Reinsurance Group of America, Incorporated (NYSE:RGA) Q1 2024 Earnings Call Transcript

Reinsurance Group of America, Incorporated (NYSE:RGA) Q1 2024 Earnings Call Transcript May 3, 2024

Reinsurance Group of America, Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Reinsurance Group of America Q1 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Larson, Senior Executive Vice President and Chief Financial Officer. Please go ahead.

Todd Larson: Thank you. Welcome to RGA’s first quarter 2024 conference call. I am joined on the call this morning with Tony Cheng, RGA’s President and Chief Executive Officer; Leslie Barbi, Chief Investment Officer; and Jonathan Porter, Chief Risk Officer. A quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. Some of our comments or answers to your questions may contain forward-looking statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, the information we provide may include non-GAAP financial measures.

Please see our earnings release, earnings presentation and quarterly financial supplement, all of which are posted on our website for a discussion of these terms and reconciliations to GAAP measures. Throughout the call, we will be referencing slides from the earnings presentation which, again, is posted on our website. And now I’ll turn the call over to Tony for his comments.

Tony Cheng: Good morning, everyone, and thank you for joining our call. Last night, we reported adjusted operating earnings of $6.02 per share, which is our highest ever quarterly result. Our adjusted operating return on equity for the past 12 months was 14.8%, exceeding the intermediate targets we previously shared. The record earnings and attractive ROE is not solely from one or two areas of the company. All four geographic regions and both the Traditional and GFS businesses met or exceeded our run rates. In particular, our Traditional results stood out driven by strong underlying experience notably in the U.S. It was a quarter where many things came together and follows an excellent 2023 for RGA. I am very pleased that we just learned that RGA was rated number one for the 13th consecutive year on NMG Consulting’s Global all respondents Business Capability Index.

This is based on 2023 feedback from the life and health insurance companies around the world. In addition to the outstanding earnings and external recognition, our new business activity was very strong. We deployed a record amount of capital into in-force transactions of $737 million. We have always shared a preference to redeploy our excess capital back into the business for both financial and strategic reasons. Successful transactions lead to favorable economics over the long run and can create repeat opportunities from these clients. In addition to the record quantity of new business, we are delighted with the quality of the new business as we continue to see a high percentage of transactions centered around exclusive arrangements with some of the leading life insurers in the world.

These transactions are more innovative in nature and create greater value for RGA and its partners. When we see excellent earnings, ROE, new business performance across many parts of the enterprise and external recognition of our capabilities, we know our strategy is working. We know our brand and capabilities are strong, and I know our people and culture are second to none. Combining this incredibly strong foundation with macro tailwinds, we are highly confident in delivering long-term attractive results and shareholder returns. I have previously outlined four areas of notable growth in the company. Let me discuss some of the activities and successes in each of these areas, starting with our longevity and PRT business. Longevity not only diversifies our mortality exposure, but also provides favorable opportunities given the increased funding levels of pension funds around the world.

In the U.S. PRT market, we announced deals with both of our partners, including our largest PRT transaction to date, and we remain optimistic about our prospects going forward. In the UK longevity space, where RGA is a market leader, we built on a very successful 2023 with additional transactions this quarter. The pipeline remains active in both the U.S. and the UK, and we expect 2024 to be another exciting year. Our second area of notable growth is the asset-intensive business in Asia. During the quarter, we executed a number of reported transactions in the region. As announced, we closed an approximately $4.7 billion deal in Japan. Our success shows the powerful position RGA has in many of our markets around the world. This is a client that we have shared a strong business relationship with for over a decade.

This is an innovative solution being the first sizable longevity transaction in Japan, leveraging our strengths in the UK and the U.S. This transaction demonstrates our integrated approach with our investment and business teams working hand-in-hand to arrive at the right asset solution tailored for these liabilities, strong local relationships, coupled with worldwide expertise further enhanced by the collaboration amongst our teams is how we win at RGA. In our third area of notable growth, which is our Asia Traditional segment, we continue to see very positive results. Our focus is to package product development with capital and underwriting solutions to fuel our clients’ growth and success. In January, we adopted a product from Japan and launched with a major insurer in Korea.

