Reinsurance Group of America, Incorporated

Welcome to the Reinsurance Group of America third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded today. I would now like to turn the conference over to Todd Larson, Senior Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning and welcome to RGA's third quarter 2022 conference call. I'm joined on the call this morning with Anna Manning, RGA's President and Chief Executive Officer, Leslie Barbee, Chief Investment Officer, Jonathan Porter, Chief Risk Officer, and Jeff Hobson, Head of Investor Relations. A quick reminder about 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, information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation, quarterly financial supplement, all of which are posted on our website for discussion of these terms and reconciliations to GAAP measures. And now I'd like to turn the call over to Anna for her comments.

Thank you, Todd. Good morning, and thank you for joining our call. Last night, we reported adjusted operating earnings per share of $5.20, another very strong quarter following the record level of earnings in the second quarter. The results this quarter include favorable performance across many of our segments and businesses. As well, new business activity and production levels were robust and encouraging, and we have started to see some tangible benefits from higher investment yields. The COVID-19 claim costs were comfortably absorbed, and our underlying non-COVID-19 mortality experience was favorable in many of our markets. Segments of particular strength this quarter include U.S. and Latin America traditional, Asia traditional, and U.S. asset intensives. In the US and Latin America traditional segment, the individual mortality business performed very well with favorable underlying mortality experience and a modest impact from COVID-19. The US group and individual health businesses also performed very well. In the Asia traditional segment, we continued to see strong overall performance and our client-centric product development capabilities and underwriting expertise continues to solidify our market leadership in the region. Reported premium growth was 4.9% and 10.1% on a constant FX basis, reflecting the strong new business activity I mentioned earlier. We had another good quarter for capital deployment, putting $100 million into Inforce and other transactions, bringing the year-to-date total to $351 million. Our transaction pipelines remain very active and broad-based across many risks and geographies, and we expect this good momentum to continue. This quarter's results help to underscore the substantial additional value and earnings power we've added in the last few years through focused execution on our strategy, and we are in a great position to continue this momentum going forward. The life insurance industry has proven its value during the pandemic, and we expect the increase in demand for protection products to continue. I believe that RGA's value proposition has been amplified throughout the pandemic as we have worked closely with our clients helping them navigate through increasing levels of uncertainty. Further, our client-centric partnership efforts are translating into more exclusive opportunities as well as additional arrangements combining our value-added services and solutions. these last few years have reinforced the strength of this client strategy. For example, in the U.S. individual market, we are seeing new business from key clients in recognition of underwriting services that accelerate policy issuance through digital and data solutions. In addition, our facultative underwriting support, which provides valuable capacity to our clients are seeing nice growth through expanded programs and new clients. In Asia, I am very pleased with work we've just completed for a large market-leading client to develop an innovative first-to-market product providing access to protection that was previously not available. Because of RGA's leadership and partnership in the development efforts, this new product will be co-promoted within our client's large distribution network, creating value for their distributors and consumers while also enhancing RGA's visibility and brand recognition. In another recent example, our team in Italy closed its largest health deal to date with expected annual reinsurance premiums of over $50 million. We delivered a novel reinsurance structure to address specific client needs by leveraging the deep market knowledge of our local Italian team, combined with the experience and expertise of our global health team. These are just a few examples of partnership initiatives with our clients that help to differentiate us, while also providing us the ability to better manage competitive dynamics. Turning to another important earnings growth lever, interest rates. Higher interest rates and investment yields are notable earnings positive for us, as future cash flows in many of our biometric businesses can be reinvested at higher rates than in the past. What for us had been a steady headwind over many years is now moving into becoming a measurable tailwind, and we would expect to see continued benefits going forward if these higher rates are sustained. We have a great franchise and we are well positioned around the world. Our business is resilient. We've successfully managed through periods of elevated risk and uncertainty. And this quarter continues to demonstrate our many strengths. As I think about the future, I am very encouraged by the dynamics we are seeing in the underlying life insurance industry. And I remain optimistic and confident in our ability to continue to create substantial long-term value for our investors. Thank you for your interest in RGA. I'll now hand it over to Todd to review the detailed financial results.

