Reinsurance Group Of America CEO Discusses Q3 2010 Results - Earnings Call Transcript

Reinsurance Group of America CEO Discusses Q3 2010 Results - Earnings Call Transcript
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Reinsurance Group of America, Inc. (

RGA

)

Q3 2010 Results Earnings Conference Call

October 26, 2010 9 AM ET

Executives

Jack Lay – Senior EVP and CFO

Greig Woodring – President and CEO

Analysts

Jimmy Bowler – JP Morgan

Andrew Kligerman – UBS

Steven Schwartz – Raymond James and Associates

Jeff Schuman – KBW Investment Bank

Nigel Dally – Morgan Stanley

John Nadel – Sterne Agee

Alec Ofsevit – Credit Suisse

Sean Dargan – Wells Fargo Securities

Eric Berg – Barclays Capital

Mark Finkelstein – Macquarie

Presentation

Operator

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Previous Statements by RGA
» Reinsurance Group of America, Inc. Q2 2010 Earnings Call Transcript
» Reinsurance Group of America, Inc. Q1 2010 Earnings Call Transcript
» Reinsurance Group of America, Inc. Q4 2009 Earnings Call Transcript
» Reinsurance Group of America Inc. Q3 2009 Earnings Call Transcript

Good day ladies and gentlemen and welcome to the Reinsurance Group of America’s third quarter conference call. Today’s call is being recorded, and 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.

Jack Lay

Okay, thank you and good morning. Welcome to everyone to RGA’s third quarter 2010 conference call. Greig Woodring, the CEO, will briefly comment on the results we released late yesterday and then we’ll respond to questions from our participants. I’ll turn the call over to Greg following a quick reminder about forward-looking information and non-GAAP financial measures.

We will 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 financial performance and growth potential of RGA and its subsidiaries.

You are cautioned that actual results could differ materially from the expected results. A list of important factors that could cause actual results to differ materially from 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 business. Please refer to the tables in our press release for more information on this measure and reconciliations of operating income to net income for our 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 the third quarter results and then we’ll open the line for your questions. Strong third quarter operating income totaled $128 million or $1.72 per diluted share. Last year’s third quarter was also strong with $115 million of operating income or $1.56. Consolidated net income also totaled $128 million or $1.72 per share this quarter compared with the $118 million or $1.61 per share last year.

Consolidated net premiums including $81 million from the Group Reinsurance business totaled $1.6 billion during the quarter, an increase of 16% on an original currency basis and 17% on a U.S. dollar basis over third quarter 2009.

For the first nine months, net premiums increased to $4.9 billion or 18% on a reported basis, 14% on an original currency basis compared with last year. Net investment income totaled $288 million this period with an average yield on the portfolio of 5.66%. This yield was slightly higher than our second quarter 2010 yield of 5.51% due to a higher level of income on our small limited partnership portfolio which can be a little inconsistent on a quarterly basis.

Looking ahead to 2011, we expect continued downward pressure on our overall portfolio yield. For example, if free investment rates hover around 4% and remain there throughout 2011, we would expect to see an adverse effect of $0.20 to $0.25 per share next year compared with 2010.

Impairment losses including mortgage loan evaluation allowances reflected in income were less than $10 million for the quarter. Our net unrealized gain position rose to $833 million benefiting our book value per share, which is up 29% since year end to $68.30 including ALCI.

Third quarter interest expense was significantly higher than we’ve seen in third quarters past as we typically settle a previous year’s uncertain tax position related to FIN 48 and reserve any applicable interest accrual. Since we extended the prior tax year that would have typically been settled in the third quarter, we’ve not yet reversed any applicable interest accrual on any related uncertain tax positions. The effect was roughly $11 million of additional net interest expense which we would expect to roll off at a future period.

The active financing with exceptional legislation was not extended this quarter as well, so we added another $5 million to our tax position which had an adverse effect of $0.07 per share. As Congress passes an extender package this year, we will reverse the position which currently totals about $15 million year to date.

On a consolidated basis, foreign currency fluctuations added $0.02 per share this quarter compared to third quarter ’09.

Now turning to segment results, our U.S. traditional business including the Group Reinsurance business reported pretax operating income of $101 million compared to $85 million in the third quarter of 2009. Premiums were up 16% for the quarter including the Group Reinsurance business and 6% without it. The Group Business posted another better than expected earnings result. Mortality experience fell in line with expectations this quarter. The U.S. marketplace continues to be a little more competitive than a couple of years ago, but it still presents a generally favorable operating environment.

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