Given the success of this product launch, we expect multiple clients to launch with RGA in 2024. In China, we closed an in-force transaction, and we expect this success to lead to further opportunities in this space in the near future. Finally, in Hong Kong, which is our largest Asian market, we continue to be excited by the increased volume of Mainland Chinese visitors buying life insurance. Throughout the past few years, we have increased our share of key products and therefore, well positioned to benefit. And finally, in our U.S. Traditional segment, which is our home market and the largest reinsurance market in the world, we continue to strategically build our offerings in the underwriting space to act as our key differentiator. In the quarter, we launched a partnership to extend our digital underwriting offerings.

This complements our full-service facultative and supplemental underwriting programs. It is this ability to offer the full breadth of the underwriting spectrum that positions RGA so well in this market. In addition, we see strong momentum and in-force activity as clients continue derisking their balance sheets which we believe is a leading indicator for future new business for RGA. Beyond these four areas of growth, we also continue to have tremendous success in other markets. You will have seen our announcements on the USD 4.4 billion transaction in Canada as well as our EUR 900 million asset transaction in Belgium. Both of these transactions create long-term value for the organization and is due to the tremendous work and effort of our local and global teams.

You can see that we have won a lot of meaningful transactions this quarter. But what you have not seen are the transactions we have looked at and have chosen not to pursue. We remain disciplined and execute only when the risk return trade-off meets our requirements. This risk management focus is as important as any other part of our culture in delivering long-term sustainable performance. As proud as I am about all these accomplishments, I am even more excited about the future. My job as CEO is to make sure that we continue to execute today, but also make sure we are in an even better position tomorrow. It’s a true privilege to lead this organization and I am clearly confident in our ability to continue to deliver growth at attractive returns to our shareholders for many years to come.

I will now turn it over to Todd to discuss the financial results in more detail.

Todd Larson: Thanks, Tony. RGA reported pretax adjusted operating income of $516 million for the quarter and adjusted operating earnings per share of $6.02. For the trailing 12 months, adjusted operating return on equity was 14.8%. We are very pleased with the strong results as well as momentum in new business activity and in-force transactions. Reported premiums were up 58.8% for the quarter. This increase includes $1.9 million – or $1.9 billion from a single premium U.S. PRT transaction in our Financial Solutions business. Our Traditional business premium growth was a healthy 8.2% for the quarter on a constant currency basis. We are pleased with the premium growth that there are good results across all regions. The effective tax rate for the quarter was 22.4% on pretax adjusted operating income, slightly below the expected range, primarily due to tax benefits received in foreign jurisdictions.

Before turning to the quarterly segment results, I would like to point out the addition of Slide 7 in our earnings presentation that displays the current period claims experience and the related financial statement impacts. For the period, underlying biometric experience, which includes experience on our mortality, morbidity and longevity risks was favorable by $138 million, of which $58 million was recognized in current quarter income. The remaining favorable claims experience will be recognized in income over the life of the underlying business. As we’ve discussed, under LDTI, the financial impacts from experience can vary based on the product, duration of the business and whether experience occurs in capped, uncapped or forward contracts.

The U.S. and Latin America Traditional segment results reflected favorable individual life experience as well as favorable health and group results. The individual life favorable experience was broad-based and reflected a lower frequency of large claims. The U.S. Financial Solutions results were slightly below expectations due to lower variable investment income. As you’ll notice, starting this quarter, we have combined the U.S. Asset Intensive and U.S. Capital Solutions results into a single segment. This is consistent with our management of these businesses and the presentation for other regions. Canada Traditional results reflected favorable experience in both group and individual life businesses. The Financial Solutions business reflects longevity experience that was in line with expectations.

