Oct 29, 2013
Executives
Jack B. Lay - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President Albert Greig Woodring - Chief Executive Officer, President, Director and Member of Finance, Investment & Risk Management Committee Alain P.
Néemeh - Chief Executive Officer and President
Analysts
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division Sean Dargan - Macquarie Research Humphrey Lee - UBS Investment Bank, Research Division Jeffrey R.
Schuman - Keefe, Bruyette, & Woods, Inc., Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division Ryan Krueger - Dowling & Partners Securities, LLC David Motemaden
Operator
Good day, and welcome to the Reinsurance Group of America Third Quarter 2013 Results Conference Call. Today's call is being recorded.
At this time, I'd 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 B. Lay
Okay. Thank you.
Good morning, and welcome to RGA's Third Quarter 2013 Conference Call. Joining me this morning are Greig Woodring, our CEO; and Alain Néemeh, Head of RGA's Canada and Australia operations.
I'll turn the call over to Greig after a quick reminder of our forward-looking information and non-GAAP financial measures. Following Greig's prepared remarks, we will open the line for 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 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 would cause -- or could cause actual results to differ materially from expected results is included in the earnings release we issued yesterday. In addition, during the course of this call, we will make comments on a pre-tax and after-tax basis for operating income, which is considered a non-GAAP financial measure under SEC regulations.
We believe this measure better reflects the ongoing profitability and underlying trends of our business. Please refer to the tables in our press release for quarterly financial -- and the quarterly financial supplement for more information on this measure and reconciliations of operating income to net income for our various business segments.
These documents and additional financial information may be found on our Investor Relations website at rgare.com. With that, I'll turn the call over to Greig.
Albert Greig Woodring
Thank you, Jack. Good morning, everyone, and thanks for joining us this morning.
We are pleased to report a strong quarter, one that was favorable in most respects and one in which we had good stability across our diverse regions and lines of business. Mortality and morbidity claims experience was in line overall, including a few regions which had very good experience, including the U.K.
Our global financial solutions business had another strong quarter benefiting from higher spreads and ongoing transaction activity, while our large block acquisition from 2012 has continued to produce strong results. Finally, there was incremental benefit from the effect of share repurchases and from a lower tax rate.
The net result was an annualized ROE of 13% despite negative currency effects again this quarter. The operating EPS comparison of $2.14 versus $1.35 a year ago reflects strength this quarter versus the depressed result a year ago.
Premiums were up 9% in original currencies quarter-over-quarter and 6% in translated U.S. dollars.
Book value per share, excluding AOCI, is up 5% this year despite the significant charge in Australia last quarter. Our average investment portfolio yield of 4.75% was roughly even with the most recent quarter, but down 23 basis points from last year's third quarter.
The ongoing execution of our capital management strategy continues to enhance key profitability and return measures. We've opportunistically repurchased shares throughout the first 3 quarters of this year, buying back an additional $31 million in shares during the quarter, for a year-to-date total of $261 million or 4.2 million shares.
We still have about $139 million available under our current repurchase authorization. Our excess capital position increased to approximately $600 million, reflecting the buybacks and our recent $400 million senior note offering.
We'll continue to evaluate the most efficient uses for that capital. Turning now to our third quarter segment results.
Our U.S. Traditional business had a good quarter, producing pre-tax operating income of $90 million, that's a 24% increase.
All products outperformed the prior-year period due to improved claims experience, particularly our group insurance line. U.S.
Traditional premiums grew 6%, reflecting primarily growth in our individual health and group reinsurance businesses. Individual mortality premium growth of 4% was on the high end and we expect some moderation of this rate going forward absent the acquired blocks.
The U.S. Asset Intensive subsegment reported another strong quarter, exceeding its expected run rate as it has all year.
Pre-tax operating income totaled $38 million versus $27 million last year. Improved investment yields boost the results in our fixed and equity indexed annuity businesses.
Fixed annuity reinsurance, which includes the large block we acquired last year, performed better-than-expected due primarily to our further opportunistically positioning of the investment portfolio. Our U.S.
financial reinsurance operation reported $12 million of pre-tax operating income this quarter, driven by a 35% increase in fee income. Canada results were better than last year's third quarter, with pre-tax operating income totaling $36 million, reflecting improved claims experienced from a year ago.
A relatively weaker Canadian dollar reduced pre-tax operating income by about $2 million. Premiums grew 4% quarter-over-quarter and totaled $236 million, net of a $10 million foreign currency headwind.