Thanks, Anna. RGA reported pre-tax adjusted operating income of $452 million for the quarter. and adjusted operating earnings per share of $5.20 per share, which includes a COVID-19 impact of $1 per share and a foreign currency headwind of $0.15 per share. We consider this to be a very strong quarter and demonstrates the strength of RGA's earnings power. We are pleased with the performance across the range of fundamental metrics such as new business production, premium growth, capital deployed into transactions, underwriting results, and investment returns. The trailing 12 months adjusted operating return on equity was 7.9%, which is net of estimated COVID-19 impact of 3.9%. Turning to the segment results listed on slide 6 and 7 of the earnings presentation, reported premiums are up 4.9%, After adjusting for adverse foreign currency impact of $160 million, premiums were up 10.1% on a constant currency basis, highlighting good business momentum across our various segments. Because of the significant currency movements in the quarter, I wanted to give you a region-by-region summary. Canada traditionally reported premium increase of 1.2%, and in constant currency increased 5.2%. EMEA traditional reported an increase of 0.9% in premiums. However, in constant currency, premiums increased 16.7%. Asia Pacific traditional reported a 5.4% increase in premiums, and in constant currency were up 13.4%. Now turning to the segment earnings results, the U.S. and Latin America traditional segment results were very strong, reflecting both favorable individual mortality experience, and modest COVID-19 claims that totaled approximately $52 million. Variable investment income was in line with our expectations, although below the recent run rate. The U.S. individual health business had favorable experience overall, including an assumption update to the disabled life reserve. Our group business results were above our expectations, as most lines performed well. The U.S. affidavit business results reflected favorable overall experience and higher investment spreads. Our capital solutions business continues to perform well and within our expectations. Both the Canada traditional and financial solutions segment results were in line with expectations, with COVID-19 claim cost of $3 million. In Europe, Middle East, and Africa segment, the traditional business results reflected unfavorable UK mortality experience, partially offset by favorable results in other markets. COVID-19 claim costs were $5 million for the quarter. EMEA's financial solutions business results were somewhat below expectations, reflecting some client reporting updates. Turning to our Asia Pacific traditional business, Asia results reflected favorable underwriting experience across the region, absorbing COVID-19 claim costs of $7 million, primarily in Japan. Australia reported a modest profit in the quarter, driven by favorable group experience and absorbing $1 million of COVID-19 claim costs. The Asia Pacific Financial Solutions business results were impacted in the quarter due to $21 million in COVID-19 related medical claims in Japan for in-home sickness benefits, but would have been strong otherwise due to new transactions and higher yields. As you have heard from others in the industry, and as Jonathan will shortly discuss, we expect the volume of these claims to decrease materially going forward. The corporate and other segment reported a pre-tax adjusted operating loss of $56 million, higher than our expected quarterly range due to higher general expenses and interest expense. I would note that on a year-to-date basis, results are in line within our expected range. Moving on to investments on slides 8 through 10 in our earnings presentation, the non-spread portfolio yield for the quarter was 4.4%, reflecting variable investment income that was lower than the recent run rate, but was positively impacted by a much higher new money rate, as well as some benefit to existing floating rate securities. For non-spread business, Our new money rate rose to 5.35% in the quarter compared to 3.31% in the fourth quarter of last year, a fairly good increase in a short period of time. The new money rate benefited from an increase in both risk-free rates and credit spreads. Looking at a base yield, which is before variable investment income, we have moved from 3.78% in the fourth quarter of last year to 4.12% this quarter. Meanwhile, credit impairments were minimal at $14 million, and we believe the portfolio is well positioned as we move through a more uncertain economic environment. As shown on slides 11 and 12 of our earnings presentation, our capital position remains strong, and we ended the quarter with excess capital of approximately $1.3 billion, which includes an incremental increase from the recent hybrid debt issuance. We deployed $100 million of capital into Inforce and other transactions and continue to see very attractive deal pipelines. We also returned a total of $75 million of capital to shareholders through share repurchases and dividends. We believe our well-diversified global platform and underlying earnings power positions us to continue to support our clients and deliver attractive financial returns to our shareholders over time. I will now turn the call over to Jonathan Porter, our Chief Risk Officer.

