Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Reinsurance Group of America (NYSE:RGA)

Q4 2013 Earnings Call

January 31, 2014 9:00 am ET

Executives

Jack B. Lay - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Albert Greig Woodring - Chief Executive Officer, President, Director and Member of Finance, Investment & Risk Management Committee

Analysts

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Nigel P. Dally - Morgan Stanley, Research Division

Erik James Bass - Citigroup Inc, Research Division

Sarah DeWitt - Barclays Capital, Research Division

Humphrey Lee - UBS Investment Bank, Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Sean Dargan - Macquarie Research

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Operator

Good day, everyone, and welcome to the Reinsurance Group of America Fourth Quarter 2013 Results Conference Call. Today's call is being recorded.

At this time, I'd 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 B. Lay

Okay. Thank you. Good morning, to everyone joining us for our RGA's fourth quarter 2013 conference call. Joining me this morning is Greig Woodring, our CEO. I'll turn the call over to Greig after a quick reminder of our forward-looking information and non-GAAP financial measures. Following Greig's prepared remarks, we will 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 of RGA and its subsidiaries. Keep in mind that actual results could differ materially from 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 businesses segments. These documents and additional financial information may be found on our Investor Relations website at rgare.com.

With that, I'll turn the call over to Greig for his comments.

Albert Greig Woodring

Thank you, Jack, and good morning, everyone. Thanks for joining us. We are pleased to report another good quarter, as fourth quarter operating EPS totaled $2.17, although down from an unusually good quarter a year ago. Virtually every segment, this quarter reported strong bottom line results highlighted by the strong individual mortality results in the U.S. and Canada, and a strong performance in our Global Financial Solutions business.

Our International segment, together also performed well over all. Asia Pacific was particularly strong, although Europe and South Africa were slightly weak.

On a global basis, mortality was favorable and vibrant financial markets provided a boost as well, collectively more than offsetting a higher tax rate and currency headwinds.

Full year operating income totaled $358 million, or $4.95 per diluted share compared to $515 million, or $6.96 per share last year. The full year results included, of course, the $184 million after-tax charge taken in the second quarter related to our Australian operation, a disappointing event that detracted from an otherwise very good year.

Reported net premiums were up 1.5% for the quarter and 4% for the full year. In original currencies, those increases were 4% and 6%, respectively.

Total revenues topped $10 billion in 2013, a record level and book value per share, excluding AOCI, increased 7% this year to $69.66.

Our average investment portfolio yield was 4.7% this period, down 15 basis points quarter-over-quarter and 25 basis points year-over-year. With rates stabilizing recently at a new money rate above 4%, the downward pressure on earnings could moderate somewhat over the intermediate term. We instituted a more aggressive capital management effort that added to EPS. We returned 9% of the beginning of the year market caps with combined share repurchases and dividends through the year, excess capital now is $600 million. And we continue to evaluate the most efficient uses for that capital.

Turning now to our segment results. The U.S. Traditional sub-segment had another strong quarter in terms of premium growth and profits. Pre-tax operating income of $121 million benefited from favorable individual mortality, stronger investment income and controlled expenses. U.S. Traditional premiums grew 7% quarter-over-quarter, better than expected and helped by strength in our individual health and group Lines. We still expect some moderation of U.S. Traditional premium growth going forward absent acquired blocks.

Over the past few years, premiums have benefited from robust growth in individual health business, which we believe could moderate. Our asset intensive business in the U.S. maintained its recent momentum, gaining -- again exceeding its expected run rate this quarter with pre-tax operating income of $42 million. Favorable financial markets boosted results, so we still expect this business to produce $35 million to $40 million in pre-tax operating income per quarter. Continued growth in the financial reinsurance operation boosted fee income resulting in a pre-tax operating income of $14 million this quarter.

In Canada, claims experience was better than expected and pre-tax operating income totaled $47 million. Not quite as strong as last year's fourth quarter but a good result. You may recall that the fourth quarter in 2012 included a $16 million pre-tax reserve adjustment and a pre-tax operating income of 40 -- $54 million. A relatively stronger U.S. dollar produced -- reduced top and bottom line results this quarter as it has all year. Translated premiums were down slightly quarter-over-quarter totaling $243 million, net of $14 million foreign currency headwind.

Premiums grew 4% in Canadian dollars year-to-date, excluding currency fluctuations, premiums grew a solid 8%.

