance.
Are you suggesting a new norm for asset intensive of $16 million?
Jack Lay
No Steven, I would suggest I may have mischaracterized it or are not done a good job of describing at last quarter. I think what you see reflected here is our best estimate of the expectation.
Operator
And we'll take a follow-up question from Jeff Schuman with KBW.
Jeff Schuman - KBW
I apologize if you spoke to this, but ReliaStar, I think you gave us the premium impact. Can you give us any sense of just how the business performed otherwise and is there everything on track in terms of retaining the key employees and running that business going forward?
Jack Lay
Yes, Jeff this is Jack. In terms of the financial results and that sort of thing while we don't break them out separately, there is certainly add or exceeding that doesn't mean a whole lot for one quarter but certainly add or exceeding our expectations in terms of the underlying economics and that sort of thing.
Greig you may want to comment.
Greig Woodring
In terms of the people in the integration, Jeff we are more convinced than ever that this was a good acquisition in terms of the way we see people operating and we have kept the staff. We have come to respect the staff in what they do and we are very pleased with the start they've gotten off to as Jack said their one quarter doesn't mean much it could have gone the other way if things have been that but its going off to a good start which is nice and it's a good team.
We are very pleased with that acquisition and expect it will contribute significantly with RGA over time. The integration is not a real expensive integration because it's a standalone unit, but the integration of systems in accounting information and so forth is continuing pretty much as planned.
Operator
And we have a follow up from Jimmy Bhullar with JPMorgan.
Jimmy Bhullar - JPMorgan
I just had a couple of follow-ups. First, if you could comment on how pricing trends are in the US business.
Some of your competitors and like companies like Hanover have been pretty active or trying to grow their US presence. And then secondly, in your Asian business, the premium growth ex-currency was pretty light, I think down 3.4%.
I'm not sure if that's because of some treaties expiring or there's something else, and if you could just give us an outlook. Should that get better from here, or is this what it should look like for the rest of the year on a constant currency basis?
Greig Woodring
Jimmy we expect the Asian growths pick up a bit we did mention last quarter that as we look out from this point. We are expecting a low in both Japan and South Korea; as that business have seen the end of some large producing treaties coming to the end of their natural production and so flattening out of premiums a bit in those markets but we don't expect to see a fall of the magnitude we saw in the first quarter sustain through the year, we expect it to pick up.
In terms of pricing trends in the US, we still think the pricing environment is fairly favorable. The business of volume exceeded into the marketplace is contracting and we saw that marginally contracting in '09 based on official numbers that were published by Society of Actuaries our Munich Re survey, the business that RGA is riding has been pretty stable.
However, we've basically continued production at about the same levels and we are very pleased with the pricing levels, generally speaking on the business we're taking on.
Operator
Mr. Lay, there are no further questions.
At this time, I'll turn the call back over to you for any additional or closing remarks, sir.
Jack Lay
Okay, that really pretty much ends our conference call. Thanks to everyone who'd participated and looking in today and to the extent any other questions come up, feel free to call us here in St.
Louis. With that we'll end the call.
Thank you.
Operator
Ladies and gentlemen that does conclude today's conference. We thank you for your participation.