In the Europe, Middle East and Africa segment, the Traditional business results reflected favorable timing impacts due to the earnings recognition on an annual premium treaty and positive contributions from new business. EMEA’s Financial Solutions business results were in line with expectations. Turning to our Asia-Pacific Traditional business, results reflected favorable experience across the region. The Asia Pacific Financial Solutions business results reflected favorable overall experience. The Corporate and Other segment reported a pretax adjusted operating loss of $38 million, in line with the expected quarterly average run rate. Moving on to investments on Slides 9 through 12. The non-spread portfolio yield for the quarter was 4.7%, including the impact of lower variable investment income.

For non-spread business, our new money rate was 6.12%, still well above the portfolio yield, but lower than the prior quarter, primarily reflecting lower average yields available in the market. Credit impairments were modest, and we believe the portfolio is well positioned for the current environment. Related to capital management, as shown on Slides 13 and 14, our capital and liquidity positions remained strong, and we ended the quarter with excess capital of approximately $600 million. We have an active and balanced approach to capital management over time, and as we have communicated in the past, we are comfortable bringing down excess capital given the right opportunities. This was the case in the first quarter as we deployed a record $737 million of capital into in-force transactions.

I will note that we do expect to retrocede a share of this to Ruby Re, which is expected to increase available capital by approximately $150 million. We remain well capitalized with access to multiple forms of capital, including debt capacity, retrocessions to Ruby Re and other forms of alternative capital. We expect to remain active in deploying capital into attractive growth opportunities while balancing returning excess capital to shareholders through dividends and share repurchases over time. During the quarter, we continued on track record of increasing book value per share. As shown on Slide 15, our book value per share, excluding AOCI and impacts from B36 embedded derivatives, increased to $146.96, which represents a compounded annual growth rate of 10.6% since the beginning of 2021.

As we’ve discussed, the first quarter was a very strong start to the year for RGA. The primary drivers of the results were favorable experience across the globe, strong premium growth, emerging earnings power from active capital deployment in prior periods and the impact of higher interest rates. Overall, we continue to see very good opportunities across our geographies and business lines and are well positioned to execute on our strategic plan. Our business continues to demonstrate its resilience and underlying earnings power. We are very excited about the future and expect to deliver attractive returns to our shareholders. This concludes our prepared remarks. We would now like to open it up for questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from John Barnidge with Piper Sandler. Please go ahead.

John Barnidge: Good morning. Thank you for the opportunity. In your comments, you talked about transactions not considered and talked about exclusive transactions. Can you maybe expound on that a little bit? How much of growth is coming from exclusive? And with others talking about a more competitive environment for certain parts of the institutional market, should exclusive continue to grow as I know you like creation REIT? Thank you.

Tony Cheng: Thanks, John. Exclusives have been part of our DNA really since the start of the organization. We used to call it entrepreneurial spirit, which is very much flowing through our veins right now. To answer your question, we’ve set higher goals on the exclusive proportion of business relative to last year and were definitely – there are internal metrics that we’re definitely performing extremely well against. And just to give you a bit more flavor, exclusives sound difficult, right? But that’s the power of RGA. That’s the power of our platform, is our ability to have that global team, to have that ability to take risks around the world and assess the right risk. So oftentimes, exclusives will come from either a new type of risk that we add to a product, or a new underwriting type of underwriting, or a new reinsurance structure.

Exclusives can – RGA is quite uniquely positioned because we take both the asset and the biometric risk. A lot of reinsurers and competitors focus on the asset side, some focus on the biometric. Us being really the only U.S.-based global life and health reinsurer allows us to take both the asset and the biometric side. And that’s what we call our sweet spot. So we remain as bullish as ever in terms of the proportion of exclusives that we’re getting. It’s very much a North Star for us and an aspirational culture for us. And to me, that flywheel effect is starting to permeate throughout the whole organization and we’re relatively early stages of seeing the impact of that change.

