Reinsurance Group of America Earnings Call NUGGETS: Asset-Intensive Business, Hancock Transaction

On Friday, Reinsurance Group of America Inc (NYSE:RGA) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Asset-Intensive Business

Jimmy Bhullar – JPMorgan: I was wondering if you could give us a little bit more granularity in terms of results in the asset-intensive business. If you assume that the acquired block had a 7% ROE annualized in the second quarter it means maybe earnings are around $6 million or so and you take that out of the $17 million you reported in the quarter in asset-intensive, seems like the legacy RGA business performed very poorly. So, what happened there and what your expectations are going forward? Then secondly, you’ve had elevated mortality in the U.S. business for several quarters or the last couple of quarters, but with a relatively high degree of frequency in the last – over the last year or two years as well. So, if you’ve seen in the underlying book that might make you rethink what your long-term margin expectations are for the U.S. business?

A Closer Look: Reinsurance Group of America’s Earnings Cheat Sheet>>

Jack B. Lay – SEVP and CFO: Jimmy this is Jack. Let me respond to the asset-intensive business results question. I think you’ve got the relative contribution from the large block transaction pegged pretty closely. We did – I wouldn’t call – while, the legacy business, I wouldn’t suggest that it under – maybe exact words, underperform significantly or something like that. It was a little weaker than our typical run rate, which I would characterize at about $70 million per year pre-tax on that business. And we have no reasonable either, won’t be in and around that number for the year. That is the business other than the block that we put on this quarter. So, we’re quite comfortable with it, sometimes the last rates will spike in earnings little bit from quarter-over-quarter. So, it’s not unusual for that to move around little bit. We’re very comfortable with the overall performance of that underlying business.

A. Greig Woodring – President and CEO: In terms of mortality Jimmy, you know the U.S. has not had a particularly good run in the last I’d say, five or six quarters, there’s been some good periods and some weaker periods. We continue to see elevated claims from the period of issues in the last couple of years of the 90s and in the early parts of the 2000. And when we get a surge in those claims, it seems to be the biggest culprit of our in-force block and that was particularly the case here in the second quarter too. This was a little odd in the second quarter since it was more of a frequency than severity issue in the second quarter, but we believe that we have a good handle on what to expect going forward. We are still fighting though with that particular band of issues from, as we’ve mentioned couple of times in the past from around ’97 or ’98 to about 2003 or so.

Jimmy Bhullar – JPMorgan: Then just one more on the European business, the margins there were slightly weaker as well, I think you mentioned, you might have had high U.K. claims but wondering if that was – was that mortality or was that critical illness again?

A. Greig Woodring – President and CEO: In the second quarter, it was more a mortality than critical illness I believe. The U.K. was a little bit off, not terrible but again, it’s one of our bigger businesses. So, we really had none of our four largest business, U.S., U.K., Canada or Australia performing exceptionally well. Canada was in line which was a deviation for them, because they’re usually better than expected in recent years and Australia had a good bounce back on the disability side, so very good results on a disability side but disappointing results in terms of mortality and lump sum business.

Hancock Transaction

Nigel Dally – Morgan Stanley Dean Witter: First on the Hancock transaction. I think you mentioned it was a 7% ROE this quarter, hoping for it to be 10% for the full year. I think that’s a lot lower than many investors would have expected, so if you can discuss where you ultimately expect that ROE to get to? Perhaps discuss some of the steps that you’re taking to improve those returns and whether the low interest rates are a potential headwind to achieve those returns. Second, given the transaction, you’ve used significant portion of your excess capital, but I believe the pipeline of potential block transactions are still very robust. So, if there are attractive opportunities, how would you expect to finance any further transactions?

A. Greig Woodring – President and CEO: Nigel, first of all, on the John Hancock transaction, we booked essentially a fairly small amount of profit this quarter. It was a small portion of the quarter. We need to reposition the portfolio to be a little longer because of the way we manage these assets compared to how they were managed before, so that will take a little while. We expect this – if you think about our mix of capital and debt to be a return that exceeds most of our pricing returns that we’re pricing for today, talking about an unlevered return of 13% and a levered return of something in excess of 15% ultimately, but we will be essentially lengthening the portfolio a little bit as the year goes on. We expect to get the assets next week now that everything seems to be in order to get that transfer over. So, until we get that, we can’t reposition the portfolio. The level of rates, where they are today, was built into all of our pricing, and we have every confidence this business is going to perform quite well for us. In terms of our excess capital, yeah, we do have a bursting pipeline. I can let Jack comment on the level of capital and how he sees that going forward in terms of additions to it and so forth, but we do have a bursting pipeline, lots of opportunities. They run the gamut both geographically and in size, and so, we are very carefully watching that and hope to do more transactions.

Jack B. Lay – SEVP and CFO: The pipeline to which Greig refers, is activity underway. It’s not signed deals, but there is certainly a lot of activity as he indicated. In terms of how we would finance that, it really depends on the size of the deal. You can almost look at our underlying generic growth rate as – if you look at it historically, it’s moderated quite a bit over the last six to eight years or so. So we’re really enhancing the growth rate with any kind of block or M&A sort of deals and to the extent that those deals are modest in size, we likely unless we pile up quite a few at all once, we can likely finance those internally. Now if we do any large M&A deals and I think it’s probably more obviously we can’t necessarily finance that internally and we would have to go to the capital markets and with some mixture of capital. It all depends on the deal and the relative return in terms of how we would finance. But it would have to be a fairly large deal before we have to go to the capital market.

Nigel Dally – Morgan Stanley Dean Witter: Just couple of other questions, numbers question as well. Tax rate what should we expect over the remainder of the year and also if corporate expenses remain higher been at this level for several quarters now, should we view this level of losses as an appropriate run rate?

Jack B. Lay – SEVP and CFO: Okay, first on the tax rate. Unfortunately it does tend to bounce around from quarter to quarter that’s why we’re reluctant to give up an estimate per quarter what you should expect. But annually it really should settle in between 33% 34% and you could almost cut it right down the middle of 33.5% would be probably our best estimate at this point going forward. We’ll probably likely not see that in any particular quarter but over time that’s what we would expect. In terms of the corporate segment, we have because of the growing business volumes in all the operating segments we tend to allocate more capital which drives the investment income allocation. So, we’ve allocated more capital to those segments, as a result we are attributing more of the investment income to those segments and as a result there is less attributed through the corporate segment. So I think going forward you could almost expect something around a breakeven performance and it won’t be there in any one quarter, but over time because there is a little bit of volatility there. But over time that’s probably a best estimate at this point.