Q2 2022 Reinsurance Group of America Inc Earnings Call
Good day and welcome to the reinsurance group of America second quarter 2022 results Conference call. Today's call is being recorded at this time I'd like to introduce Mr. Ted Larson Senior Executive Vice President and Chief Financial Officer and.
MS Anna Manning, President and Chief Executive Officer. Please go ahead Mr. Larson.
Thank you.
Good morning, and welcome to Rga's second quarter 2022 conference call.
I'm joined on the call. This morning, with Anna Manning Rga's President and.
Chief Executive Officer Leslie.
Leslie Barbie Chief investment Officer, Jonathan.
Jonathan Porter, Chief Risk Officer, and Jeff Hopson head of Investor Relations.
Now a quick reminder, about forward looking information to GAAP financial measures.
Some of our comments or answers to your questions may contain forward statements.
Actual results could differ materially from expected results.
Please refer to the earnings release, we issued yesterday for 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 discussion of these terms and wreck patients to GAAP measures.
And now I'll turn the call over to <unk> for her comments.
Good morning, and thank you for joining our call. This morning last night, we reported adjusted operating earnings per share of $5 and 78.
This was a record level of earnings for Us and importantly, it included strong contributions from many of our business segments.
In addition growth in organic new business, Let's go ahead, and we had another active quarter for capital deployment into in force and other transactions.
We also saw Covid claims come down substantially.
Underlying non COVID-19 mortality was favorable in most markets.
And while uncertainty remains we expect future COVID-19 impacts to continue to be more limited given the protection provided by vaccination from prior infection and <unk>.
By the continued development of vaccines and treatments.
I think this quarter point too many positive signs of the strength of our underlying business the momentum on new business and the continuing attractive pipeline of growth opportunities.
Turning to some further highlights in the quarter.
The U S and Latin America traditional business had an excellent quarter.
Individual mortality experience was very favorable with both claims frequency and severity better than expected and premium growth reflected solid underlying demand.
The Asia traditional business also had an excellent quarter with favorable underwriting experience across the region.
Very pleased with a range of new business activities.
Notably product development and other client partnership initiatives that will allow us to continue to deliver profitable growth into the future.
Our global financial solutions business also delivered another strong quarter across all of their business segments and geographies.
<unk> business saw measurable GFS earnings growth, reflecting our success over the past couple of years and deploy meaningful amounts of capital into in force block transactions.
Further our capital deployment of $121 million into in force and other transactions post that puts us roughly on pace to match last years record capital deployment levels.
Our pipelines remain active and broad based across risks and geography and momentum is good as we stand here halfway through the year.
Our reported premium growth was four 3% and eight 1% on a constant FX basis and.
And we continue to see favorable dynamics for insurance products and many of our traditional markets and strong demand from clients for our insurance risks and capital reinsurance solutions.
Our investment results were favorable overall, reflecting the benefit of higher new money yields.
Paying higher yields would become a meaningful benefit going forward.
I'm also pleased to report that we increased our quarterly dividend by nearly 10%, reflecting our confidence in the strength as sustainability of Rga's underlying earnings.
We have a great franchise and are very well positioned around the world. We've demonstrated that we can successfully manage through periods of elevated uncertainty and change.
Which makes me confident in our ability to continue to create substantial long term value for our investors.
Thank you for your interest in RGA and I'll hand, it over to Todd to review the financial results.
Thanks Anna.
<unk> reported pre tax adjusted operating income of $505 million for the quarter and adjusted operating earnings per share of $5 78.
Which includes a negative COVID-19 impact of <unk> 12 per share and a foreign currency headwind of <unk> 16 per share.
We consider this to be a very strong quarter a record one as Ana has already mentioned.
If effective tax rate for the quarter was 22, 5%.
Just below the expected range of 23% to 24%.
Turning to the segment results listed on slide six and seven of our earnings presentation.
Ported premiums were up four 3%.
After adjusting for the adverse foreign currency impact of $119 million premiums were up eight 1%.