Asia Pacific also had a very good quarter. Pre-tax operating income of $27 million with particularly, good results in Japan, as well as in Hong Kong and Southeast Asia. All Asian markets performed well this quarter and Australia was roughly breakeven as expected. There were no major developments in the Australian group market this quarter, and we expect that situation will take some time to play out. Our situation remained stable in that market since we increased reserves in the second quarter.

Segment wide net premiums were up 12% quarter-over-quarter in original currencies. A generally stronger U.S. dollar adversely affected the reported premiums by $33 million, resulting in an increase of only 3% in reported premiums.

In our Europe and South Africa segment, results were similar to the prior year fourth quarter with both periods reflecting some adverse critical illness claims experienced in the U.K. That segment of the market continues to be very competitive and we are not winning many new quotes there.

Pre-tax operating income totaled $14 million for the quarter with strong operating performances in Spain and Italy, reflecting typical claims volatility. Net premiums were down quarter-over-quarter, primarily due to single premium and forced transactions in Italy in the prior year. Those transactions added nearly $100 million to 2012's fourth quarter premiums.

Our corporate segment reported a pre-tax operating loss of about $22 million this period, reflecting lower investment income, coupled with increases in interest expense and other operating expenses. Our quarterly effective tax rate of 36.8% was above expectations, due primarily to our inability to defer U.S. taxes on certain foreign earnings.

Overall, we're pleased with the fourth quarter and consider 2013 to be a very good year in many respects. Our U.S. Traditional and Canada operations posted solid results, as did many of our many international operations. Our Global Financial Solutions business performed particularly well in a period when our U.S. Mortality business has faced a slowdown. We continue to see good opportunities in other areas. And we now have scale and enhanced capabilities on a global basis. Having said that, we intend to be disciplined and opportunistic in putting capital to work.

As expected, interest rates were a net negative to us but there was some moderation in this trend. The charge taken in the second quarter to increase reserves for the Australian group business was a major disappointment. But this was necessary to address the problems there and the trends in the market there support our decision. We continue to think that it will take multiple years to restore industry fundamentals and our defensive strategy is unchanged.

Ongoing execution of our capital management strategies continues to pay benefits in the form of improved return metrics for our shareholders.

At this time, I'll turn it back over to Jack to discuss forward-looking expectations.

Jack B. Lay

Okay. Similar to last year, we are providing guidance regarding our expectations over the intermediate term, given the challenges associated with determining when capital will potentially be deployed into the business, when we may take advantage of opportunities to repurchase shares, et cetera.

We expect the operating EPS growth to be in the range of 5% to 8%, and operating return on equity to be in the range of 11% to 12% going forward. These targets are consistent with last year and assume a continued low, although stabilizing interest rate environment and continued execution of our capital management strategies.

The continuing low interest rate environment is expected to have an adverse effect of about $0.10 per share in 2014 versus 2013.

Premium growth in the near term will likely reflect a reduction from our group business in Australia. We would estimate that effect to be about something in excess of 1% of our premium base growth rate, that is. Although our bottom line results should not be affected because we've essentially, in our view, stabilized those results with the charge we took in the second quarter.

Our net premiums are expected to grow in the mid-single-digit range over the intermediate term. Favorable financial markets provided a modest boost to our bottom line in 2013, and some of the extra income might not repeat itself depending upon how those markets perform going forward. The vast majority of our success in the intermediate term will continue to be driven by our underwriting results.

Foreign currency is also a consideration and it's hard to predict over time but our near-term expectation is that it will present a mild headwind. We expect a normalized effective tax rate to be in the range of 34% to 35% over the intermediate term, reflecting an anticipated shift of earnings in our operations with various tax rates involved.

We thank you and appreciate your support and interest in RGA, and now we'll take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Jimmy Bhullar with JPMorgan.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

First, you mentioned Australia in your comments but obviously, it will take a few years to determine a reserve adequacy but you've had a couple of quarters since the large charge. Just wanted to get an idea on how claims are actually trending versus the assumption that you'd embedded in your charge? And then secondly, maybe if you could discuss your use of captives and offshore subsidiaries you've got. The Barbados company, you've got Timberlake REIT. How dependent is your business on these? And what would the impact be if there was a change in regulation in terms of captives?

