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Reinsurance Group of America, Inc. (RGA)

Q2 2012 Earnings Call

July 27, 2012 09:00 am ET


Greig Woodring – President & Chief Executive Officer

Jack Lay – Senior Executive Vice President & Chief Financial Officer


Jimmy Bhullar – JP Morgan

Nigel Dally – Morgan Stanley Dean Witter

Jeff Schuman – KBW

Ryan Krueger – Dowling & Partners

John Nadel – Sterne Agee

Steven Schwartz – Raymond James

Humphrey Lee – UBS

Sarah DeWitt – Barclays Capital

Mark Finkelstein – Evercore

Sean Dargan – Macquarie Equities Research



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Good day and welcome to the Reinsurance Group of America’s Q2 2012 Results Conference Call. Today’s call is being recorded. At this time I would like to introduce the President and Chief Executive Officer, Mr. Grieg 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, and welcome to RGA’s Q2 2012 conference call. Joining me this morning is Grieg Woodring, our CEO. I’ll turn the call over to Grieg after a quick reminder about our forward-looking information and non-GAAP financial measures. Following Grieg’s prepared remarks we’ll open the line for your questions.

To help you better understand RGA’s business we’ll 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 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 we issued yesterday.

In addition, during the course of the call we will make comments on pre-tax and after-tax 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 and 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 With that I’ll turn the call over to Grieg.

Grieg Woodring

Thank you, Jack, and good morning to everyone. Yesterday we reported Q2 after-tax operating income of $122 million or $1.65 per diluted share, up $0.05 cents $1.60 per share last year. Foreign currency fluctuations adversely affected the current quarter by about $0.03 per share and the slightly higher effective tax rate had an adverse impact of another $0.03. Overall Q2 results were stable but a bit below our expectations, primarily due to mixed claim results in some of our key markets.

But we did have several bright spots during the quarter as well. Despite foreign currency headwinds reported net premiums were solid, increasing 9% quarter-over-quarter; and ignoring those currency effect, premiums rose 12%. Our US Group and Individual Health lines performed well this quarter and we executed a significant deferred annuity reinsurance transaction in our US Asset-Intensive sub-segment.

Our financial reinsurance business continues to thrive domestically as well as abroad. Claims experience in Canada was in line with expectations as it was for most of our markets. We did see somewhat higher than expected claims in the US individual mortality as well as in the UK and Australia this quarter.

Investment income decreased $9 million or 3% quarter-over-quarter including a $45 million decline in the fair value of option contracts supporting equity index annuities and an increase from the annuity transaction that I mentioned. Excluding those items, investment income was flat compared to Q2 2011 as the increase in invested assets was offset by the drag of declining new money yields. The average portfolio yield remained at 5.05% as it was last quarter, which is down 30 basis points from last year’s Q2.

Our balance sheet and overall capitalization remains strong. We’re pleased to report a 33% increase in our quarterly dividend per share, which as announced yesterday rises from $0.18 to $0.24 per share. Booked value per share increased to $84.75 including AOCI and to $60.34 without it.

Turning now to our segment results, our US traditional business reported pre-tax operating income of $96 million, an increase of 5% over last year’s $91 million. Individual mortality experience was slightly adverse but the group and individual health lines performed well. Premiums were up 11% quarter-over-quarter benefiting from an in force transaction executed in Q1 of this year. Our US asset intensive sub-segment posted pre-tax operating income of $17 million down from $20 million last year, and that’s reflecting a relatively weak equity market performance in the current period.

The current quarter also includes the results of a large fixed deferred annuity reinsurance transaction. We invested approximately $350 million of capital in that transaction and expect to earn a 13% return over the life of the business, earning a bit less in the first several quarters while we reposition the investment portfolio. For Q2 the annualized ROE on this transaction was approximately 7% and we expect the return on the transaction to total 10% overall for 2012. Our financial reinsurance business continues to perform well, growing pre-tax operating income to $10 million this quarter up from $7 million a year ago.

Turning to Canada, pre-tax operating income declined to $31 million in Q2 from $42 million last year. Current period claims experience was in line with expectations while claims were better than expected last year. Foreign currency movement adversely affected pre-tax operating income by $3 million. Forwarded premiums increased 5% in Canada to $221 million this quarter and in local currency premiums were up 10%.

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