Thanks, Todd. Overall non-COVID-19 claims experience was favorable this quarter with notable positive contributions in the U.S. and Asia. COVID-19 claim costs were moderate with an estimated impact of $89 million this quarter, down significantly from the $485 million reported in the same period last year. Starting first with U.S. individual mortality, Strong overall underwriting results reflect favorable non-COVID-19 large claims experience in the quarter. Estimated COVID-19 claim costs of $45 million in U.S. individual mortality were $11 million per 10,000 general population deaths at the low end of our rule of thumb range. This result is consistent with the continuing trend of a declining proportion of general population deaths at ages below 65, where there is more life insurance exposure. Turning to Asia Pacific, as Todd mentioned, COVID-19 related medical claims in Japan were elevated this quarter with combined claim cost estimate of $34 million split between our traditional and financial solution segments. This result was driven by an unprecedented number of COVID-19 infections in the Japanese general population, which saw an average reported daily case count of 130,000 in the quarter, combined with the government supported industry practice of paying claims on hospital benefit policies for at-home care to reduce potential pressure on the medical system. Looking ahead, we expect that future medical claim costs in Japan will be materially reduced for two reasons. First, new infections have dropped significantly in the general population, with case counts averaging 33,000 per day in October. And second, effective September 26th, the government of Japan changed requirements so that COVID-19-related at-home medical claims will only be covered for a subset of the most at-risk individuals, the elderly, pregnant women, and those with preexisting medical conditions. We expect that this change of definition will further reduce go-forward medical claims by approximately two-thirds. Total COVID-19 claim costs on all other businesses total $10 million, with nothing material to note by country or segment. We remain optimistic about the favorable trends in COVID-19 claim costs, and although there is still uncertainty on how the pandemic will evolve, we believe that future impacts will continue to diminish and be manageable. This concludes our prepared remarks. We would now like to open it up for questions.

We will now begin the question and answer session. Please limit yourself to one question and a single follow-up. If you have additional questions, you can rejoin the queue. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble our roster. And our first question here will come from Eric Bass with Autonomous Research.

Please go ahead.

Hi, thank you. So you've now delivered two quarters in a row with ROEs well above 10%, and I realize there are a lot of moving pieces, but given where interest rates are and the capital that you've been able to deploy the last couple of years, should we think about your historical ROE targets of 10% to 12% being a reasonable expectation for the go-forward earnings power?

Well, hi, Eric. Good morning. This is Todd. Yeah, no, we're proud of the strong results we've achieved the last couple quarters. I think it Again, it highlights the positive momentum of our business and our successful execution of our strategy. We do have some seasonality and some variances that are both positive and negative, so I'd be careful just to simply extrapolate out the two strong quarters without looking at it a little bit closer. But given the You know, capital we've been able to deploy over the course of the last, you know, couple years. You know, the underlying, you know, earnings power, you know, that we have. We're not going to, you know, we will update some of our targets as we get into next year under the new financial reporting bases. But I would say, you know, based on what we're seeing, definitely there's some upward pressure on what we can deliver from the ROE front if things continue the way they are.

Thank you. And then maybe a question for Jonathan. So if we could talk a little bit more about the mortality experience in the U.S. this quarter. And as COVID cases are coming down and you're starting to get more data, are you seeing non-COVID mortality trends normalize as well? And does this change or inform your view at all about sort of a pull forward of claims that may have happened during the pandemic?