Jack B. Lay

Jimmy, this is Jack. Let me start. Relative to the Australia claims experience, it's pretty much playing out as we would have expected. So certainly, we don't have any inclination to change our reserve that -- it will take some period of time before we get a better feel. But certainly, we think we're adequately reserved at this point. On the captives issue, first of all, our suspicion is that captives are really not abused within the life insurance and reinsurance industry. So I think there's been a lot of talk and consideration and deliberation around how companies are using captives. We don't really think there'll be any major changes on that front. There will likely there'll be a lot more disclosure, which is appropriate so that investors and others have a better feel for how captives are being used. But we don't really think that there will be any major changes there. And to the extent, there were changes that would have an impact on pricing within the industry. But that would -- it would essentially affect everybody. So we don't see any significant issues associated solely with RGA and how we would price this business.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Do you have a number in terms of how much of a benefit your RBC ratio has in it because of the use of captives?

Jack B. Lay

That's a hard one to answer. Keep in mind, RBC relates only to RGA Re, our U.S. operating subsidiary. We're writing business all around the world. So certainly, there is a benefit but it's kind of hard to quantify. And I think it may be ultimately a meaningless number because any risk that is moved, as all reinsurers do, would not ultimately come back to the U.S. operating subsidiary.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Okay. And then if I could ask one more. You didn't repurchase stock in the fourth quarter. You obviously, did have the capital during the quarter as well. So you mentioned $200 million to $400 million in terms of your capital deployment goal on an annual basis. Should we assume that if there isn't a deal, then at some point during the year, you start using that for buying back stock? Or has the increase in the stock price made buybacks less likely?

Jack B. Lay

No, I think your former statement is appropriate. To the extent, we don't see opportunities to deploy capital into the business, then that would make stock buybacks more attractive. We don't have really a particular point at which we do or don't buyback stock. We just try to do it opportunistically. But as I said, if we don't have other opportunities to deploy capital then the buyback becomes more attractive.

Operator

And we'll take our question from Nigel Dalley with Morgan Stanley.

Nigel P. Dally - Morgan Stanley, Research Division

First question, just a follow-up on the capital. Excess capital at $600 million didn't change despite the strength of results. Perhaps you can just discuss why we didn't see any growth in this quarter?

Jack B. Lay

Yes. This is Jack. I'll take that. It actually did increase. We peg excess capital right now at probably $650 million to $700 million -- we had indicated that we were an excess of $600 million in our introductory comments, but it's likely closer to $700 million. I say, likely, because we haven't yet modeled -- we don't have all the information available yet to model exactly at year end. But you can presume the excess capital did increase during the fourth quarter because of the earnings retained within the capital structure.

Nigel P. Dally - Morgan Stanley, Research Division

Okay. And then second question on the guidance. The EPS growth to be the range of 5% to 8%. That comment was made that it should be applied to normalize EPS. Obviously, there's a lot of noise in 2013, Australia being the most obvious. Although there's the strengthened market from these taxation distortions, bunch of other smaller items. Can you help us, come out with what a normalized base of EPS for 2013 would be?

Jack B. Lay

Sure. That always gets to be a difficult process because at some point, you don't know what should be pulled on and what should not. Obviously, the situation in Australia was significant and just reflecting that -- added back in the earnings would take the operating results into the mid-$750 million range or so. On top of that, you can layer on -- the extent to which we benefited from positive mortality, somewhat during the year. Certainly, the positive capital markets, we wouldn't necessarily expect that to repeat itself. So as I said, it's hard to determine where to stop, but I think maybe a run rate for 2014 would have been in the $750 million to $760 million range. Sorry, 2013 is what I meant to say.

Operator

And we'll go next to Erik Bass with Citi.

Erik James Bass - Citigroup Inc, Research Division

Can you talk a little bit about the level of activity you're seeing in the block transaction market right now? Maybe, how is competition for transactions picked up, given either the entrance of private equity or just the relatively high level of excess capital across the industry right now?

Albert Greig Woodring

Yes. We have been looking at a few small blocks, very small blocks. And we actually closed a few of those minor transactions during the course of 2013. We were happy to see that. It supplemented our normal business activity in the U.S. mortality market. We haven't really seen any real good opportunities for us in the annuities space recently. There is heavy competition from some of the private equity people to take a little bit more aggressive posture on than -- investing than we do. So that's a pretty tough competitive landscape in terms of closing transactions on the asset-intensive side. But overall, we normally expect to see a flow of transactions in force blocks of one sort or another that present themselves. Some are small, some are large. The larger they are, the more difficult it is to predict whether it's going to happen in any given period of time or at all. The smaller transactions seem to close a little easier with less muss and fuss. So generally speaking, I think 2013 was a year where we were a little bit light on in force transactions. But we did do quite a number of them, they tended to be small though.

