Q1 2022 Reinsurance Group of America Inc Earnings Call
Please standby we're about to begin.
Good day and welcome to the reinsurance group of first our America first quarter 'twenty 'twenty. Two result conference call. Today's call is being recorded at this time I would like to introduce Mr. Todd Larson Senior Executive Vice President and Chief Financial Officer.
Anna Manning, President and Chief Executive Officer. Please go ahead Mr. Larson.
Thank you.
Good morning, and welcome to Rga's first quarter 2022 conference call.
With me. This morning on the call is Anna Manning, Rga's, President and Chief Executive Officer, Leslie Barbie, Our Chief Investment Officer, Jonathan Porter, our Chief risk Officer, and Jeff Hopson, the head of our Investor Relations.
We will discuss the first quarter results. After a quick reminder, about forward looking information and non-GAAP financial measures.
Following our prepared remarks, we'll be happy to take your questions.
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.
Our 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 and website for a discussion of these terms and reconciliations to GAAP measures.
And now I'll turn the call over to Anna for her comments.
Thank you Todd.
Good morning, everyone and thank you for joining our call. This morning.
Last night, we reported adjusted operating EPS of 47 cents, which included a COVID-19 impact of $310 million pre tax or $3.48 per share.
We're encouraged by the results this quarter as we reported positive operating earnings despite absorbing a meaningful level of COVID-19 claims.
There are also many bright spots throughout the business and I consider this to be a very good start to the year.
Before getting into the details of the quarter.
Want to emphasize a few key points.
Our core business continues to deliver strong underlying results and that is a testament to the value of our global franchise and is a positive indicator for our future results.
We continue to see good new business activity in our markets.
Organic new business and through enforced transactions and that means we've been adding meaningfully to future earnings.
And we also see encouraging pipelines in both channels.
Now turning to the quarter.
Well the 19 claims in the quarter were concentrated in the U S, Canada and the U K John .
Jonathan will provide further insights on our global COVID-19 claims shortly.
Our Asia traditional business had a very strong quarter, reflecting favorable underwriting results, even after absorbing a moderate amount of COVID-19 claims.
Our GFS business continues to excel and produced results that were above our expectations led by the EMEA region. This quarter.
Our U S group and U S individual health business again reported strong results continuing the trend of very good performance.
The Australia traditional business reported a profit the best results in quite a while and it was profitable across both group and individual businesses.
We remain cautiously optimistic about the Australia business and the ongoing market developments as the industry starts to move towards more sustainable conditions.
Our investment results were favorable and the rise in interest rates and new money rates, if sustained would be a positive tailwind going forward.
Capital deployed into in force and other transactions with $130 million in the quarter.
Nice start to the year and that's already mentioned the pipelines remain active and broad based across risks and geographies.
A factor in our long term success and enforced transactions, just having deep local market expertise.
Bind with long and well established local client relationships.
That is having strong local operations.
That strategy and positioning has been paying off and is further evident this quarter in Asia, where we deployed a large part of the $130 million of capital into transactions.
Our reported premium growth was a strong eight 3% and that is while some countries are still facing some level of pandemic restrictions.
We continue to see good momentum in new business going forward with favorable dynamics for insurance products and many of our traditional markets and strong demand from clients for our reinsurance solutions.
I'm also proud to announce.
Excuse me you'll have to excuse me. This morning is I'm getting over a cold.
I'm also proud to announce that for the 11th consecutive year RGA was ranked number one for global business capabilities by LNG and their 2021 global life and health reinsurance report.
Leveraging our leading capabilities and being a trusted partner as well as a thought leader has allowed us to deliver value to our clients throughout the years a point of personal pride in this organization and a tribute to our employees and our culture of client Centricity.
Looking ahead I see many reasons to be optimistic.
First although uncertainty remains evidence shows that COVID-19 deaths are declining in many countries.
And our value proposition and client partnerships has been strengthened throughout the last two years and our new business success has added material long term earnings.
Third a global platform.
It's a technical expertise and strengths of capabilities and valued client partnerships differentiates us and positions us extremely well to capitalize on the many attractive growth opportunities as we move forward.
