Reinsurance Group of America, Incorporated

Good morning and welcome to the Reinsurance Group of America third quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, 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, this event is being recorded. I would now like to turn the conference over to Jeff Hobson, Investor Relations. Please go ahead.

Thank you. Welcome to RGA's third quarter 2024 conference call. I'm joined on the call this morning with Tony Chang, RGA's President and Chief Executive Officer, Axel Andre, Chief Financial Officer, Leslie Barbee, 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 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 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.

Good morning everyone and thank you for joining our call. Last night we reported adjusted operating earnings excluding notable items of $6.13 per share. This is yet another record quarter for RGA. Our adjusted operating return on equity excluding notable items for the past year was 15.5%. Both the profit figure and the ROE continues to exceed the intermediate term targets we have previously shared. This is the result of RGA's strong focus to create long-term shareholder value. We do this by optimizing both our new business activities as well as our balance sheet management, and we are excited about the future opportunities as we continue in this fashion. It was another quarter where we showed continued strong business momentum with excellent capital deployment and strong premium growth. For 2024, we have deployed into transactions $1.4 billion of capital, which is more than 50% higher than in 2023, with one quarter remaining to go. Our internal measure, new business and better value for this year, already exceeds what we achieved during all of last year. This is the result of both the quantity as well as the quality of the new business one as we continue to execute a material number of exclusive transactions around the world. Exclusive and other higher value business, which we call creation business, has for the past one to two years been the majority of our new business embedded values. Let me provide more details on our business and some of these exclusive wins focused on our four areas of notable growth. commencing with our Asian traditional business. We see conditions there that are as favorable as I have seen over the past 15 years. This is due to our teams, the unique RJ platform, and the successful execution of the product development strategy. We have biometric capabilities second to none. We can reinsure both sides of the balance sheet and we will always exercise discipline to transact only when the risk-reward trade-off is favorable. I want to highlight three examples of exclusive transactions where we have broken new ground strategically during the quarter. In Korea, we continue to successfully execute the product development strategy that we launched nearly 20 years ago. We created a new cancer treatment product earlier this year and have completed 19 agreements with clients to sell this product. This product has already sold over 2 million policies in 2024 and will increase in 2025. Secondly, in mainland China, we take our product development strategy one step further. we can provide a solution for the biometric liability and asset sides of the balance sheet. We believe this capability is unique to RGA and generates material value for our clients as it not only supports their sales, but also helps manage their new business capital strains. Finally, in Hong Kong, this strategy has taken yet another step further by combining our underwriting technology to our product development capabilities and our ability to reassure both sides of the balance sheet. One of the market leaders in Hong Kong announced their use of our MedScreen Plus digital underwriting system. This is a major differentiator as it streamlines the underwriting process for the mainland Chinese buying policies in Hong Kong. These three examples in three markets show that each element of this product development strategy can lead to quality business. When the elements are combined together, you can see why we are able to generate a high proportion of our business through exclusive transactions. Clearly, you can see in Asia, we link our strategies, capabilities, and data across the region and then tailor and innovate in each of these markets for our treasured clients. As other markets in Asia evolve, RJ will export and tailor these initiatives to help our clients grow. In our second area of notable growth, U.S. traditional, the third quarter was one of our strongest for new business in recent memory. As announced, an important win during the quarter was with American National. This transaction includes a balanced mix of asset and biometric risk. As mentioned previously, RGA prides itself on our strong pricing discipline and prudent capital deployment. We believe the U.S. market is presenting increasingly attractive opportunities that align with RGA's sweet spot. We had over 20 other new business wins with considerable activity in terms of both organic and enforced block transactions. These wins can take months, if not years, to cultivate. This quarter is one where many things successfully came together. Our third area of notable growth is the PRT and the longevity market. In the US PRT market, we completed another transaction this quarter. The pipeline remains very strong and we are optimistic about our prospects going forward. In the UK, we continue to have a very strong year. Like in Hong Kong, we have another market-leading digital underwriting system, which allows us to win exclusive business, reinsuring individual retail annuities. In addition, we continue to win more than our fair share of business in the UK PRT reinsurance market. We are on track to surpass last year's new business performance, which was a record year for RJs. Finally, in our Asia asset intensive business, we further expanded our presence in the Korean market where we completed two additional coinsurance transactions. This included one with a market leader for an asset size equivalent to approximately 500 million US dollars. These landmark transactions have created a strong pipeline for future growth for RJ. The Korean market shares many characteristics for coinsurance business as we have seen in Japan over the past decade. Our teams are best in class and we have already cultivated many client relationships over the past 20 years on the traditional reinsurance side. Record earnings and strong business wins are two reasons why 2024 has been successful. A third reason that is just as important is our strong progress in the optimization of our balance sheet. I have previously mentioned that we have other management levels beyond winning new business to enhance our ROE and EPS growth. This quarter, we initiated a transaction to recapture retroceded business, which we expect will generate $1.5 billion in long-term value and will be accretive to ROE and PTAOI 2025 and beyond. Axel will expand on this topic shortly. This example of balance sheet management follows other initiatives we have completed this year, such as asset repositioning and enforced management actions. Collectively, balance sheet management actions have raised our expected value of enforced business margins by $2 billion, and we believe there are continued opportunities capital management. RJ continues to actively explore alternative capital sources on multiple fronts. We will imminently complete the capital raise for RubyRee at the upper end of our target. In addition, we placed another transaction with RubyRee during the third quarter. Finally, I am very pleased to see that the value of our enforced business margins increased 13.9% or $4.6 billion over the past three quarters. Long-term economics remains our key focus, and this measure is clearly aligned to that. As our earnings presentation shows, there are both material contributions from the new business place and the balance sheet management actions, examples of which I shared earlier on the call. We believe this financial information provides another lens to the intrinsic growth in value of our enterprise. So in conclusion, we enter Q4 with accelerating momentum and firing on all cylinders. I could not be more pleased with our team, our strategy, and our execution, and this shows up in results for the quarter and year to date. Our intention will be to continue this momentum, build to sustain our future growth, and ensure capital sources are diverse and best to fund this growth. Clearly, we have had great results year-to-date, and I am fully confident that the best is yet to come. I will now turn it over to our new CFO, Axel Andre, to discuss the financial results in more detail.