Erik James Bass - Citigroup Inc, Research Division

Okay, that's helpful. And then, I mean, is the type of properties available changed at all? And I guess as you're seeing -- are you seeing more blocks sort of have guarantees or other features that I guess, may make them either more or less attractive?

Albert Greig Woodring

Yes. The blocks have changed a little bit over time. Clearly, there's a lot of -- a lot in the market of variable annuities business, we weren't particularly interested in those blocks. So it depends on what companies are looking to divest. In what direction they want their future core businesses to function. So we're seeing a little bit of activity in lines of business that are probably problematical to some. And that's been the case for the last couple of years. Actually, I think we're getting towards the end of that. We're seeing less of that and more what I would call, normal blocks, a little bit more in line with the strategy decisions made by the companies that want to divest them as opposed to getting out from under problem situations. So we're seeing a little bit of a change there, but I wouldn't go too far with it.

Operator

And we'll go next to Sarah DeWitt with Barclays.

Sarah DeWitt - Barclays Capital, Research Division

Just following up on the last question. So what lines of business or geographies in particular, are you seeing the most opportunity for M&A or large block deals?

Albert Greig Woodring

There's certainly a lot of activity in Europe. There's a fair amount in North America as well. But I think, there's quite a bit in Europe. And it tends to run the gamut. There's really not a lot of commonality, it seems with a lot of these blocks we see. We see blocks of all different types that emerge. And sometimes, blocks, together, different types of business. So I'm not sure I can give you a good answer in terms of what kinds of business standout. Like I said, there was a period of time when variable annuities were pushed around the marketplace and structured settlement annuities. Some things that didn't seem to have too many buyers. But we're not seeing much of that at the moment. We're seeing more traditional type situations. It's still complicated.

Sarah DeWitt - Barclays Capital, Research Division

Okay. So are you seeing Mortality business?

Albert Greig Woodring

Mortality tends to be a smaller component of most of the blocks that we see. Although, like I said, we did close a couple of small mortality blocks in 2013, that were strictly mortality. So there's a little bit of that activity that has to do with some special things going on in the marketplace. But mostly, it's asset-related.

Sarah DeWitt - Barclays Capital, Research Division

Okay, great. And then just following up on your interest rate comment. How high would interest rates need to rise before that would become a tailwind to your earnings?

Jack B. Lay

This is Jack. It would probably need another 75 basis points or so.

Operator

And we'll go next to Humphrey Lee with UBS.

Humphrey Lee - UBS Investment Bank, Research Division

Just a question on Asia Pacific. So can you remind us what percentage of the net premiums now come from Australia, given, the strong growth that you've seen in other regions for -- in 2013?

Albert Greig Woodring

Yes. Humphrey, the Australia premium base is roughly $700 million.

Humphrey Lee - UBS Investment Bank, Research Division

Okay. And then looking at Australia's performance, so it was breakeven for both 3Q and 4Q. And for the other market in the region, kind of report a strong performance for both quarters. However, the operating earnings has more than doubled in the fourth quarter. Can you provide some color in terms of the variance between the third quarter and fourth quarter? And how should we think about it? Kind of on a normalized basis going forward, assuming Australia stayed at breakeven?

Jack B. Lay

Yes. This is Jack. I think we would characterize the fourth quarter results as a little bit higher than the typical run rate. But I think that's probably the best way I can respond to that. That we're in a number of markets there and you see variances in every market. But if you put it all together, we would characterize the run rate in Australia is probably, exceeding our expectations in 4Q.

Albert Greig Woodring

In Asia.

Jack B. Lay

In Asia. Yes.

Humphrey Lee - UBS Investment Bank, Research Division

Okay. And then, one last question on Europe and South Africa. So for U.K., it's once again reported kind of unfavorable mobility. And it's now being what? 6 of the past 8 quarters. Are you concerned with the experience in the U.K.? And what has been the major cause for this trend? And how should we think about this, the performance going forward?