Yeah, sure. So first, I mean, as we know, it was a good quarter for experience and U.S. mortality, individual mortality, which is great to see. You know, a lot of the non-COVID gains this quarter were driven by large claims, positive, so lower than expected large claims, which is the main contributor. As far as excess mortality goes, you know, we did see an increase in the general population excess mortality, according to CDC data this quarter. We didn't see this translate into material impact in our claims numbers, though, for the U.S. individual business. And again, any amount that would have been in there would have been more than covered by the favorable experience on large claims. One other point to note is we did have favorable experience in our U.S. group mortality results as well. So I think all those point to excess mortality not being a major driver for us this quarter. Thinking about the pull forward of mortality, It is likely we are getting some benefit from this. We believe it's still a modest tailwind though, so we haven't changed our view on this from prior quarters. And it will be spread out over a number of future years. Of course, it's difficult to estimate exactly what that pull forward is, given some of the variables involved in the calculations. But, yeah, I do think that will help create some more momentum. I think if we think about COVID evolving going into 2023, I would still expect that, you know, we're going to see a net headwind from COVID even after taking into account that pull forward benefit that we might be seeing.

And our next question will come from Dan Bergman with Jefferies.

Please go ahead.

Thanks, Zach. Good morning. I guess with all the moving pieces, I wanted to see if you could help quantify some of the variances in U.S. traditional this quarter, including how underwriting results compared to your expectations in individual group and the individual health businesses, as well as that individual health assumption update that you mentioned. And just given the recent premium growth and the benefit you're hopefully seeing from higher interest rates, any updated thoughts on the run rate annual earnings level you'd expect in U.S.

traditional would be helpful. This is Todd. I guess I can start, and please, anybody can chime in.

I think you asked about the individual health assumption updates. Maybe I'll address that one first, is that in normal course, we always look at our underlying assumptions, and this relates to the disabled life reserve, which is based on best estimate assumptions, and we did a fairly comprehensive assessment review of the assumptions that go into the reserve calculation, and we ended up updating the termination and utilization rates that resulted in that positive adjustment to the income. On the U.S. traditional side, we had what we review as positive variances from both COVID and non-COVID experience, a portion of the positive on the non-COVID related to, you know, the amount of large claims that we, I guess, didn't receive in the quarter. And as we've talked about in the past, you know, the large claims can create some volatility, you know, period to period, but over time, they're fairly predictable.

Got it. And just maybe just to follow up in terms of those,

underwriting variances, is there anything you can give in terms of quantifying, like how those came in relative to what you would expect in a normal quarter?

Yeah, we're not providing sort of an overall new run rate at this point, but we will provide some good new targets as we get into next year. But I would just comment that certainly the higher interest rates will be a positive, will be a a tailwind to the overall U.S. traditional business, as well as, you know, the underlying, you know, business excluding the COVID impacts is performing, you know, quite well. So, you know, I think we hopefully should see some, you know, positive impacts as we go forward.

Hey, Todd, it's Leslie. I thought I'd chime in as well since you asked about the tailwind from interest rates and last quarter we had given an estimate of 70 million more income for over the next 12 months given the rise in rates year to date and certainly rates continue to rise. So we would up that estimate over the next 12 months by 30 million or so. So call it 100 million over the next 12 months from if we stay at the current level. So another 30 million.

although that's for the non-spread overall, not just U.S. And our next question will come from Ryan Kruger with KBW.

Please go ahead.

Thanks. Good morning. My first question was just a follow-up on the last comment. Is the $100 million over the next 12 months, is that incremental from here? In other words, like, not from kind of last, Is it forward-looking of the next 12 months from today?

The incremental from where we are now, I would look at the additional interest rate move, so that would be the additional $30 million or so. But over the next 12 months, $100 million. But we had already been expecting some of that a quarter ago.

Understood, understood. Then the other question was, Asia had really strong earnings. Can you give any sense of, I guess, anything in terms of where you'd expect run-right earnings in that business to be or how favorable the results were in that business this quarter? Hey Ryan, it's Todd.