Premium growth was 8% on an original currency basis. In Asia Pacific, pre-tax operating income was $13 million this quarter, with good results in all Asian markets and breakeven results in Australia.
Nearly every country in this segment reported stable claims experience, with particularly strong performance in Japan. Segment-wide net premiums increased 4% to $343 million, including a foreign currency drag of about $33 million.
On a local currency basis, Asia Pacific premiums were up 14% of solid growth rate. In Australia, as you know, we undertook a comprehensive analysis of our group claims liabilities in the second quarter, which led to a substantial addition to the related liabilities of that time.
Group claims liabilities will run off over the next several years and we believe the adjustments reflected last quarter have stabilized that situation. There were no changes to the assumptions embedded in those group claims adjustments.
And this quarter's breakeven performance net business was in line with expectations. Likewise, the individual business produced breakeven results this quarter, also in line with our most recent expectation.
We continue to believe that we are out in front of the industry issue in Australia and are now seeing more evidence of negative FX reported by others. In the meantime, we continue to manage through our situation by taking action where we can on pricing and also by working with our clients and industry participants to effect change in the fundamental risk profile of the market.
Any significant changes will take some time to implement. Outside of Australia, we remain optimistic about the growth opportunities in the Asian life reinsurance space and expect that area to continue adding significant value to the RGA enterprise.
In our Europe and South Africa segment, results were much like those in Asia, with overall stable claims experience and good premium growth. Segment pre-tax operating income increased to $40 million, driven by favorable mortality and morbidity experience in the U.K., this segments largest operation; and a new global financial solutions transaction in Continental Europe.
The new transaction was signed in the third quarter, but included a retroactive origination date of January 1 and totaled about $11 million pre-tax through September. Net premiums grew to $330 million, an increase of 9% quarter-over-quarter in reported U.S.
dollars and a 12% increase in original currencies. Our corporate segment reported a pre-tax operating loss of about $3 million this period versus $6 million last year, reflecting slightly favorable overhead costs, capital charges from internal allocation.
Our tax rate of 32.5% was below expectations due to various tax benefits and adjustments, but we continue to expect a normalized rate of 33% to 34% in future quarters. In conclusion, we're pleased with our third quarter results.
A good top and bottom line performance across all operating segments, providing good momentum heading into the fourth quarter. We're equally pleased to report an operating return on equity of 13% this quarter.
We added to our capital base by issuing $400 million in senior notes, taking advantage of favorable market conditions. Our excess capital is now in the neighborhood of $600 million and we continue to evaluate the most effective uses for that capital.
We repurchased $31 million of shares this quarter, all below book. Excluding AOCI, we are encouraged by improving results in our high-growth areas in Asia and Europe and look forward to capitalizing on what we believe to be excellent opportunities in those markets going forward.
We thank you and appreciate your support and interest in RGA, and we'll now take your questions.
Operator
[Operator Instructions] We'll take our first question from Jimmy Bhullar with JPMorgan.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
I had a couple of questions. The first one on the Asia business.
If you could talk about how the claims trends have been in Australia thus far. I realize it's a short period, but over the last few months versus the expectations embedded in the order charge last quarter.
And then related to that, if you look at the earnings outside of Australia then, was that a normal period? So as we think about what you're non-Australia business earns, is this what we should be expecting going forward?
And then, secondly, on -- Europe had a very strong results, what level or what were the main drivers of that? It seems like the fee income was pretty high and you had good mortality and morbidity, but the main drivers of that and how much do you think this quarter's earnings are inflated versus what you'd expect in a normal quarter?
Alain P. Néemeh
Jimmy, it's Alain Néemeh. I'll take the Australia question first.
I think it's fair to say Australian claims were high, but we expected them to be high. And so essentially they're in line with what we expected when we set up the provisions at the end of last quarter.
Albert Greig Woodring
In terms of the other 2 areas, Jimmy, I think the commentary is similar for both of them. The earnings in Asia outside Australia and for Europe were probably a little bit to the good of because of good experience.
In Europe, we additionally had that one fee income transaction that was backdated to the beginning of the year and so we had a little bit of extra fee income in the quarter. But that happens quite often with our business.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
And then is the breakeven of your assumption for future periods outside or in Australia?
Albert Greig Woodring
Certainly, when we look at 2014, that would be the case.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
And then if I could ask one more on just -- what's your outlook for buybacks? You bought a little bit of stock in the third quarter, you still have $139 million, I think, remaining on your authorization.
How should we think about the timing of when you complete that?
Jack B. Lay
Jimmy, this is Jack. We do have that much still available.