Albert Greig Woodring

Yes, Humphrey. We've been watching the critical illness experience. Especially, in the U.K. for some time and have done a couple of extra studies on that. We've concluded that the fluctuations we've seen so far are within the range of just fluctuations, although it is concerning that the business has not performed in the longer-term to our pricing expectations. We've not been terribly competitive in that marketplace for some time. And our assumptions are fairly high as far as the market standards go but still, they don't seem to be quite performing. It's not a situation like Australia, where this business is explosive. We're just sort of seeing less profit than we would have priced for and would've liked. And we've had some good quarters in the same time, too. I think the third quarter of this year was exceptionally good in the U.K. So there's been a little bit of ups and downs, and it has gone both ways. But generally, we're not really thrilled about the -- especially the critical illness experience in the U.K., over the last 3, 4 years, if you put it all together. It's not terrible but it's not what we would like.

Humphrey Lee - UBS Investment Bank, Research Division

And usually, what are the terms for this treaty. Are they kind of have any repricing opportunities for you guys? Or how do they work?

Albert Greig Woodring

How do the treaty's work?

Humphrey Lee - UBS Investment Bank, Research Division

No. For the block. Do you have any opportunity there to reprice or...

Albert Greig Woodring

We have some limited opportunities to reprice and we will take advantage of those when we have them. But mostly, the business is not guaranteed for the longer-term, but there's certain limitations into how much you can change premiums and at what times and so forth. But we're looking at all those repricing possibilities in the U.K. book.

Operator

And we'll take our next question from Jeff Schuman with KBW.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

First, just a little clarification on the tax rate outlook. I assume your new kind of tax rate guidance contemplates eventual renewal of the AFE, is that correct?

Jack B. Lay

Yes, it does, Jeff.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

And can you give us, kind of any rough sense at all of kind of what that's worth to you at this point, the AFE?

Jack B. Lay

Yes. The AFE is not as significant as it was at one time. I would argue, it's probably less than $10 million impact right now. Whether it's renewed or not.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then Jack, you made a number of comments about the top line. I was just hoping to kind of review those and kind of tie it all together. Last year at Investor Day, you talked about intermediate-term expectation of 5% to 8% top line growth. I think you've talked about -- maybe a few headwinds that have emerged. Obviously, Australia is sort of more defensive. U.S. mortality continues to mature. I think there was a comment about U.S. health maybe moderating from here. And then I think, I heard you say something about mid-single-digit. So is it fair to say that maybe the intermediate-term expectation is maybe a point or 2 off the range, you articulated a year ago? Or how are you thinking about that?

Jack B. Lay

Yes, I think that's fair. It's always hard to call because it's hard to determine what block opportunities will present themselves. But I think if we take a step back, because there are certain headwinds. I think it's fair to characterize that it is perhaps a point or 2 off that prior range.

Albert Greig Woodring

Yes. I think it's worth pointing out, Jeff. In 2013, if you take away the effect of in-force blocks and you take away that happened in 2012, and you take away the currency effects, we're closer to the top end of the range. I would expect that it would be closer to the bottom of the range for 2014, because of the currency headwinds and because of the retrenchment in Australia.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Because you've said earlier that the constant currency for 2013 is 6%. But you're saying if you adjusted for differences in block transactions, that actually would've been higher than 6%.

Albert Greig Woodring

Yes. Remember for example, those -- the $100 million of single premium Italian business that came in the December of last year. You start taking those blocks and maybe you add a little bit for the mortality blocks we added in 2012 back and you're still a number closer to the top end of that range.

Operator

And we'll go next to Ryan Krueger with Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

I was hoping to get an update on the repricing effort on the individual business in Australia.

Albert Greig Woodring

Yes. That's -- I think our basic work has been done there, those negotiations, I think are mostly concluded, if not entirely concluded. And not all the effects have been seen at all in the fourth quarter. I expect we'll see some effects going into 2014 and some of the effective dates may stagger out through the early part of the year. The upshot is that we will collect a little bit more premium on the business. We also, though, had some business recapture. So net-net, I think we're going to be happier with the position we find ourselves in on the individual side in Australia in 2014 than we had been.

Ryan Krueger - Dowling & Partners Securities, LLC

Is the expectation for Australia in 2014 still breakeven overall? Or did the individual repricing cause a little bit of upside to that?

Jack B. Lay

Ryan, this is Jack. I'll take that. We would expect -- probably the best way to characterize, it is a modest profit in 2014 on Australia.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay. And then just a quick one on the corporate segment. It seems like there is some moving parts in the fourth quarter. Can you give us some sense for what a more normalized level of earnings in that segment would be?

Jack B. Lay

Yes, this is Jack again. That does bounce around quite a bit quarter-to-quarter. I think if you go -- going into 2014, I think our run rate and it will vary every quarter, but likely at end-of-the-year, we will be close to this. So run rate would be about at $10 million loss, pre-tax, on a quarterly basis.