Thank you for your interest in RGA and I Hope you all remain safe and well let.
Let me now turn it over to Todd to go over the detailed financial results.
Thanks Anna.
RJ reported pretax adjusted operating income of $59 million for the quarter.
Adjusted operating EPS of <unk> 47 per share.
Which includes a negative COVID-19 impact of $3 48 per share.
While we did experience a meaningful level of COVID-19 claims are underlying non COVID-19 results were strong.
Our trailing 12 months adjusted operating return on equity was two 1%.
Which was net of COVID-19 impacts of eight 9%.
Consolidated reported premiums increased eight 3% in the quarter.
When adjusting for currency effects, and one time items organic growth was a solid six 3% for the quarter.
The effective tax rate for the quarter was higher than the expected range of 23% to 24%.
The items that drove the rate were not large on a dollar basis and we expect this to even out over the course of the year.
Turning to the segment results on slide six and seven of our earnings presentation.
The U S and Latin America traditional segment included approximately $272 million of COVID-19 claim costs too.
260 million of which was in our U S individual mortality business with the majority of the balance in our U S group business.
Our non COVID-19 excess claim costs were minimal consistent with the low level of general population excess mortality data.
Variable investment income was again favorable this quarter.
The U S individual health business performed better than our expectations due to favorable experience overall.
Our group business result was above expectations as a moderate level of COVID-19 claims was offset by favorable non COVID-19 experience.
The U S asset intensive business reported strong results aided by variable investment income.
The Canada traditional segment results reflected unfavorable individual life mortality experienced the impact of COVID-19 claim costs of $20 million.
And quarterly volatility from an above average level of large claims.
Canada Financial solutions segment results reflected favorable COVID-19 related longevity experience.
In the Europe , Middle East and Africa segment.
Yeah.
The traditional business results reflected COVID-19 claim cost of $10 million in total.
With most of that in the U K.
We also saw some non COVID-19, excess large mortality claims in the UK, which we attribute to normal quarterly volatility.
Emea's financial solutions had a very good quarter as business results reflected favorable longevity experience and the impact of the growth of the business.
Turning to our Asia Pacific traditional business Asia results reflected favorable underwriting experience with a moderate COVID-19 impact.
Australia reported a profit for the quarter as both group and individual businesses were profitable.
The Asia financial solutions business results were inline with expectations.
The corporate and other segment reported a pretax adjusted operating loss of $22 million, which is modestly better than our quarterly average run rate.
Moving to investments the.
The non spread portfolio yield for the quarter was 5.29%.
Reflecting strong variable investment income primarily due to the real estate joint venture games.
While hard to predict from a timing perspective.
Variable investment income as a core part of our investment earnings.
Additionally, in the quarter credit impairments were modest and totaled $14 million.
Included 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 billion.
We deployed $130 million into in force and other transactions.
And returned $74 million to shareholders through dividends and share repurchases.
This quarter highlights our balanced approach to capital management, and our ability to absorb the impacts from COVID-19.
Fund organic growth.
Deploy capital into transactions and return capital through share repurchases and dividends.
In summary, we believe our well diversified global platform.
Strong balance sheet and underlying earnings power position us to continue to deliver attractive financial returns to our shareholders over time.
I will now turn the call over to Jonathan Porter, Our Chief risk Officer, who will provide additional comments on our COVID-19 related experience.
Thanks Todd.
Morning, I will be covering our global COVID-19 claims experience Q.
Q1 saw an increase in COVID-19 general population deaths and many of our key markets compared to Q4 2021 reported general population deaths were up 20% in the U S 40% in the U K and almost tripled in Canada.
Despite these increases our estimated COVID-19 claim costs were essentially flat from the previous quarter for these three markets and declined approximately 10% across our global portfolio.
Starting first with the U S. Slide 13 shows U S General population deaths based on CDC reporting.
There are three key observations from the reported data that I wanted to highlight.
First as previously mentioned reported COVID-19 General population deaths were approximately 155000 in Q1 up 20% from Q4.