John Barnidge: Thank you for that. My follow-up question, I know there was record deployment of capital into in-force, and I think you said $150 million improvement in excess capital as that ceded. But how should we be thinking about buybacks within the framework of the capital allocation? Is it more of a timing with that ceding? Or can you talk about that a little bit? Thank you.

Todd Larson: Hi, John, it’s Todd. Yes. No, we – as you know, we manage capital over time. And as Tony mentioned, we do like to deploy capital back into the business where we like the transaction, the risk return profile. We’ve maintained a pretty steady dividend over time. And we’ve always balanced it out with share repurchases when we didn’t see an active pipeline. As we’ve already discussed, we had a record deployment of capital in the transaction in the first quarter. And the pipeline continues to look pretty healthy in the transactions that we really like.

Operator: The next question comes from Bob Huang with Morgan Stanley. Please go ahead.

Bob Huang: Hi, good morning. First is on your B36 derivative, and actually, not – so first one is really just the difference between net income and operating income, just to broadly think about the below the line overall. I understand that a lot of that came from central risk transfer deals this quarter because of the one-time impact. But as you think about future PRT deals, as you think about becoming more optimistic in that area, are there ways to further minimize the impact of the below the line from that particular line or no?

Todd Larson: Yes. So specific to the PRT, it’s – that upfront loss, if you want to call it that, is – it’s really as a result of LDTI adoption and accounting because we have to discount the liabilities at a lower rate than what the investment yield is just the way the accounting standard is written. We certainly are looking at ways to see if we can address that somehow. But unfortunately, right now, we do see that upfront loss in net income. But from an operating income perspective, we’ll amortize it in over time with how the earnings emerge.

Bob Huang: Alright. Thanks. Second one is really on your biometrics. Obviously, definitely a lot of tailwind and even potentially more tailwind coming up from biometrics. But can you maybe give us a little bit more details in terms of how you think about the potentials of the biometrics going forward and other potential risks there as well, either a specific geography where you think you can take more advantage of the biometrics? Or are there any regulatory risks that we should be aware of going forward?

Tony Cheng: Yes. Maybe I’ll start, and then I’ll hand it over to Jonathan to get into more specifics. I mentioned in my comments the many tailwinds we have. And I’ll sort of just share with you at a company level, just some of them. One is the interest rates that are higher than historic. One is some of the changing capital regulations that are creating opportunities around the world. But to answer your question on the biometric, the fact that there is still major underinsurance of the population around the world, which gets filled up over time as GDP and incomes grow as well as continued medical technology advances. So I’ll hand it over to Jonathan to – elaborating more on the biometric side.

Jonathan Porter: Yes. Thanks, Tony. And I agree with you. I think we are seeing widespread opportunities around the world. So being specialists in all of the biometric risks really, so mortality, morbidity and longevity, gives us the flexibility to pursue the best opportunities globally. And then just to pick up on what Tony mentioned about technological advances and things. I think we remain encouraged by what we’re seeing in emerging data relative to weight loss drugs, as an example, GLP-1 type drugs. We think that, that could lead to measurable improvements in both mortality and morbidity over time. And it’s not just limited to that from a technology perspective. So, diagnostic tools like liquid biopsies for cancer, AI genetic editing and advances in protein activity as well in medical science.

I think they’re all things that are just examples of things that we see that could be a tailwind for mortality going forward. And given our risk exposure and our weight to mortality overall, I think that would – that bodes well for the organization.

Operator: The next question comes from Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar: Hey, good morning. So first, just a question for Jonathan. If we look at industry or population that’s – it seems like based on CDC data that they’re still fairly elevated – improved from COVID times, but still elevated versus pre-COVID, but it seems like your results have actually been pretty good. So what is it that you’re seeing in your business that’s different than the general population trends?