We're not updating the run rate at this point. You know, we're still in that 45 to 50 million a quarter on the traditional side. We did have a very strong, you know, quarter in Asia this quarter. And I'd say about half of that variance from the run rate was, you know, underlying experience favorability. And then the other half was, again, you know, periodic basis, we update, you know, models and assumptions, you know, across all the different regions, and that contributed a positive impact of about half of that variance, about half experience, half assumption, modeling updates, and also client reporting updates.

And our next question will come from John Barnage with Sandler O'Neill.

Please go ahead.

Thank you very much. You're seeing strong top line growth and opportunities for enforced block transactions. Can you maybe dimension how much of that 10% constant currency is rate versus new business?

Thank you.

I would say a good part of the 10%, some of it relates to the enforced growth, but Most of it would be from the impact of both organic new business and any transactional – anything that we've done on the transactional side that would come with premiums. We're still comfortable with the overall target that we've provided in the past of that mid to high single digits, but we continue to see some good momentum across the various geographies and regions. a good appetite for production protection products and continuing to work closely with our clients on product development opportunities.

Thank you very much. And then my follow-up question.

Provided LBPI commentary on impact of the balance you put, we started to hear others talk about the earnings benefit or headwind from it. How are you thinking about it impacting you from an earnings perspective as we think about it, at the very least from a conceptual standpoint. Thank you.

Yeah, I will answer it from a conceptual standpoint because we're not prepared to provide any numbers at this point. But as far as when we add on new business, we won't be including provisions for adverse deviation in the reserves anymore as we do under old GAAP. So I would think that would be a positive to current earnings on new business. We did, for the transition balance sheet, need to eliminate some of what we call negative reserves, primarily on the longevity business. That should come back through income over time. We don't expect a significant impact from changes in the DAC amortization. But I'd say those other areas should be a positive. Again, it's difficult to quantify at this time.

And our next question will come from Jimmy Buller with J.P. Morgan.

Please go ahead.

Good morning. So first, I had a question for Todd on share buybacks. you've sort of resumed activity, but it's been fairly modest the last few quarters. Wondering if that has to do with just ongoing uncertainty with COVID, or is it more of a reflection of just the opportunity that you're seeing in terms of deal pipeline and growth in the business?

Thanks, Jimmy. Yeah, so we did have an increase in the excess capital position quarter after quarter, but that was primarily because We did the hybrid transaction back in September, and we got pretty strong receptivity the day we went out for that offering. So we decided to upsize it a little bit above what we needed to refinance an existing security. So that was really why the excess increased during the quarter. The net income for the quarter pretty much funded organic growth and transactional activity and the dividends and share repurchases. I think as far as the level of share repurchases, I think you've seen over time we've been fairly balanced, but we're pretty optimistic and we're seeing an attractive transactional pipeline across all of our different geographies right now. And I think as we've been pretty consistent in the past, we like deploying the capital back into the business where the transactions, we can get a an appropriate return and support our clients.

Todd, if I can add, we do see very strong pipelines and strong demands for what we do and what we deliver. In my prepared remarks, I shared some examples, and really it's pointing to two of the strong pillars of our strategy, which are the create and partnership pillars of our strategy, working directly with clients, creating either new products, new underwriting processes, journeys. And what that does is it moves us from having to compete to being in exclusive arrangements, And so if you think about our growth, our growth levers really come from three different dimensions. One is just the underlying growth in the life insurance industry. The second is growth in session rates. And the third is growth in our market share. Well, in instances where we're... exclusive we're really hitting on all three levers we're helping clients grow their business groups so grow the underlying market and we're essentially getting a hundred percent of the you know of the reinsurance market share on that because we're an exclusive so so strong demand we're really well positioned right around the globe and And I expect the momentum, we expect the momentum to continue as we go forward.

Okay, thanks. And then maybe for Jonathan, on COVID claims, we had seen a spike in cases and deaths in Japan because of COVID, and then obviously it subsided close to the end of the quarter. As you think about, and you mentioned the hospitalization and deemed hospitalization-related claims, as you think about the reporting of those, I think in some cases there tends to be a little bit of a lag in reporting in foreign countries. Would you have caught up to all of that and assumed an IBNR or some component in your reporting?

Yeah, so the charge that we took related to the Japan medical claims this quarter was primarily IBNR, almost all IBNR, just given the lag in reporting that you mentioned. You know, we're quite comfortable with our methodology and process for setting up that level of IBNR. And I believe subsequent to the quarter, we've actually received some statements that have sort of given us no reason to be concerned about the level that we set up. So overall, I think we're very confident with the estimate that we have there.

Again, if you have a question, please press star, then 1 to join the queue.

Our next question will come from Alex Scott with Goldman Sachs. Please go ahead.

Hi. First question I had is just on the longer-term mortality expectations. I think you guys have talked in recent quarters about having an ongoing study of you know, just expectations for longer-term mortality and implications of COVID. So I just wanted to see if you could provide any kind of update on that, any shift in one way or the other of your thinking there.

Yeah, hi, Alex. It's Jonathan. So no change to our views that we've talked about in the last quarter. You know, I think we continue to be encouraged by the favorable trends we're seeing in COVID-19 claims. from what we've seen over the last couple of quarters. I think consistent with expert views, we do expect future variants and waves of infections and hospitalizations to continue, but at a declining rate as we go ahead. I think there's also a wide range, obviously, around depending what assumptions you use for the various underlying projections that you do. But I think we remain bullish on long-term mortality improvement overall. Got it.

Okay, thanks. And the other question I just wanted to ask you is on SGL, you know, I think I'm sure you're well aware we've had some volatility from some of the primaries in terms of some of these universal life books. I just wanted to, A, confirm, like, any exposure you have there, and, B, any appetite for, you know, potentially doing reinsurance if, you know, assumptions have been level set to the right place now.

Yeah. Thanks for that question. I'll start and then offer up to my colleagues if they have anything to add. So, Alex, let me start with we've looked at this risk in the past both from a flow new business basis or traditional reinsurance and on an enforced block basis. And as we've discussed with you before, we haven't been able to get comfortable with the risk return profile. The bid-ask spread was just too wide, and so we haven't participated. That is not a risk that we have on our books right now. And I'll point out that it's really no different to what we've done on some other risks or when there are other unfavorable market dynamics, at least as we view them to be unfavorable. if the opportunity doesn't pass, pass our risk return filter, then we'll be patient and we'll watch and we'll monitor for changes. So, so we can do this because a, we're a global reinsurer. We have both flow reinsurance. And in fact, we're one of the leaders in flow reinsurance and in force blocks. So our, we have many growth levers to pull, which means that we aren't overly reliant and we are patient and disciplined. Now, Conditions move, they change, and as they do, we'll look at it again. We'll check to see if risk return trade-offs are more attractive. But we'll also look at other factors, like the competitive dynamics and what the likely sell-side drivers are. maybe. And, you know, frankly, whether we're a good partner, given all of those things, and then act accordingly. So that's what you can expect from us on the go forward on this risk. On the actual risk itself, we don't have the policyholder behavior risk. But I will remind you that we have the mortality associated. We provide regular, you know, YRT type of mortality protection on these products.

Got it. Thank you.

This will conclude our question and answer session. I'd like to turn the conference back over to Anna Manning for closing remarks.

Thank you for your questions. And as we've noted throughout this call, this was a strong quarter and we are very pleased with the demonstrated earning strength that is coming through, especially in the last two quarters. We have a resilient and valuable platform. Our teams are highly engaged and excited, working closely with clients to bring solutions to address the protection needs highlighted by the pandemic. So let me end by repeating how optimistic and confident I remain in our ability to continue to create substantial long-term value for our investors. Thank you for your continued interest in RGA, and that concludes our third quarter call.

The conference has now concluded. Thank you very much for attending today's call. You may now disconnect your lines.