As we eat into that authorization, we are a little more picky, so to speak, in terms of what price we're willing to pay. So we will likely be in the market selectively.
If we do, that would be a good value in terms of taking out some of those shares. But I think, as you saw this quarter, you could expect somewhat of a deceleration compared to the buyback activity in the first half of the year.
So we'll be selective going forward. And it's probably unlikely that we would eat through the entire authorization through the remainder of the year.
Operator
We'll take our next question from Sean Dargan with Macquarie.
Sean Dargan - Macquarie Research
After completing the $400 million bond offering, you have $600 million excess capital relative to I guess your target RBC. As we think about your appetite for acquisitions, should we think about it that you're more comfortable maybe adding on to mortality traditional life-type businesses than Asset Intensive?
Because there are some payout annuity blocks out there in the market.
Albert Greig Woodring
Sean, our interest is fairly wide ranging. It's true that we are probably extremely comfortable and conversant with mortality in all the shades and colors of it, but that tends to be a very competitive auction at times and we've found that the returns on some of those auctions have not been to our suiting.
So at times it might seem like we are looking at things that are not in a sweet spot as mortality is, but it has to do with the whole range of return characteristics, comfortability with the risks involved in the transaction and so forth. So we look at a wide range of things.
Sean Dargan - Macquarie Research
And a related question, I think in the opening remarks, you mentioned that the Hancock acquisition from last year was, I guess, performed well in the third quarter. Is that trending better than your expectations at the time of the deal?
Albert Greig Woodring
It's trending probably a little bit better, but it's within the range that we expected when we did the transaction.
Operator
And we'll take our next question from Humphrey Lee with UBS.
Humphrey Lee - UBS Investment Bank, Research Division
A follow-up, tax benefit for this quarter, was it FIN 48-related?
Jack B. Lay
No. We didn't really have any reversal of taxes associated with FIN 48 because we didn't, during the quarter, end up with a release of a tax year.
So no, we've done nothing with respect to FIN 48. The lower effective tax rate had more to do with where our profits were emanating and some minor adjustments upon filing the 2012 return.
Humphrey Lee - UBS Investment Bank, Research Division
Okay. So I think from earlier this year, you mentioned that there's -- the expectation is the modest benefit from FIN 48 likely in the first part of this year.
Is this still the expectation? And also kind of sense where it comes towards the end of the year, do you have a better handle in terms of potential benefits for the year?
Jack B. Lay
Yes. As we sit here today, Humphrey, I would expect that we would not have a FIN 48 release in the fourth quarter of this year.
We're not in control of that situation.
Humphrey Lee - UBS Investment Bank, Research Division
And then just one more. So for the U.K.
favorable mortality and morbidity, how should we kind of think about in terms of how much of a good driver for this quarter?
Albert Greig Woodring
It's about $5 million.
Operator
And we'll take our next question from Jeff Schuman with KBW.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
I want to ask first couple of questions about U.S. financial reinsurance.
You've had good growth there for a few years now, it seems to be accelerating further. I think at your Investor Day, you talked about 8% to 14% intermediate term growth.
You've gotten of a whole lot more than that this year. Is it really due to just a few transactions or is there some sort of broad trend here for there just to be more industry activity?
Jack B. Lay
Jeff, there's a little bit more industry activity and there's a number of transactions, but it's not dozens. It's a very discreet number of transactions.
A lot of them are financing of XXX reserves or AXXX reserves. We've done a few of those sorts of transactions where our risks are very remote tail-risk.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. And then was wondering, the 14% constant currency premium growth in Asia Pacific, what was driving that this quarter?
Albert Greig Woodring
I think it was spread across the region pretty well, Jeff. We've -- the last several years, we've been refilling pipelines in Korea and Japan as some of our treaties from earlier days, which were sizable, have expired and we pretty much come to the end of that period now.
So I think we're going to see a good premium growth throughout the rest of Asia. We will also see though, in addition, Australia premium start to fall off in the future pretty rapidly in coming quarters.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
So in this quarter, were Australian premiums up or down?
Alain P. Néemeh
Group premiums were pretty much flat. Individual premiums were up about 14%.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
And is that the sort of growth you are targeting for individual or are you trying to kind of manage that more defensively in line with the group?
Alain P. Néemeh
We're definitely being cautious as we approach the business, but recall that there's a step premium nature to the business. And so premiums will increase year-over-year by about 10%, absent any underlying business growth with the treaties that we have in place.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. And just one last one, we've seen an industry pickup in fixed an indexed annuity sales, are you expecting to kind of participate in those increased blows or you're still looking more sort of for one-off transactions like Hancock?