Although CDC reporting isn't yet complete it is showing very little excess non COVID-19 population thats in the quarter.
We believe this is a result of two offsetting factors there.
The very low levels of influenza deaths, when compared to an average year offset by excess non COVID-19 mortality that we have seen throughout the pandemic and that we believe is likely directly or indirectly related to COVID-19.
And the third observation I would like to share that we've also talked about in prior quarters is with respect to the age composition of general population COVID-19 deaths.
As you see on the chart on the right hand side of the slide the proportion of COVID-19 population data set ages below 65 agents, where there is more life insurance exposure exposure declined to 24% from the Q3 2021 peak of 42%.
Our U S. Individual mortality results are very consistent with what we're seeing in the general population this quarter.
COVID-19 mortality claim costs of $260 million were material given the high level of population deaths.
But we saw a reduction in our claim cost per 10000 general population deaths as compared to Q3 and Q4 of 2021.
This improvement we believe is in part due to the lower proportion of deaths and working ages as shown in the CDC data.
Our excess non COVID-19 mortality experienced in the quarter was minimal again consistent with the absence of excess mortality in the general population.
There were no notable trends and looking at our underlying U S mortality experienced by policy size age or issue year cohorts.
Turning to Canada, and as shown on Slide 15 estimated COVID-19 mortality claims were $20 million or approximately double the prior quarter.
This was a lower increase than observed in the general population deaths.
<unk> Q1 results also include the impact of one very large COVID-19 claims. Excluding this one claim would result in Q1, COVID-19 impacts in Canada being within our rules of thumb range for claim costs per 10000 general population deaths.
In the U K COVID-19 mortality claim costs were also within our expected range based on general population deaths and similar to full year 2020 results after being elevated for much of 2021.
We are maintaining our stated claim costs rules of thumb for the U S U K and Canada.
We are encouraged that Q1 claim cost per 10000 deaths have decreased relative to the impacts observed during the delta waste peaks in Q3 and Q4.
Now more in line with the midpoint of our ranges.
In India, and South Africa, COVID-19 impacts were minimal in the quarter as newly reported claims remain modest and were offset by favorable prior quarter claims development.
So far in Q2, COVID-19 general population deaths in the U S and other key markets have remained at relatively low levels when compared to Q1, and we are cautiously optimistic that future impacts will continue to decline in severity due to higher population immunity from vaccination and prior infection as well as increasing access.
To more effective treatments.
Uncertainty persists, but we remain confident that impacts will be manageable.
Let me now hand, it back to Todd.
Thanks, Jonathan.
That concludes our prepared remarks, so we'd now like to open it up for questions.
Of course, thank you and if he would like to ask a question. Please press star one on your telephone keypad, if youre using a speakerphone. Please pick up your handset and makes your mute function is turned off so that your signal reaches our equipment.
We do ask that you only ask one question and one follow up question.
Feel free to reenter the queue after that.
Again, it is star one if you would like to ask a question.
Our first question from John Barnidge with Piper Sandler. Please go ahead.
Thank you very much.
My question relates to the indirect COVID-19 mortality.
Clearly direct access.
Excess mortality.
Some correlation to COVID-19, but as we move from pandemic endemic how should we be thinking about that direct mortality prospectively. Thank you.
Okay.
Hi, John its John .
Yeah, So I think with respect to to excess mortality I think.
Our belief is that that will likely continue.
Well.
Covid impacts are are meaningful so again, because we believe that there is a connection between this excess mortality and other direct or indirect as you said related to COVID-19.
So as Covid deaths come down we have no expectation that that excess mortality will continue in a material way.
Okay and then.
And my follow up.
On floating rate securities with higher rates can you talk about how much lift from that you saw in the first quarter as well as how from resetting as well as how you think about that prospectively. Thank you.
Leslie would you like to take that sure Hi, This is Leslie yeah. So.
As you know while rates moved meaningfully out the curve, there's a little bit of a lag and actually having that short rates move you attack the fed and other central banks.
Flow through until we have not yet seen the full impact from the floating rate in cash.