Jonathan Porter: Yes. Thanks for the question, Jimmy. And you’re right. I mean, what we see in the CDC data is that excess mortality is still elevated. I think it’s a single – mid-single-digit percentages in 2023 when you look at the actual experience in the population. I mean, as the excess mortality starts to come down, which is the trend definitely over the last couple of years, it starts to get more difficult to map that directly to between population and an insured book of business, so the differences are the absolute level of excess mortality is lower. What we saw this quarter, in particular, in the U.S. was favorable large claims experience, which, as you know, from prior quarters can be volatile period-over-period.

So we run the – we benefited from favorable large claims experience this quarter. I’d say our expectations have not changed from when we reviewed our assumptions in Q3 of last year. We still expect some level of excess mortality for the intermediate term, which is reflected in our reserve assumptions, but we do expect that to decline over the next several years.

Jimmy Bhullar: And then maybe for Tony, if there are improvements in life expectancy and mortality, you obviously would be a big beneficiary given that you’ve got a lot more exposure to mortality versus longevity. But it doesn’t seem like companies are pricing the longevity business and pension business based on expected improvements in mortality. And obviously, they’re not – it’s not a given that, that would happen as well. But how are you pricing your longevity business? Are you baking in the cushion for potential better life expectancy because if you were, then you’d have a hard time being competitive in the market or are you okay pricing based on the actual data given that you’ve got more exposure to mortality anyway?

Tony Cheng: Thank you, Jimmy, very much for the question. Look, first key point is the way we set our mortality and longevity assumptions are very consistent, right? I mean at the end of the day, they’re two sides of the same coin. They both form a mortality. So whatever we do on the mortality side, we’ll do on the longevity side. I would say we’re spending a lot of energy, as Jonathan shared, analyzing the data, but also doing a lot of medical R&D to get a stronger sense of appreciation of what could happen due to the medical advances. So – and obviously, any medical advances that we believe will occur and practical, once again, as you shared, would be net very good for RGA, given we are still way more materially longer on mortality and longevity.

Todd Larson: One point maybe I would add on, Jimmy, is that our mortality average age – or mortality block average age is lower or younger than the longevity business. So the longevity block is – average age is higher or older. So there’s less room for the improvement to take effect, if you will.

Tony Cheng: Yes. Maybe further to add to that. To Todd’s point, there is also some socioeconomic differences. So the mortality block tends to be higher socioeconomics, obviously, the first to be able to afford these new medical advances in the drugs.

Operator: The next question comes from Joel Hurwitz with Dowling & Partners. Please go ahead.

Joel Hurwitz: Hey, good morning. So last quarter, you guys provided updated financial targets and earnings outlook, and you since followed it up with this record quarter of in-force transactions. I guess how much deployment did you factor into those targets? And was most of this actively known and factored into those earnings and growth outlooks? Are we looking at some solid upside to what you provided?

Todd Larson: Yes, this is Todd. Yes, we did factor in deployment in the transactions into the intermediate financial targets that we provided back last quarter. I would say we’re off to a little bit faster start than we had anticipated. A lot of transactions that we had been working on came our way this quarter. So there is definitely some built into those projections, but we’re running a little bit – or intermediate targets, but we’re – I said, we got a fast start on to that.

Joel Hurwitz: Okay. And then, Todd, can you just talk about how to think about the earnings emergence from all these transactions? Like how long does it typically take for you guys to redeploy the assets and whatnot?

Todd Larson: Yes. So overall, in the aggregate, we’re pricing to our targeted returns. So we’ll see that – those margins come in over time at our expected levels. But probably, depending on the transaction, it can take a year, maybe 2 years to ramp up to get to that – the level of overall return, as you mentioned, we do some asset repositioning early on, and there can be some other financial reporting impacts as well. But overall, we should be reaching a good level within a couple of years.

Operator: The next question comes from Wes Carmichael with Autonomous Research. Please go ahead.