Axel Andre Thanks, Tony. RGA reported pre-tax adjusted operating income of $314 million for the quarter, or $3.62 per share after tax. Pre-tax adjusted operating income, excluding notable items, was $508 million for the quarter, or $6.13 per share after tax. For the trading 12 months, adjusted operating return on equity, excluding notable items, was 15.5%. This was a busy and productive quarter. We delivered excellent overall results above our targeted run rate for the quarter, which included two material in-force actions. We added significantly to the long-term value of our business, which adds recurring earnings, and we continued to execute on our strategic initiatives. With strong new business momentum, we deployed $382 million into in-force block transactions in the quarter. For the first nine months of the year, the value of in-force business margins increased by $4.6 billion, or 13.9%, reflecting strong new business as well as balance sheet management actions designed to increase long-term value. I will provide further details shortly. Additionally, we had another quarter of in-force management actions in the U.S. that had positive impact on results and will have an ongoing impact to future earnings. Lastly, we are closing on the final capital raise for Rubiri, as Tony mentioned, and executed an additional retrocession of a U.S. PRT deal in the third quarter. Reported premiums were up 3.2% for the quarter, over a strong third quarter of 2023. This quarter included approximately $600 million from a single premium USPRT transaction in our financial solutions business, compared to approximately $800 million in the prior year quarter. Our traditional business premium growth was a healthy 8.5% for the quarter and 7.9% year-to-date on a constant currency basis. Premiums are a good indicator of the ongoing strength in our traditional business, and we continue to have good momentum across our regions. In this regard, I will note that the U.S. premiums were up 6.7%, reflecting both enforced block transactions and strong new business. The effective tax rate for the quarter was 23% on a pre-tax adjusted operating income, below the expected range, primarily related to income earned in non-U.S. jurisdictions. For the full year, we expect the effective tax rate to be at the lower end of the 24 to 25% range. I now want to make a few comments on notable items reported in the period. As presented on slide seven of our earnings presentation, there were two key drivers impacting notable items. The first was the completion of the annual actuarial assumption review. The impact to current period pre-tax adjusted operating income is an unfavorable $58 million. However, the impact to expected future cash flows from the assumption updates is a positive $100 million contribution to the value of enforced business margins. In other words, the net economic long-term impact of the Actual Assumption Review is a positive $42 million. As a reminder, the economic impacts that are not recognized in the current period will be recognized over the remaining life of the business. The primary drivers of the current period charge where updated lapse rate assumptions on term life products in India, partially offset by favorable mortality updates in the U.S. and Canada. The second driver of notable items was the expected future recapture of retroceded business starting in 2025. This is the result of our decision to increase our retention limit, which is effective January 1, 2025. Under U.S. GAAP accounting, the impacts of the expected future recapture are recognized in the current period. As noted in the presentation, this notable item resulted in a $136 million unfavorable impact to pre-tax adjusted operating income in the third quarter. However, we expect a favorable impact of approximately $20 million to 2025 run rates, increasing to $40 million per year by 2030 and $60 million per year by 2040. In total, this action is expected to have a favorable $1.5 billion impact to the value of enforced business margins that will be recognized over the remaining life of the business. This is a good example of us managing our business to unlock long-term value for shareholders. Finally, before turning to the quarterly segment results, I would like to speak to slide eight in our earnings presentation. This displays the total company claims experience and the related financial statement impacts. Biometric experience, which includes mortality, mobility, and longevity, has been positive over the last six quarters. In the current period, underlying biometric experience was favorable relative to expectations, with the U.S., Asia, and EMEA all favorable. The financial statement impact recognized in the current quarter, on the other hand, was minimal. The difference between actual experience and the financial statement impact is a function of LDT-high cohorting and duration of the business. Turning to the quarterly segment results starting on slide six, the U.S. and Latin America traditional segment results reflected favorable in-force management actions and benefits from other rate increases. In these cases, there is a catch-up effect and then ongoing benefits in the future. Overall claims experience was slightly favorable