But there was some contribution in the first quarter and that will grow out over the years. So it's.
Yeah, if it's meaningful.
And we'll go ahead and move onto our next question Jimmy <unk> with J P. Morgan. Please go ahead.
Hi, Good morning first set of question for Anna just in terms of.
Your views on.
Long term demand for reinsurance and whether that the pandemic will cause any changes in session rates or buying behavior on the part of primary companies I know session rates, obviously had been declining a lot over the past few decades and seemed to have stabilized, but do you think that the pandemic will change.
Demand for reinsurance and are you seeing any indications of a move in one direction or another.
Good morning, Jimmy Thank you for that question.
First let me let me set the stage, we've been fairly active in all our regions and we've seen good wins across the market.
I would start with our facultative business in the U S that seen some nice growth in activity and remember this is the part of our business, where we underwrite the application and keep most of the risk.
And the thing to note. There is that there are fewer reinsurers, who can provide that facultative service so fewer competitors there.
Then we are seeing general underlying demand by consumers go up flowing to our clients and then we're sharing in that world.
And I would also point to many companies are accelerating have accelerated their digital efforts, so creating opportunities for us to support new products for their new customers support digitally based underwriting approaches and increasing use of data.
So I would say that certainly over the last two years not only has this pandemic increase the awareness of the value of insurance, but also our mortality expertise, we're seeing a higher demand from our clients for that expertise and it's paying off and I expect that.
That will continue on post pandemic.
So overall I see we see good growth momentum as we come through the pandemic and beyond.
Okay.
And then.
For Dod.
In terms of the buyback the amount you did this quarter was lower than what you've done the last couple of quarters any reasons for that and then should we assume that you'll get a little bit more proactive with buybacks. If it seems like the pandemic the bidding or do you see other opportunities that are out there that are better and.
That's the reason we've been reluctant to buy back a lot recently.
Hi, Jeremy.
So we were we think we got off to a good start in the first quarter here.
As far as overall capital deployment, especially considering you know that.
Still in a period of heightened Covid claims you know the $130 million deployment into the transactions. We're very pleased with and then returning capital through the $25 million of repurchases and then the $49 million.
Of dividends and I think if you look back at our history, we've had a pretty balanced approach over the longer term on how we manage the capital in combination of deploying it into the enforced transactions that we like the underlying risk and get an appropriate return.
And maintaining the a reasonable dividend and then balancing off with share repurchases and I think that's what we would continue to.
That's what we continue to expect to do is look at it on the on the horizon to see what <unk>.
Potential transaction activity. There is and then it will balance out the overall management of the capital base as well as I think you've seen we're also looking at alternative forms of capital as well as beyond equity in debt from the holding company we did the.
Strategic retro session last year on a block of business that was a good transaction for US and then also issued a surplus note out of the operating company.
Latter part of of last year, and then we continue to look at alternative forms of capital.
In terms of the Langhorne transaction or the next.
Version of Langhorne, So long winded answer to your question I think we will continue to take a balanced approach as we go forward.
And we will go ahead and move on to our next question from.
Andrew what do you mean with credit Suisse. Please go ahead.
Hey, good morning.
Just along the lines that Jimmy was asking Todd do you I mean with $1 billion.
Excess capital is is that where you'd like to kind of.
It's centered would you like to get that number down where would you like your access capital to be as we move forward.
Yes.
Andrew.
So as we go forward and we get back to a more I'll call it more normal.
Times when most of the impact of the pandemic is behind us and we're more confident with the capital generation.
And as we continue to.
Executing on these alternative forms of capital I mentioned, a minute ago, we would be comfortable coming down below that $1 billion of excess capital. Once we are confident that we can replenish the capital fairly well.
Fairly quickly through earnings and alternative alternative for them. So I know we've been at that billion plus level you know throughout the last year or two but we would be comfortable.
So bringing that down in the right situations.
And bringing that down means and like the few hundred million zone or.
Where would that comfort level.
Yeah, you know I don't have an exact number but I would say more probably around if you need me to mention a number seven to 800 million or so.
That's very helpful. Todd and then just again with the capital management.
