Reinsurance Group Of America's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Reinsurance Group of America, Inc. (RGA)

Q4 2011 Earnings Call

January 31, 2012 09:00 am ET

Executives

Greig Woodring – President and Chief Executive Officer

Jack Lay – Senior Executive Vice President and​ Chief Financial Officer

Analysts

Jimmy Bhullar – JP Morgan Securities Inc.

Andrew Kligerman – UBS

Steven Schwartz – Raymond James

Nigel Dally – Morgan Stanley

Jeffrey R. Schuman – KBW

Sarah DeWitt – Barclays Capital

John Nadel – Sterne Agee

Ryan Krueger – Dowling & Partners

Thomas Gallagher – Credit Suisse

Presentation

Operator

Good day and welcome to the Reinsurance Group of America Fourth Quarter 2011 results conference call. Today’s call is being recorded. (Operator instructions.) 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

Thank you. Good morning and welcome to RGA’s fourth quarter 2011 conference call. Joining me this morning is Greig Woodring, our CEO. I’ll turn the call over to Greig after a quick reminder about forward-looking information and non-GAAP financial measures. Following Greig’s prepared remarks, including premium and earnings guidance for 2012, we’ll 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 for 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 result is included in the earnings release we issued yesterday.

In addition, during the course of the call, we will make comments on pretax 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 the various business segments. These documents and additional financial information may be found on our Investor Relations website at rgare.com.

I’ll turn the call over to Greig.

Gre i g Woodring

Thanks, Jack, and good morning, everyone. Thank you for joining us. We are pleased to report a solid fourth quarter and completion of a strong year in terms of operating earnings, capital generation and overall business growth and development. We’ve achieved approximately 13% or better operating ROE in each of the last six years now. By almost any financial measure, we feel RGA has performed consistently and strongly for an extended period of time, which speaks to the abilities of the team to develop and execute its business plans even in difficult economic times.

Getting back to the quarter, most of our markets performed better than expected, notably Canada and several markets in Europe and South Africa. The only underperformance related to poor disability claims experience in Australian operation and our US group operation. Consolidated operating income was $141 million, or $1.91 per diluted share, in line with our expectation, but not as strong as last year’s $161 million or $2.15 per share, which included $0.20 per share associated with the extension of the tax-related active financing exception legislation by Congress. That quarter also reflected better than expected claims experience.

The current quarter results included several tax related adjustments involving claims experience on certain treaties, deferred tax refinements and other items and totaled a $9 million reduction in tax provision or approximately $0.12 per share. Also, we did not close a prior tax year with the IRS in 2011, so there was no FIN 48 related reductions in the tax provision or interest expense. Failure to close cost RGA an estimated after-tax amount of approximately $19 million or $0.26 per share, the combined effect of tax provision and interest expense.

Net foreign currency fluctuations lower operating income by $1.6 million or about $0.02. Quarterly reported premiums exceeded $2 billion for the first time ever and increased 13% over 2010’s last quarter. Investment income was down 14% compared with the prior fourth quarter totaling $305 million, including a $51 million decrease in the fair value of option contracts, which are included in funds withheld at interest and support equity indexed annuities. Excluding those contracts, investment income was flat quarter over quarter despite a 24 basis point climb in yield.

For the year, operating income increased 7% to $539 million from $504 million in 2010. On a per share basis, operating income was up 8% totaling $7.28, including $0.13 of net favorable foreign currency fluctuations. Premiums grew 10% year over year and totaled $7.3 billion. Excluding foreign currency fluctuations, premiums increased 8%. Book value per share increased 22% during 2011 to $83.65 including AOCI. Without AOCI, book value per share grew 9%. Our net unrealized gain position now totals $1.4 billion, more than double the position at the end of 2010.

Turning now to our segment results, our US traditional business reported fourth quarter pretax operating income of $86 million compared with $107 million last year. Group disability claims, which can be quite volatile over short periods of time, were nearly $11 million higher than expected. This adverse experience was primarily attributable to a few clients in this short-term business. We’ve already adjusted prices where appropriate.

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