Albert Greig Woodring
We would look at any flow opportunities that exist in the market. Those don't always end up in the reinsurance market that we have been in the past on fixed annuity treaties, but it remains to be seen what's available, Jeff.
Operator
And next we'll go to Steven Schwartz with Raymond James & Associates.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
I want to stick with scenery here, both in the U.S and international. First, in Europe and South Africa, you said there was $11 million.
It sounds like a deal you did maybe was retroactive to January 1. What should we be thinking about from that deal in the fourth quarter and going forward?
Jack B. Lay
Yes, Steven, this is Jack. That was -- as you stated, that was 3 quarters of fee revenues.
So roughly a third of that would be repeating and that's roughly a 3-year deal. So there's roughly $0.03, $0.035 per share in terms of revenue you'd expect to see us reflect each quarter going forward.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then a question on the U.S.
re, Greig, I think you just mentioned that it was mostly XXX and AXXX financings, could you maybe talk about what you're doing in this market? I mean, is it -- are you providing promissory notes, letters of credit, what are you doing?
Albert Greig Woodring
We're not trying to take the role of the bank here. We are working on transactions that get fairly complicated, sometimes with a banking partner as well.
So it gets pretty complicated to structure these, but a lot of them are involved in financing the various types using captives, we're not. But it's a sort of a wide range of things we would consider.
As I say, most of the real activity in the U.S. has been on the XXX and AXXX front in the last couple of years.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. But somehow or other you are interacting with the capital -- captive set up by the primaries?
Albert Greig Woodring
Yes.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then if I may just on Australia, a quick one.
I think you put up $274 million of reserves, if I remember correctly in the second quarter. I don't know how to say this, but how much did you take down, how much is left?
Jack B. Lay
Yes. This is Jack.
Let me comment on that. Yes, we put up additional reserves, but you may want to think in terms of the entire reserves in the $700 million to $800 million range.
And virtually all of that still remains on the balance sheet.
Operator
And we'll go to Ryan Krueger with Dowling & Partners.
Ryan Krueger - Dowling & Partners Securities, LLC
I had a question on the individual business in Australia. At your Investor Conference earlier in the year, you had talked about repricing effort in that business and I think a fair amount of the business was expected to be repriced by the end of this year, so I was hoping for an update on how that's going so far.
Alain P. Néemeh
I think fair to say we're still working through that process. We're in the, generally, in the process now of working through negotiations with clients as to both timing and amount.
I think I'll leave it there.
Ryan Krueger - Dowling & Partners Securities, LLC
Okay. Is this something that will go enforced by year end and we'll get an update next quarter?
Alain P. Néemeh
I believe so.
Ryan Krueger - Dowling & Partners Securities, LLC
Okay. And then from the individual mortality growth of 4% in the U.S., does that include any small block transactions or is that all slow business?
Albert Greig Woodring
There were some small blocks in there, but nothing significant and noteworthy.
Operator
[Operator Instructions] And we'll take our next question from Tom Gallagher with Crédit Suisse.
David Motemaden
This is David Motemaden. I'm asking the question on behalf of Tom Gallagher.
Just wanted to get an update, I know in the past you've said that there's a $300 million dollars cushion that you guys would like to have kept at the holdco. I'm just wondering if that is still the case given the increase in excess deployable capital?
Jack B. Lay
Yes. Well, that $300 million is kind of a rule of thumb that we tend to guide towards and we haven't changed that.
All things being equal, we would prefer to have that sort of a cushion, obviously. We have more than that in terms of a cushion, currently.
David Motemaden
Got it. And then in terms of where you viewed the best opportunities in terms of deals.
Could you just give us a little color on that and also what your target return are -- there is?
Jack B. Lay
Best opportunities seem to be in Europe, sometimes in North America. There's a fair amount of activity that we're looking at.
The returns that we're targeting are sort of our historical returns, sort of 13% type returns on a GAAP basis.
David Motemaden
Got it. And then I guess, is there -- I know in the past, there has not been much interest in any VA risk transfer deals, just wondering if that is still the case?
Jack B. Lay
Yes. We're not actively looking for VA at the moment.
We wouldn't rule it out if something really attractive came along, but it's not that we're out looking for it.
Operator
And there are no further questions at this time.
Jack B. Lay
Okay. Well, thanks, everyone, for joining us for the call and to the extent you have any other questions, feel free to give us a call here.
And with that, we'll end the third quarter conference call. Thank you.
Operator
Thank you. This does end today's presentation.
We thank you, all, for your participation.