What's RGA seeing in terms of our pipeline.
Acquisitions same same parallel with Langhorne re.
And.
You know what areas would you like to.
It could be making.
Acquisitions in.
Bye.
Sorry, maybe I can.
Address the pipeline question and then you can you kind of add on.
Jimmy.
You know the pipelines are.
Good for transactions across all our regions.
In Asia, if you recall, we've done several nice deals over the last couple of years and those transactions are have been generating increasing interest from other clients in those markets and we expect to see increasing interest in that part of the world.
And also coming about because of some of the upcoming changes and capital frameworks and many of the countries in that region. Then when we look at at the U S. Yeah U S. Pipelines are good although there is a lot of competition, especially for the asset intensive deals.
In EMEA our scene.
<unk> continuing longevity interest recall last year was a very good year for us we completed.
Some good longevity deal in the Netherlands, and then coming back to the U S. The U.
<unk> has a big PRT market.
Totally aware of that there are significant pension liabilities on corporate balance sheets and they are pretty well funded at this point and then you add in the rise in rates and the volatility in the environment I believe that it's likely increasing sponsors desires to do a deal.
Very very big market I've seen estimates ranging up to a trillion dollars or more in potential demand. That's a really big number and with current market capacity. That's me it was worth of opportunities, but it is an attractive growth market for us.
Is highly competitive and so what you can expect from us and we'll be disciplined we'll pick our spots and I expect us.
To be active and successful over time, so I see I see opportunities right around all our regions across different risks and I think where we're good we're in good shape and you've seen our success over many years.
We've been in this business for multiple decades.
And we will go ahead and move on to our next question from Erik Bass with Autonomous Research. Please go ahead.
Hi, Thank you maybe first just to follow up on that last point about the U S. PRT opportunity would you be interested in doing fully funded deals or just longevity transfers or both.
We do both so and we have done.
You know asset intensive longevity deals.
As well as the swap type longevity deals.
We we are you know we are I'm very interested in both parts of that market.
Thanks, and then I was hoping you could talk about how much benefit you could see from the rise in interest rates over time or maybe asked another way how much of lower rates weighed on your ROE in recent years and our rates now at a level, where they're neutral or even positive going forward.
Yeah. This is Todd I'll start off and then maybe Leslie you can.
Add on as well.
It's good to see.
Rising rates are good for our business than we've.
So we've had this drag, especially in the U S traditional market for quite some time with the reinvestment rates being below the portfolio rate and that's finally starting to get back.
Evelyn and hopefully become a tailwind so we're optimistic about the the rising.
Rate environment that Leslie.
Sure Todd.
So combining sort of that and the other question. The I think the available yield for US now are.
Much more favorable than they have been in this whole low for long period. So this is a welcome change if current.
Market opportunities hold we'd be above the yields on maturing our book yields on maturing securities I know that it's been a long time for most of the industry on that kind of dynamic and you know as we noted it will have to play through but on our cash and floating rate securities were going to continue.
You get a positive the the the move Hasnt, so far been parallel, but we're gonna get continued benefit over the coming quarters.
And we will go ahead and move on to our next question from Ryan Krueger with <unk> W. Please go ahead.
Thanks, Good morning, just to follow up first.
How big is the floating rate portfolio.
So you know I guess, when we look at it net of a floating rate liabilities I'd characterize it as a percent of the total portfolio.
Got it thanks and then.
I had a question on.
Capital generation.
Yes.
Things have been skewed as we've gone through the pandemic.
You'd think about.
Excluding COVID-19 do you have an updated view on kind of normalized capital generation in a given year.
Yeah, you know it'll be lumpy.
Lumpy year to year, but pre pandemic.
We were in that $3 million to $500 million range before.
Appointed into in force transactions.
As Anna mentioned earlier in her comments, we've continued to add nicely to our move.
Block of business over the course of the last couple of years during the pandemic to produce you know.
Future earnings.
We would anticipate as we come out of the pandemic that will get back to those pre pandemic levels, if not even better.
Okay.
And well go ahead and move on to our next question.