Operator

And we'll go next to Steven Schwartz with Raymond James.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Jack, there was -- Greig mentioned a number of times about a really strong individual mortality results in both U.S. Trad and Canada. Could you put numbers on that? How much you think you benefited from better-than-expected mortality?

Jack B. Lay

Yes. If you look solely at the U.S., it was probably, for the quarter, $0.17-or-so per share.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

All right, $0.17. In Canada?

Jack B. Lay

Canada, certainly less than that. I'd say, $0.05 to $0.06 positive.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

$0.05 to $0.06, okay. And then, I take it from Jeff Schuman's question, the active finance exemption was not renewed in the fourth quarter. It sounds like your guidance is assuming it gets renewed to take care of this year. Do you assume, I guess to, you get both benefit from this year and for 2014?

Jack B. Lay

Yes. Well, it didn't affect 2013. It needs to be extended in 2014. And yes, as you suggested, we are presuming it will be extended. Even if it's not, because of our mix of business, it doesn't have as a significant affect -- of an effect as it would've had a couple of years ago. But as I said, we do expect an extension this year.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay, I get that. And then finally, a more general question. The question of captives came up early. You do have a Barbados captive. A number of companies lately have redomesticated their offshore captives from Bermuda or Barbados. I guess the question would be, what's the advantage today of having that captive in Barbados as opposed to bringing it back on shore?

Jack B. Lay

The primary advantage -- and we have several companies in Barbados. The primary advantage is you get more of an economic look at reserves and capital requirements and that sort of thing.

Albert Greig Woodring

Much more capital efficient.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

If my understanding is that, whatever reserves you seed over there. My understanding was you seed that U.S. Treasury Reserves, you still have to have some type of -- you have to have some type of asset that equals the reserve that you seeded on a U.S. statutory basis. Is that true?

Jack B. Lay

Yes., that's true.

Albert Greig Woodring

You have to have collateral.

Jack B. Lay

Yes. You have to have collateral in the form of assets entrached [ph] or letters of credit or something that will back those lines...

Albert Greig Woodring

But Steve, Steve still it's much more efficient than actually...

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

I guess I don't understand why that would be -- since you don't really, I mean, you don't think of yourselves that way in terms of consolidated RBC and excess capital. I mean, I understand the reserves might be less but that really helps you?

Jack B. Lay

You're right. We do have our own economic capital formula. We run our business using that formula. But in terms of capitalizing individual operating subsidiaries, we do look for the most efficient means possible, because that means less financing costs, if we didn't move business around. So it is part of our operating model. And we're not alone in that respect. But we do take a step back and run the company and price business more broadly using our own economic capital methodology.

Operator

And we'll go next to Mark Finkelstein with Evercore.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

I actually wanted to go back to the captive but maybe from a different angle, which is, is this in any way influencing, and I understand your points, Jack, that and your view on it. But is this, in any way, influencing your discussion with counterparties? And if so, is it having any positive or negative effect on your outlook for the U.S. business?

Jack B. Lay

The answer, Mark, is no. I mean, it really doesn't -- in terms -- when you say counterparties, are you talking about our clients, I presume?

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Your clients. Yes.

Jack B. Lay

No, it rarely comes up. Our clients presume that we will finance and back our business whatever, is most appropriate under the circumstances so no it's not part of that discussion.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

And more thinking about of it, in terms of how you they think about their own captive and their use of XXX and AXXX support.

Jack B. Lay

We haven't been co-insuring AXXX ever. We have not been co-ensuring much XXX business for quite a while, because the market has moved away. There are cheaper ways for primary companies to finance that rather than, to put it into the reinsurers and have them finance it. And so, we get a little bit of that but not a lot. And I don't think it makes that much difference if that disappears. It's been a little bit of a financial reinsurance benefit for us to participate in the marketplace on XXX, and AXXX business. But it's not something that's really critical.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. Can you just give the outlook on the financial reinsurance business? I know you did the bigger transaction in the third quarter, retroactive to 1/1. What is your outlook on that? And where do you see the opportunities?