Wes Carmichael: Hey, good morning, thanks for the question. You talked about some of the capital relief from the Ruby Re retro session that’s planned. Should we continue to think about Ruby Re being effectively kind of a quota share for 50% of U.S. asset intensive? I know now that’s I think within U.S. Financial Solutions, but is there any change to the thinking there?

Todd Larson: No. Yes. So for qualifying business, which is the U.S. Asset Intensive business, yes, I would think about it as a quota share of 50% or even up to 70% of new transactions that come in that are U.S. Asset Intensive, up to the capacity that Ruby Re has, which will probably be from an equity capital perspective, $450 million to $500 million or so.

Wes Carmichael: Got it. Thanks, Todd. And then thanks for Slide 7, and I just had a question to clarify that. The favorable claim experience that wasn’t recognized in the period, is that recognized on a straight-line basis, basically evenly every quarter? Or is it more closer to the period, which declines over time?

Todd Larson: It will come in over time of the underlying duration of the business, if you will. It will all depend on the net premium ratio and how that impacts the release of [indiscernible] over time.

Jonathan Porter: Yes. And just maybe Todd, to add on to when we look at the weighted average duration of our business, our traditional business, in our GFS business, it’s probably in that 10 to 15-year range on average, just to give you a sense of the period over which those earnings would emerge.

Operator: The next question comes from Suneet Kamath with Jefferies. Please go ahead.

Suneet Kamath: Thanks. Tony, I wanted to circle back to something you talked about in terms of the deals that you were looking at, but that you didn’t end up doing. I don’t expect you to give specifics, but just some color around what caused you guys to kind of walk away? Was it the liability profile or the pricing? And to the extent you can comment, were those deals eventually executed in the market?

Tony Cheng: Thanks for the question. Yes. Look, really, it’s more a general statement that we – it’s one thing that’s so embedded in our culture to have that discipline of making sure the risk return trade-off is right. So at times, there could be a liability is not perfectly fine. It’s just a question of – we pride ourselves on the ability to be able to price most liability types. And then the question is, is it the right thing to do for our shareholders. But I want to add on top, often these – transactions transact or oftentimes they don’t or oftentimes, clients have to change the way they do things. So if I point you towards just a few years ago, we had a spate of large longevity wins in the Netherlands, which sort of seemed like an overnight success, but that was an area where we had been pricing transactions probably for a number of years until once again, the risk return trade-off played out. And there’s other numerous examples of that.

Suneet Kamath: Got it. And then just relatedly, long-term care is an area that I think historically you have been reluctant to pursue. Just wanted to get your current thoughts, obviously, we saw a transaction late last year, rates are higher. Does that change your appetite for that line of business?

Tony Cheng: Yes. I think definitely, firstly, our current book of business is the newer generations of long-term care. We believe it’s performed very, very well and continues to do so. However, once again, we pride ourselves on being the liability experts of the world in the life and space, which long-term care is one type of risk. And we will look at that type of risk and we will be selective and we will apply discipline. And I wouldn’t say it’s the top of our priority list. There are just so many opportunities for us to apply ourselves capital given the numerous headwinds that I – numerous tailwinds that I communicated earlier.

Operator: The next question comes from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger: Hey. Good morning. The – so recognizing that you just raised your ROE target to 12% to 14%, but I think if I take the results for the last few quarters and adjust for the actual to expected biometric results that you have provided, it looks like you are running closer to a 14% to 15% ROE. So, just is – I guess just wanted to give some more perspective on do you think you are kind of running more towards the higher end of that 12% to 14% or above at this point?

Todd Larson: Hey Ryan, it’s Todd. I will start off with that. Yes, we have been performing quite well. Things – the work – quality and the biometric experience has been performing well. We have had some other positive impacts as well. We just recently put out 12% to 14%. Clearly, we are not ready to adjust that at this point, but we are glad to see that we are hitting that high end of the range.