Dan Bergman with Jefferies. Please go ahead.
Thanks, Good morning, I guess first I saw you booked a profit in Australia for the I think it was the second straight quarter just wanted to see if you could size. The earnings you saw there this quarter and also any additional color you can give on just the performance in your broad across your blocks in the region and any updates on the business and Mark It would be helpful or is this now in a position where anything.
Australia can produce sustained profitability going forward.
So yeah for Australia, both the Oh, there's two lines primary lines of business as the individual and the group business.
And both of those lines were profitable in the quarter, which was.
Good to see also their system industry dynamics and changes that are taking place that we view will be positive for the performance of the business going forward.
The overall there's still.
Overall profitability for the Australia business was about $4 million pre tax.
So there's still some upside to go as we continue as it continues to improve.
Yes.
Got it that's helpful. And then just on your Covid claims in the quarter is it possible to size the favorable prior quarter development, you saw in India, and South Africa, and kind of what the net COVID-19 impact was in those two countries in the quarter and I guess is there any more granularity on breaking down that bucket of Covid claims outside of your main markets I think it was $18 million in it.
By country it'd be great.
Yes, Dan this is Jonathan so.
So for both India, and South Africa, the level of claims that we actually had as new reported claims in the period was around $12 million or so.
The release of the IV and are from prior quarters favorable development was actually more than that so it was a slight positive contribution to earnings. So that gives you sort of single digit million. So that gives you a sense of sort of those two pieces and as far as that other bucket outside of.
What we pulled out and already talked about.
We have some ideas that we set up in Hong Kong given the spike in claims there. So that's about $10 million of that number and then smaller pieces and in other markets.
And we'll go ahead and move on to our next question from Alex Scott with Goldman Sachs.
First one I have is just back on Asia I'd be interested in some of the things you're doing there to grow it seems like some of it is paying off and improving fundamentals. So I'd just be interested if you can provide any details on some of the underlying drivers from a play.
Sure.
The places you're deploying capital et cetera.
Hi, Alex.
I would point to we've been investing and we've been in that region who are.
Oh coming on to our two decades or so so what we're seeing that.
That we're early in the development of the market. So that we're helping to structure and shape those transactions and that's what's helping to hum, helping our success in that in that region combined with what I said in the prepared remarks, which is really.
Understanding the market understanding the products understanding the underlying risks and that's you know from 20 plus years being on the ground there deep and long lasting relationships, we've built with our clients all of that when you put that all together that's what's that slipped.
Part of the value proposition that we can take to that market and that's what's leading to the success in the deals in that market.
Okay.
Okay.
That's helpful. Thanks, and my follow up is just the one on one of the primaries that already reported mentioned, they're reviewing a mortality study that they received ahead of their actuarial review.
And I know you guys sort of updated things on a more real time basis, rather than doing it all at one time, but I'd just be interested if that's something you've reviewed if theres anything in there that.
Or even outside of that specific study if there's anything you're seeing in the environment that caused you to change any you know.
Expectations for longer term mortality.
Yeah.
Okay.
Yes, maybe I can start.
So at this point, where we haven't changed our expectations for long term mortality improvement our trends.
Obviously, there is a lot of work.
I'll work that we're doing to look at data as it's emerging relative to COVID-19.
Also looking at some of the potential knock on effects of the post COVID-19 environment, So things like delayed delays in diagnosis.
Allergy advances changes in personal behaviour.
No conclusions in that space, yet what I will say too about just experienced cities as we have a pretty robust framework or process in all of our markets, where we look at our assumptions on a very regular basis.
And review, our expectations and to the extent, we see something that would be.
Material, we would reflect that and our best estimates going forward such as more of a general statement I guess overall on how we look at experience I'm not sure of the exact study you're referring to though.
And with that that does.
Hum.
And with that that does conclude our question and answer session I would now like to hand, the call back over to Todd Larson for any additional or closing remarks.
Well. Thank you for joining our earnings call. This morning, and your continued interest and support of RGA.
You very much.
And with that that does conclude today's call. Thank you for your participation you may now disconnect.
Yeah.
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