Albert Greig Woodring

On the financial reinsurance, we've done financial reinsurance now pretty globally. There's a fair amount of it that we do in Asia. There's an increased activity in the U.S. over the last couple of years in particular, and a little bit now in Europe. And we see that, that marketplace has become more active. It's very sophisticated market. I think we have a lot of expertise in that and it plays very well. Discussions with companies are continuing along. We did a lot of transactions in the fourth quarter on financial reinsurance basis. Some of them will not even take effect until the beginning of this year, or early parts of this year. And so, I think we're very pleased with that. We never can predict how that business is going to grow. Sometimes, it grows quickly and sometimes, it stagnates for a while. It depends on needs in the marketplace. And those vary from time to time.

Operator

And we'll go next to Sean Dargan with Macquarie.

Sean Dargan - Macquarie Research

I just have a question about your capital generation. So it sounds like your outlook for top line growth is just moderated. When we think about the $200 million to $400 million of excess capital deployment baked into your guidance, should we think that you're capable of generating that much above what you need to invest in your business?

Jack B. Lay

Yes, Sean, this is Jack. Our run rate is probably right about $300 million. That can vary year-to-year but that's -- that's -- call that redundant capital above and beyond what we would need, just to support the business. So, yes, we certainly would expect in a normal year to generate that amount of additional capital.

Sean Dargan - Macquarie Research

And then -- question about asset intensive. I'm sure 2013 results benefited from prepayments and probably some favorable market activity. But nevertheless, it seems like every quarter came in above what you were talking about as run rate before. What should we think about in terms of a run rate earnings progression in that line of business going forward?

Jack B. Lay

This is Jack again. Our best estimate would be in the $35 million to $40 million range per quarter.

Operator

And we'll go next to John Nadel with Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Just, I guess, so many questions have been asked and answered. So Greig, I'll just ask this question. I mean, you just made the comment, that you haven't really done anything on in terms of coinsuring universal life with secondary guarantees or AXXX type of business. And you've done a whole lot less on the XXX side over the last couple of years. I'm just interested in your opinion as to whether all the pricing adjustments in the universal life insurance market, especially here over the last 12 months or so, does it make you a little bit more interested in reinsuring new business there should you get the opportunities? Or do we still have further to go, in your opinion?

Albert Greig Woodring

That's a good question, John. I'm not sure I have an informed answer on that because I haven't looked at exactly, what it would take to reinsure those blocks of business. We have not been comfortable with the lapse rates that we would have to assume in the policyholder behavior assumptions we would have to make, to get comfortable for such long-term risks as AXXX. Now we'll do some way out of the money cat business on AXXX and I feel very comfortable with that. But the modeling on some of the newer benefits is getting closer to realistic, but I don't know how far we are off from that. And I would hesitate to guess on it. It was no active project on RGA's part to try to look at that, at the moment either. It's just not on our radar to try to reinsure at the moment.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

I think that says enough all by itself.

Albert Greig Woodring

Well, maybe we're missing an opportunity but maybe, we're just not comfortable yet with where it is.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Sure. And then, I'd like to ask the -- I'm actually more interested in the other side of this captive discussion. Because my guess is the primary company is, to the extent, that there is really any scrutiny incrementally from here. It's really -- it's going to be on the primary insurers, I think. I could be wrong on that, obviously, but are you seeing any new opportunities for deal flow? You mentioned financial reinsurance but thinking more about traditional reinsurance as a result of some of the companies here, really making some changes, bringing the offshores onshore, Met's got obviously, the big project that they are consolidating several insurance subsidiaries. It's things of that sort. And obviously, I wouldn't expect you to talk about a specific name but wondering if you're seeing any incremental opportunities just as a result of that flow?

Albert Greig Woodring

No, I don't think, John, there's much incremental opportunity from that trend. I think we have seen some financial reinsurance opportunities that come about because companies are trying to get everything buttoned down in anticipation of where the future might be, get out ahead of everything. And so there's been a little bit of a land rush at the last minute. So that's part of what's driving some good strong financial reinsurance demand at the moment. In terms of generating more risk transfer mortality business in the regular marketplace. We continue to believe that overall, the amount of mortality risk reinsured is going to continue to drop a little bit. It's dropping at a much reduced rate from a number of years ago, but it's still not increasing. It's pretty flat.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

That's a U.S. comment, Greig?