Because of the significant currency in the quarter I wanted to give you a region by region summary.
Canada traditional reported a premium increase of four 3%.
And then constant currency increased 8%.
EMEA traditional supported a decrease of one 4% BMS.
However in constant currency premiums increased.
9%.
Asia Pacific traditional reported a three 9% increase in premiums and then constant currency were up 10, 2%.
We are pleased to see the good momentum in our business.
Now turning to the segment, earning results.
U S and Latin America traditional segment results were very strong.
Reflecting both favorable non COVID-19 and COVID-19 individual mortality experience.
Jonathan will provide further details in a few minutes.
Variable investment income was in line with expectations, although below the recent run rate.
The U S individual health business had favorable experience overall.
Our group business result was slightly below our expectations, reflecting unfavorable morbidity claim experience offset by positive development on the Covid <unk>.
The U S asset intensive business results reflected favorable overall experience.
The U S capital solutions business reported very strong results.
Due to a treaty recapture fee of approximately $49 million.
The Canada traditional segment results reflected unfavorable individual life mortality experience.
Due to the quarterly volatility from an AD from an above average level of large claims and.
And the impact of COVID-19 claim cost of $1 billion.
Canada Financial solutions segment results were in line with expectations.
In the Europe , Middle East and Africa.
The traditional business results reflected unfavorable UK mortality experience, partially offset by favorable results in other markets.
COVID-19 claim costs were $5 million quarter.
Emea's financial solutions had a good quarter, reflecting favorable longevity experience.
Turning to our Asia Pacific traditional business.
Asia results reflected favorable underwriting experience across the region.
And absorb COVID-19 claim cost of $3 million.
Australia reported a small loss for the quarter due.
Due to a $4 million of COVID-19 claim costs.
The Asia Pacific Financial solutions business results were very strong, primarily reflecting business growth and favorable investment yields.
Actually offset by $4 million of COVID-19 claim cost.
The corporate and other segment reported pretax adjusted operating loss of $5 million better than our quarterly average run rate due to higher net investment income, including the positive impact from limited partnership investments.
Moving onto investments on slides eight through 10 and our earnings presentation.
The non spread portfolio yield for the quarter was $4 six 3%.
Reflecting variable investment income that was in line with expectations as.
As well as the positive impact from higher rates.
And we have achieved in the first two quarters.
Then some benefit to existing floating rate securities.
Where non spread business, our new money rate rose to five 6% in the quarter compared to $3 eight 1% first quarter.
The new money rate benefited from an increase in both risk free rates.
And public credit spreads as well as private investment nation activity.
Additionally, in the quarter credit impairments were modest and totaled $16 million.
We believe the portfolio is well positioned as we move through <unk>.
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 billion.
We deployed $121 million into in force and other transactions.
$49 million to shareholders through dividends.
And as Ana mentioned, we increased the quarterly dividend dividend by nearly 10%.
I will now turn the call over to Jonathan Porter, our chief risk officer to provide some additional comments.
Thanks, Todd Covid.
COVID-19 general population deaths were down this quarter and all of our key markets compared to the first quarter reported general population deaths were down almost 80% in the U S, 40% in Canada and 10% in the UK.
Our claims experience was consistent with these population trends as our estimated COVID-19 claim costs are at their lowest level of the pandemic.
As shown on slide 13 U S. COVID-19 general population deaths were approximately 32000 in the quarter the lowest quarterly level since the start of the pandemic.
And although CDC reporting isn't yet complete there was a negligible level of excess non COVID-19 mortality in the U S General population in Q2.
Finally, we have now seen three consecutive quarters of a declining proportion of general population deaths at ages below 65 ages, where there is more life insurance exposure.
Turning to our U S individual mortality results non COVID-19 experience was favorable due to both a lower frequency of claims and a lower average claim size.
And COVID-19 mortality experience was a net positive in the quarter due to a $40 million of favorable development of prior period IV NR.
Excluding the benefit of this IV in our adjustments COVID-19 claim costs were approximately $9 million per 10000 general population deaths below the low end of our expected range.