while the financial impact was slightly unfavorable due to where the experience occurred by LDTI cohorts. The U.S. financial solutions segment results were below expectations due to lower contributions from new business. Canada traditional segment results reflected modestly unfavorable experience. However, year-to-date underlying mortality experience is favorable. The financial solutions segment in Canada reflected the negative impact of a modest one-time item. In the Europe, Middle East, and Africa region, The traditional segment results were modestly above expectations and reflected favorable experience, both in the UK and on the continent, and was consistent across profitable and capped cohorts. EMEA's financial solutions segment results were above expectations, reflecting the impact of strong new business in recent periods. Turning to our Asia-Pacific region, the traditional segment results were above expectations, reflecting some one-time items as well as favorable claims experienced. Underwriting experience was favorable on an economic basis, but the bottom line impact was in line as the favorable experience in profitable cohorts was deferred into the future. Financial solutions segment results were solid, reflecting favorable overall experience partially offset by a delayed impact from recent transactions due to planned portfolio repositioning. The corporate and other segments reported a pre-tax adjusted operating loss of $18 million, favorable compared to the expected quarterly average run rate, primarily due to higher investment income. Moving to investments on slides 10 through 13, the non-spread portfolio yield for the quarter was 5.08% as compared to 4.72% a year ago, reflecting the impact of new money rates benefits from previous portfolio repositioning as part of our balance sheet management, and variable investment income that was in line versus expectations. For non-spread business, our new money rate was 5.68%, which was down from the second quarter, but still well above the portfolio yield. Credit impairments were minimal, and we believe the portfolio remains well positioned. Related to capital management, as shown on slides 14 and 15, our capital and liquidity positions remain strong, and we ended the quarter with excess capital of approximately $700 million. We had another strong quarter of capital deployed into enforced block transactions across multiple geographies. We expect to remain active in deploying capital into opportunities to achieve attractive returns as our pipeline remains healthy. As part of our planning for continued growth in the fourth quarter, we will be evaluating how we view excess capital across the multiple frameworks we manage. We believe our current excess capital estimate is conservative. Additionally, we continue to be active in seeking various forms of capital to effectively and efficiently fund these opportunities. This is demonstrated by Ruby Re, where we are closing on the final capital raise, bringing the total capital raise to the higher end of the $400 to $500 million range previously disclosed. We're very happy with the level of interest expressed by investors, and this gives us confidence that there will be interest in future vehicles that we pursue. We successfully completed a retrocession of $350 million of liabilities to Ruby Re in the third quarter. Including the additional capital raised, we have roughly two-thirds of the capital capacity left available to be deployed. During the quarter, we continued our long track record of increasing book value per share. As shown on slide 16, our book value per share excluding AOCI and impacts from B36 embedded derivatives increased to $151.79, which represents a compounded annual growth rate of 10.4% since the beginning of 2021. Turning to the value of enforced business margins on slide 17. As mentioned, the metric has grown by over $4.6 billion, or 13.9% during the first nine months of 2024, and ended the quarter at $37.6 billion. This is split roughly evenly between our traditional and financial solutions business. The increase was primarily driven by strong new business, which contributed $3.8 billion, and $2 billion from balance sheet management actions. This includes $1.5 billion from the expected retrocession recapture, and around $500 million from management actions executed in 2024 and previously discussed. These increases were partially offset by the unwind of enforced margins that contributed to earnings during the year. Overall, the growth of this metric is a testament to our ongoing success in delivering long-term value to the enterprise and to shareholders. To summarize, we've had a great first nine months of the year. We continue to see very good opportunities across our geographies and business lines, and we are well-positioned to execute on our strategic plan. With that, I would like to take a moment to thank everyone for your continued interest in RGA. This concludes our prepared remarks. We would now like to open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit yourselves to one question and one follow-up. If you have additional questions, you may rejoin the queue. Our first question today is from John Barnridge with Piper Sandler. Please go ahead.