Albert Greig Woodring

That's a U.S. comment. It's also a little bit of a Canadian comment. It's definitely not an Asian comment where we're seeing good growth and mortality risk acceptance and transfer. But it's part of the reality of the marketplace right now that, a lot of available U.S. business is going down. It makes competition -- competition is actually causing us a little bit of the concern right now. It looks a little bit like a mild version of what we saw at sort of the '99-'04 years or '97-'03 years, depending when the competition was. The number of competitors in the U.S. market competing for a smaller amount of business is heating up competition a lot.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

And then if I could sneak one last one, in. Greig, I appreciate it. Just thinking about capital management, capital allocation. I know you guys have spent more time, I think, incrementally more time over the last 12 months or so, really, thinking about this particularly, given the free cash flow generation of the business. Do you have a payout ratio or some kind of way that we should be thinking about your return of capital, particularly on the dividend side, that you and the board have come to any conclusions there?

Jack B. Lay

John, this is Jack. I don't think we have quite sharpened our pencils to the point, where we can articulate it as a payout ratio. Keep in mind that, that sort of thing is influenced by other opportunities for capital deployment. I'm talking about the dividend rate, as I make these comments because the buyback opportunities and the opportunities to deploy into the business also have an effect. So I don't think we've quite gotten it down to a payout ratio. Perhaps, we will in the future but we're not quite there now.

Operator

[Operator Instructions] We'll go next to Tom Gallagher with Crédit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Just one question on U.S. and another one on Japan. So U.S. mortality, I know you mentioned it was favorable this quarter. But if you look at trends that we've seen over the last few years on the primary side, actual to expected has gotten worse across the board. Swiss Re, I know, is taking some pain on U.S. mortality. Just curious what you're seeing underneath the covers on trends there, including this quarter but also more importantly, over the last few years. And then secondly, Japan. Can you comment on what drove the better results there? Was it volume? Was it margin? Was it both?

Albert Greig Woodring

Sure. Mortality for the quarter was good, but mortality for the year was good as well, Tom. It was the second year in a row where U.S. mortality has been generally favorable. In particular, the fourth quarters have been extremely favorable compared to other quarters in terms of just the raw experience. It's -- the strange phenomenon maybe. But there's one particular month that's been -- it's been very good for the last 2 years. You never know how those things are going to work out. No, we're happy with the U.S. mortality. We have a lot of data, a lot of information. Our blocks are very stable. We can look at our experience on that troubled '99 to '04 business, and we can say we're making money on that block. It's just not as good a return as we would like, but we know where that is. It's a mature block of business and it's now gotten very stable. So we think that the impact of that block has gotten less over time. And so, that's created some pretty good results in the last 2 years. And we expect that this slowly -- returns on our U.S. mortality business are actually moving upward. In terms of Japan, you're right. It's a little of both. The business flow has been nice. There's been some very strong developments in terms of new treaties, new flows of business in 2013, generating quite a bit of business that's performed better than expected. The business is a mix there of some financial reinsurance, some facultative business and some other special product development or special program features. And together, they're all performing well. It's been a good market for us, and we expect it to continue.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

So the outlook for growth in Japan continues to look pretty good?

Albert Greig Woodring

Yes, we think so. It's such a big industry there. And companies have, historically, not reinsured very much. But we're slowly, and I have to emphasize slowly because it's not something that's happening at anything like the pace we would like to see. But it is slowly happening, that companies are beginning to see the advantages of tapping into expertise and knowledge that reinsurers may have.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got it. And then just one final follow-up. Just -- and I know you'd mentioned earlier competitions heating up a bit. And I'm not sure exactly which markets you're referring to. Can you talk a little bit about where there is the best opportunity for the best margins that you see, in which regions? And how is that influencing your business plan?

Albert Greig Woodring

Well, let me phrase it this way, Tom. I was speaking of the U.S. in particular. Competition has gotten heated in the U.S. We still expect to collect our margins. We still expect to stay very disciplined in all these markets. The U.K. has been a tough market for the last many years, very competitive, very difficult. But I would say the Asian markets and other markets have been generally favorable for us. We see markets that are growing and appreciate the things we bring to the table as ones where we can collect a little bit better margins than where it becomes a commoditized price competition. Sometimes, that happens. That, right now, looks like where the U.S. has starting to head and the U.K. has been in that mode for a number of years now.

Operator

And gentlemen, we have no further questions at this time. I'll turn the call back over to you for any additional or closing remarks.

Jack B. Lay

Okay. Thanks, to everyone, who have joined us this morning. To the extent, any other questions come up, feel free to give us a call here in St. Louis. And with that, we'll end the fourth quarter conference call. Thanks again.

Operator

Thank you. And that does conclude today's conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Reinsurance Group of America Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts