Reinsurance Group of America, Inc. (RGA)

Q2 2010 Earnings Conference Call

July 27, 2010 9:00 AM ET


Jack Lay – Senior EVP and CFO

Greig Woodring – President and CEO


Mark Finkelstein – Macquarie

Jim Bhullar – J.P. Morgan

Jeff Schuman – KBW

Andrew Kligerman – UBS

Steven Schwartz – Raymond James & Associates

Alek Sivit (ph) – Credit Suisse

Eric Berg – Barclays Capital

Dennis Davila (ph) – Sterne, Agee

Jenny Jones – Schroders



Good day ladies and gentlemen and welcome to the Reinsurance Group of America second quarter conference call. Just as a reminder, 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. Welcome everyone to RGA's second quarter 2010 conference call. Greig Woodring, our CEO, will briefly comment on the results we released yesterday and then we'll respond to questions from any participants on the call. 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 today 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 expected results. A list of important factors that could cause actual results to differ 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 an 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 second quarter and then we will open the line for your questions. Our second quarter income totaled $122 million or $1.63 per diluted share. Last year's second quarter was very strong with $131 million of operating income or $1.79 per share. Tax adjustments helped last year's second quarter by $0.16 and hurt the current period by $0.07 and so there is a net swing of $0.23 in comparing the two. Consolidated net income totaled a $127 million or $1.70 per diluted share this quarter compared with $153 million or $2.10 per share last year, which included a significant gain related to the repurchase of a portion of the company's junior subordinated debentures.

Consolidated net premiums including $73 million from the ReliaStar Group Reinsurance acquisition totaled $1.6 billion during the quarter; that's an increase of 12% on an original currency basis and 15% on a U.S. dollar basis over second quarter 2009. For the first six months, net premiums increased to $3.2 billion or 18% on a reported basis and 13% on an original currency basis compared with last year. Net investment income increased to $292 million this period with an average yield on the portfolio of 5.5%, new money rates are below that level so we do expect some continued downward pressure on yield in the near term.

Impairment losses reflected in income were less than $5 million this quarter and our net unrealized gain position continued to rise along with the overall strength of our investment portfolio. Book value per share including ALCI is up nearly 15% since year-end to $60.73. Congress did not pass an extension of the act of financing exception legislation, so we increased our tax provision another $5 million this quarter, which had an adverse effect of $0.07 per share. If Congress passes the extender package later this year, we will reverse the provision, which currently totals around $10 million. On a consolidated basis, foreign currency fluctuations added $0.04 per share this quarter compared to second quarter '09.

Turning now to segment results, our U.S. traditional business including our newly acquired Group Reinsurance business reported pretax operating income of $96 million compared to $100 in the second quarter of 2009. Premiums were up 16% for the quarter including the ReliaStar business and 7% without it. For the first half, premiums are up 15%. Our newly acquired group business posted another strong earnings results and it's clearly off to a good start out of RGA. Mortality experience was much better than the first quarter at about 1% above expected. Mortality experience in the second quarter of 2009 was slightly better than expected. The overall level of price competition in the U.S. market seems to be ratcheting upwards slightly although new treaty activity remains quite low. Our U.S. asset intensive business reported another solid quarter with $16 million of pretax operating earnings, roughly the same as the second quarter of '09.

Turning to Canada, the segment produced very strong results for this quarter with pretax operating income totaling $33 million compared with $18 million last year. The increase reflects favorable claims experience in the current period coupled with adverse experience in last year's quarter. Premiums were up 14% this quarter due in large parts were relatively stronger Canadian dollar. For the first six months, premiums are up 32% in U.S. dollars and 13% in local currency. We have continued to be a leader in the Canadian market.

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