Good morning. Congrats, Axel. Nice to hear your voice again. Question around the excess capital redefinition. Could you talk about utilization of purposes other than enforced organic? Could you see it Optimizing the investment portfolio through stakes and asset managers similar to Velocity Partners back in 2022. Thank you.

Hi, John. Thanks for the question.

Yes, look, as you know, for use of capital, obviously the primary use is towards growth of the business, so going into transactions. We have, of course, also a long-term track record of paying a dividend to shareholders and then at times buying back stock. Obviously, in the current environment, we're just so excited by the opportunities in front of us that we're redeploying capital into opportunities. That would include potential opportunities on the asset side that gives us access to private assets origination. Again, we have a long-term track record of doing so, and that can absolutely be part of the foreseeable use of capital.

Thank you. My follow-up question, the growth opportunity in Asia sounds really exciting.

Arguably, the demographic trends around an Asian population may be more advanced there than here right now, but we'll get there eventually. Can you maybe talk about how you can take that country-to-country passportability success in Asia and products to maybe other global markets? Thank you.

Sure. Thanks, John. You know, look, throughout Asia, we're already doing that already quite a lot. If you can recall back to Invest Today, where we had a very successful mainland Chinese success last year with AIA and subsequently many other clients, which was essentially as a function of aging population, simplified underwriting, which is something we saw in Korea, I think about five to 10 years earlier. So, you know, really our hallmark and The reason we're able to do these things is the strength of the local teams. Whether the populations are aging or getting younger or whatever happens in each of these markets, our local teams are so strong with their biometric capabilities, their understanding of the consumer and so on and so forth that they're able to adapt and create new products, which is obviously the basis of a lot of our creation business that I mentioned earlier today. How we export that around the world, absolutely. I mean, you know, one example, which is not necessarily from Asia, was an initiative we did in South Africa, believe it or not, you know, where over there there's a lot of, I guess, final expense products for maybe the middle class. Lo and behold, you know, the next day I flew from South Africa to the US, and it was also a major initiative in the U.S., obviously in the U.S. maybe for the lower income segment. So our ability to understand the drivers commercially and leverage off the data, the technical elements, and export that around the company is as strong a strength that we have within the company.

The next question is from Suneet Kamath with Jefferies. Please go ahead.

Yeah, thanks. Good morning. I just wanted to start with some quick clarification. I think there might have been some confusion overnight. So just wanted to confirm that the decision to recapture this block was 100% your decision and not because, for whatever reason, the counterparties that you had been using had some issues with the business or didn't want it. I just want to clarify that.

Yeah, Cindy, thank you for the question. If it could be more than 100%, it would be. You know, this was our decision, and make no mistake about it. The precondition for us to recapture the enforced block is us raising the retention and the block being seasoned a certain amount of time. We've known this block, obviously, it's our business for over 10 years, and it's been very, very highly profitable over that period of time. And when the treaty... You know, obviously treaty conditions allowed. We did kind of wait until COVID was over. We considered the risk elements and absolutely we executed as quickly as we could.

Okay, thanks for that, Tony. And then I guess relatedly, how should we think about the capital that should be backing this business? Is that $700 million of excess capital sort of already pro forma for the capital that you'll need to back this business? And Are you looking at other sizable recapture opportunities, or should we think about this as mostly kind of a big step and then, you know, maybe not as much of this kind of going forward? Thanks.

Yep. Hi, Sunit. It's Axel. Look, from an overall mortality risk perspective, the recapture increases the mortality exposure by 1% to 2%, so it's really, you know, it's very marginal. So from a capital perspective, think of it as it's, yeah, the excess capital figure already includes that slight increase in in risk capital for mortality.

The next question is from Elise Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. I want to stick on capital as well. You guys said that you're evaluating this quarter how you view excess capital. I guess appreciating that that's ongoing, but can you just give us a sense of some things that you're you know, going to consider as you go through kind of this methodology change, you know, during the fourth quarter relative to your excess capital position?

Yeah, absolutely. Thanks, Elise, for the question. Yeah, so look, we talk a lot about value of enforced business margins on this call. So really, that's a major driver, right? So at the end of the day, the value of that business, the value of the enforced is a source of available capital. In fact, we get third-party validation on that. For example, we can borrow against the value of enforceable block. We have a track record of doing value of enforced securitizations or surplus node issuance. So it's a real source of capital. So it's really kind of making sure that our models are catching up to the substantial generation of value that we've had over this year. That's number one. And then the second is really, again, with the pace of change of the business, the new business that we're adding, making sure we've got the diversification impact recalibrated on a more frequent or regular basis than perhaps we've had historically. So those are really kind of the two main drivers that are running into that.

Thanks. And then my second question is, Can you just update us just on your LTC exposure, just in terms of the U.S. and international exposure and how the experience has been there? And I know, of course, as we've gone through earnings, we've heard some companies have said that in terms of potential transactions for that business that we've seen, kind of the bid-ask narrow. What are you seeing just in terms of on the LTC side? And would you guys consider doing additional things there?

All right, thanks for the question. Let me kick it off, and I'll let Axel go into some of the numbers. But overall, our liabilities are modest. If you can recollect, we actually stayed out of the long-term care business for, gosh, many, many years, and it was only at the point in time where we felt the new products coming on board were obviously at the right risk-return trade-off that we entered the market. As you know, strategically, and as we've said many times, we truly believe that we are the biometric experts of the world, including long-term care in the life and health space. And to answer your question, look, if the risk aligns with our risk thresholds, obviously, once again, the right return profile, then we will consider these types of transactions more so in line with what we've done historically on the books. So maybe, Axel, on the amount of in-force, how much have we got?

Yeah, just to add a bit to that, so our current in-force block, we've got about $4 billion of reserves on the books currently. And again, we're very pleased with the performance that we've had historically on that block.

The next question is from Joel Hurwitz with Dowling Partners. Please go ahead.

Hey, good morning. So you noted as part of the assumption update there was a favorable mortality update in the U.S. Can you just provide some more color on the changes there and any way to help us think about what you've baked into assumptions for excess mortality over the next few years at this point?

Yeah, hi, this is Jonathan. I can take that question. So we do, as you can expect, we do a pretty comprehensive review of our mortality assumptions on an annual basis. The drivers of the updates this period is really both considering, you know, our view on the immediate excess or excess mortality that we expect to continue, as well as, you know, considering potential long-term implications. So the changes has been a modest release of reserve that's consistent with the experience that we've had to date. We still have an expectation for excess mortality built into our reserve assumptions within the U.S. and in other markets. Think of it more in the sort of four to five-year time frame is what we expect excess mortality to continue to be

Okay, helpful. And then just one on the recapture. Can you help me understand what exactly drove the $136 million impact? Is that accounting noise or is that some upfront capital cost?

Yep.

Hi, Joel. It's Axel.

Yeah, think of the $136 million. Basically, this was kind of a reinsurance recoverable we had embedded in our reserves against potential future claims and the retro agreements. So with the decision to recapture, we basically write off that contract liability or that asset, if you want to think about it that way. So that's the accounting impact today. But of course, what happens in the future is that we get to not pay those premiums. And so, as I mentioned, the impact of that to the run rate of pre-tax operating income is you know, $20 million a year in 2025, ramping up to $40 million by 2030, further ramping up to $60 million by 2040. So all of that, you know, basically resulting in the present value impact to the value of enforced business margins of $1.5 billion.

The next question is from Tom Gallagher with Evercore. Please go ahead.

Good morning. First question, Axel. I just wanted to come back to the capital question and how you're reevaluating the model for defining XSD. So the covariance benefit and the value of the enforce sounds like those are the two changes. I guess I'm not so interested in how that's going to change your definition of access. But to me, the biggest overhang on your stock has been the fear that at some point you may have to raise common equity to fund what's been exceptional growth. So I guess my main question is, given the model changes that you're contemplating, do you think you'll be able to organically finance your organic growth plans with those changes, or do you think you'd still need to look at additional either sidecar capital or even common equity to fund your future growth plans?

Thanks, Tom. Thanks for the question. So coming back to the first part, yes, absolutely, it's the value of enforce and basically marginal diversification impact. So that goes into our excess capital view. So taken together, so both where that will land us versus in addition to that taking into account I was mentioning the two-thirds of capital for Ruby that's left undeployed You know, that's relative to our pipeline. We feel really good about being able to put the money to work with transactions that we have in front of us. And further, related to value reinforced, as I said, we have a track record of basically being able to monetize that and to either borrow Yen State or to actually turn it into capital. So I understand, you know, very clearly the really strong hurdle against raising equity in the public markets. That's clear. You know, we understand very much how shareholders don't like the dilution, et cetera. So we would, of course, always look for our resources, our capital on balance sheet, third-party capital before ever coming to equity, you know, to public investors for an equity raise.

Okay. Thanks for that. And then, My second question is when I look at the biometric table and I see how the experience has looked versus the capped versus the uncapped cohort and think about how this has been playing out on underlying capital generation, I guess I just have two questions related to that. One is I know it gets smooth for GAAP because most of your favorability is coming from the part that gets deferred. But how does that work on a statutory basis? Does that get recognized immediately? And then I guess my related question is, I know under the new gap, reserve assumptions will reset to embed some conservatism. So I guess I'm left wondering if the statutory and cash flow is getting recognized immediately for the uncapped versus capped cohorts. But then, I don't know, maybe there's less conservatism in them because I don't think you reset statutory reserves like you did under Gabb. Anyway, I know it's a long-winded question, but just curious what all this means for underlying cash flows that you've been seeing. Thanks. Thanks.

Okay. Thanks, Tom. That's a lot. I'm not sure that I'll get to a crisp answer to that. But, yeah, look, for staff, the experience comes in, right? It comes through basically immediately. The reserves are based on, you know, generally speaking, on formulaic tables, right? So we don't – reserves are what they are. We don't get to reflect that in the future. Okay. So I guess, yes, potentially it creates kind of a disconnect where the stat has seen the impact, whereas on the GAAP side you have the deferral, so it's going to come in over time. I don't know that it's mature enough at this point for it to lead to truly a material shift, for example, in how we view free cash flow generation. That is, when you look at a dollar of GAAP operating income, how much of that results in truly distributable earnings. It's a good question, but I don't think that it's been material and sustained enough that it has led to material change. And I think historically, we've talked in the past about roughly a 60% free cash conversion ratio. At this point, I'm not prepared to change that guidance.

The next question is from Ryan Kruger with KBW. Please go ahead. Hey, thanks.

Good morning. My first question was on balance sheet optimization. You've clearly done a number of things so far, but I was hoping to get a sense of how far through the different options are you at this point, whether it be further in-force actions or investment portfolio repositioning or other things. Do you still have a fair amount left to do, or have you done a lot of what you're aiming to do at this point?

Hey, Ryan. Thanks for the question. Obviously, the recapture is a one-off. We might want to do that all the time, but that's an opportunity that arose. But with regards to your question on portfolio optimization and enforced management actions, yeah, I'd say we're in the first few innings of that. I mean, that will continue. We continue to see opportunities there. As I shared during Investor Day, They can be material in size. You can't predict them from quarter to quarter, obviously. But this year we've had great success in those areas, and we anticipate continuing into the future.

Great, thanks. And then just one quick one on the mortality assumptions. The comment on four to five years of kind of endemic mortality, is that four to five years from where we are today? or from when we would have considered the pandemic to have ended.

Yeah, Ryan, this is Jonathan. It's four years from today, roughly speaking. It varies a bit by market, but you can think of it that way.

Okay, great. Thank you.

And Ryan, as you know, obviously any favorable relative to that will come through in our profitability.

The next question is from Alex Scott with Barclays. Please go ahead. Hi, good morning.

Now that Ruby is starting to put more meaningful amount of capital to work, I was hoping maybe you could give us a sense of how the economics work and what we should expect in terms of where and how it impacts your P&L.

Sure. Yeah, I can start, Alex.

So for Ruby, Basically, as we seed business into Ruby, we've got various fee streams. We've got origination fees. We've got ongoing admin fees, servicing fees, if you will, and then, of course, asset management fees because we're the asset manager for the vehicle. All of that adds up. I don't know that it's material enough for us to start talking about um, you know, fee related earnings and, and, uh, and, you know, pretending that it needs to be a whole new business segment. Um, but it is, you know, it is meaningful, it is material and we're looking to build up, uh, over it over time.

And maybe, maybe just to add on the strategic side, I mean, we did Ruby, obviously it's a meaningful source of capital, but, um, It is really to open up that channel as another form of capital down the road for other vehicles as Axel has shared previously. So that was the more strategic direction as to why we pursued it.

Got it. Second question I have is on Japan and the regulatory environment there. One of the primaries in the past week commented on just how disruptive this new ESR regime is for longer-duration life products. I was interested in how big could that opportunity be? Is it truly disruptive enough that a large portion of the bigger life underwriters in Japan have to look at these deals? How big do you expect to go on that opportunity?

With regards to the reinsurance, the co-insurance of those blocks down the road?

Yes, correct. Yeah, reinsuring to help them, you know, take care of regulatory change. Yeah.

Yeah, no, I'd say a few comments. Firstly, to answer your question, I think we're very early in the stage. And the reason why is... Firstly, it's a major change in how the Japanese life insurance company does its capital management and really recognizing some of the negative spread elements that have been embedded in the older financial regime. So I'd say the companies are only getting comfortable with it and we're starting to see, obviously, accelerated deal flow there. The other element is clients tend to not want to do it all in one go. So once they've made the decision to go ahead, they don't do it all in one go and they spread it out over a number of years. So for example, the client that we've done our first transaction with, I think we're on trench six or seven. So essentially every year that opportunity arises as companies get more comfortable with the approach.

So hopefully that answers the question.

The next question is from Wes Carmichael with Autonomous Research. Please go ahead.

Hey, thanks. Good morning. First question on U.S. financial solutions. I think you mentioned that there was a lower contribution from new business, but I think there was a $600 million PRT deal in the period. Can you maybe just elaborate on what drove a little bit of weakness in that segment this quarter?

Yep, sure. Hi, Wes. Yeah, I think on the U.S. financial solutions business, I think probably what's been slightly lower than what we expected when we put the run rates together is really the rate of origination of the more kind of classic asset-intensive side of the business. The PRT side has actually been quite nice and on track, although, you know, of course, it's episodic. It's a big, chunky transaction in one quarter and not in the other, but overall, that's on track. And just further to that, I mean...

As Axel said, the pure asset is not necessarily our sweet spot. We obviously love the transactions that have both the biometric and the asset risk within it, given that's our unique, I feel, one of our key unique differentiators. As you know, American National Transaction, that happened to be put in our traditional segment and was part of the great growth we saw there. You know, the pure asset risk, we will do time to time, but we don't feel we've got a huge advantage in that area.

Now, lastly, just to close it up on, you know, financial solutions, just to bring it to the global perspective, because I do think that's important, you know, to find U.S., you know, U.S. is slightly behind in terms of the run rate, but remember that APAC and EMEA are substantially running above the run rates on a global basis. We're, you know, ultimately very pleased with the performance of the financial solutions business.

Yep, understood, and that's very helpful. Thank you. My second question was on the retrocession recapture, can you maybe just talk about how much of that business is within capped and uncapped cohorts for LDTI? And what I'm really curious about is, you know, as you think about taking the business on, like how much potential volatility are you kind of adding to the income statement if we get kind of quarterly mortality experience fluctuations?

Yeah, so I can start there. Jonathan, probably on the volatility side. So I believe on the capped side, a relatively small, very small proportion of that was really in capped cohorts, quoted around 10%. So 90% in uncapped, 10% in capped. And so when you think of the financial statement impact, you can kind of apply that same logic of capped and uncapped cohorts in terms of that $136 million impact. In terms of the volatility, Jonathan, go ahead.

Yeah, so I think one thing to keep in mind is that volatility is two-directional as well, right? So we will have the opportunity to actually see favorable results from volatility. We've done some, as you would expect, in our modeling, we've looked at some stochastic simulations and and for the business to understand the volatility, and we do think it's quite modest, so just looking at our U.S. business specifically, we're talking low double-digit millions of volatility at a 90th percentile over a full calendar year, something in that range.

Sorry, just to add and put it in perspective, as Axel said, broadly 10% is in the capped cohort. The actual block is not that big in size. It's just highly profitable. hence the big long-term value number that pops out. So, you know, I just want to add commentary there.

The next question is from Jimmy Baller with J.P. Morgan. Please go ahead.

Hey, good morning. I had a couple of questions. First, if you could just discuss the financial implications of the reinsurance recapture. Should we assume higher earnings volatility given the increase in single life retention? Or do you think it will just get absorbed in your results given the growth in the business over the last several years and the smoothing mechanism of the LDTI accounting changes?

So, yes, like Jonathan said, you know, so, yes, the volatility, the additional volatility that we would expect going forward is really minimal, right? Because, like we said, the whole motivation was, You know, we wanted to increase the retention limits because we were able to. We're a bigger company. We're more diversified. And the LDTI accounting change helps because really the noise ultimately mostly gets smoothed over time. So from the, you know, let's say from the motivation perspective of wanting to manage earnings volatility, that basically wasn't there anymore. So... Nothing, really not a material contribution to volatility going forward.

Okay. Just to add, to give you a sense, firstly, you know, we had not raised our retention for 15 years. So, in a way, this is a bit of catch-up to an appropriate level. The second is even, you know, I guess the biggest scenario test we've ever had on mortality, volatility, just COVID, and during that period of time, this block remained profitable over that period of time.

Okay. And then secondly, on your excess capital, you gave out a fairly high number, and I think you're implying that the actual level might even be higher than that as you do your additional analysis. So just wondering to what extent are these numbers vetted by third parties or rating agencies? Because if I think about your... rating your triple B overall, which is good, but it's lower than many of your peers who are single A, despite the fact that your liability profile is actually probably more conservative than many of the other guys. And then it would sort of come down to capital. So just wondering, do you have any external affirmation of your excess capital numbers and whether you've got aspirations to be higher rated or are you comfortable being rated at these levels? And then you'd put the excess capital to work elsewhere.

Yeah, absolutely. Thanks, Jimmy, for the question. So firstly, let me clarify, we're AA minus financial strength rating from S&P. I just want to clarify that because we take great pride in that. Second, absolutely, so look, this is our view of excess capital. It incorporates, so this is RGA's view, this is management's view. It incorporates, of course, our internal economic capital framework. It incorporates a regulatory capital view, bottom-up, from all of our legal entities, jurisdictions that they're in, et cetera. And it includes, of course, rating agency capital perspective. Yes, when I talk about the changes, I mentioned recognizing the value of in-force. Yes, absolutely, there's third-party validation of that. As I mentioned, we've been able in the past to securitize blocks of business and to borrow against that value. So it's not just a theoretical number. It's actually something that we can borrow against. From a rating agency perspective, there are rating agencies that provide credit for value of enforce. The change in the accounting to LDTI positions U.S. companies with cash flow models that enable the calculation of such value of enforce. My understanding is that there are a lot of companies that are putting that ask to rating agencies to to incorporate that as part of the framework.

Let me just add from a business or competitive perspective, as Axel mentioned, AA-, it's been that way, gosh, I should note, but as long as I remember, and I've been at the company 27 years, and from a competitive position, we're definitely on the stronger side relative to our competitors. So there's absolutely no commercial reason we would need to strengthen that rating level.

This concludes our question and answer session. I would like to turn the conference back over to Tony Cheng for any closing remarks.

As always, thank you very much for your questions and your continued interest in RJ. This was a strong quarter continuing a very strong year, further demonstrating our continued momentum and sustainable earnings power. I'd like to once again thank you all, and this concludes our third quarter call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.