We have now seen a decline in our COVID-19 claim cost per 10000 general population deaths in the U S for three consecutive quarters reflective of the trend and the lower proportion of general population deaths and working ages.
To the extent that this trend continues we would expect to be at the lower end of our range in future quarters.
Total COVID-19 claim costs on all other business outside of the U S. Individual mortality was modest and is broken out by reporting segment on slide six.
We are very encouraged by the favorable trends in COVID-19 claim costs that we have seen over the past several quarters.
Although there is still uncertainty on how the pandemic will evolve we believe that future impacts will continue to be manageable.
Evidence suggests that COVID-19 has moved into an endemic phase and we will continue to impact future mortality, although to a much lesser extent has been seen over the past two and a half years.
Population immunity is higher due to vaccinations and significant levels of prior infection, and new vaccines and treatments will continue to improve overtime.
I'll now hand, it back to Todd.
Okay.
Thanks, Jonathan.
I'd like to pivot the discussion that belong to long duration targeted improvements or Ti.
As we move closer to the January one 2023 effective date.
I wanted to discuss some of the high level impacts of the new financial reporting standard.
Please note that the information we've disclosed our estimates and could differ upon final adoption.
<unk> has many positive features relative to current U S GAAP.
And we believe the financial community will come to appreciate the new standard overtime.
We also believe and we will provide further insight into the performance and value of RGA is long term business.
There are five key points that are important to emphasize.
First the economics of Rga's business remain unchanged.
Second reserves reflect best estimate assumptions, which will be updated on a regular basis.
Third that transition.
<unk> can only be increased.
For the transition adjustment to retained earnings.
It will lead to higher future income.
And finally earnings volatility from quarterly claims fluctuations will be reduced.
Now moving to some of the specific impacts to the balance sheet.
As shown on slide 18 of our earnings presentation.
We estimate a decrease to retained earnings at December 31.
2021, a $500 million to $800 million.
There are a few elements and this adjustment.
First <unk>.
<unk> requires an assessment of profitability at a lower level of granularity.
It requires the recognition of loss cohorts will not recognizing the gain position in other cohorts.
It is important to note that we have a limited number of loss recognition cohorts and have substantial margins in the rest of our business that we expect will produce material future earnings.
A second component to this adjustment is the elimination of negative reserves on cohorts, which have had very strong performance.
This primarily relates to our longevity business.
And it is required that these reserves be adjusted to zero at transition.
The decrease in retained earnings from eliminating the negative reserves that transition will flow into future earnings.
And third a small portion of the adjustment relates to market risk benefit.
Additionally.
There are also adjustments the LCI unlocking reserve discount rates.
Currently reserve discount rates are generally locked in at issue, whereas under <unk>.
Discount rates will be reflective of current interest rates and <unk> will be adjusted accordingly.
We estimate that this adjustment will decrease LCI.
We point to the $5 2 billion as of December 31, 2021.
The new reserve liability component of a OCI when.
When combined with the existing unrealized gain or loss investment component will result in <unk> that is both smaller and less volatile.
Moving to earnings emergence.
In the U S. GAAP claims were the main driver of our operating income volatility.
However, under <unk> earnings volatility from claims variability will be significantly muted compared to current financial reporting.
Thus, we expect our income under L DTI to be less volatile absent any reserve assumption changes.
Additionally, we expect to recognize slightly more earnings in early years on new business due to the removal of the provision for adverse deviation and reserves.
To conclude we feel the new standard will provide better insight into Rga's long term performance and.
And along with the new disclosures provide additional transparency to investors.
Thank you for your interest in RGA and we'll now.
I'll open the call for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to lay your signal to reach our equipment.
Also we do ask that you. Please limit yourself to one question and one follow up before reentering the queue. Once again it is star one if you would like to ask a question.
We'll take our first question from Jimmy <unk> with Jpmorgan. Please go ahead.
Hey, good morning, I had a couple of questions. The first one's for Dod on buybacks.
So you had bought back stock in the last quarter, but nothing this quarter and I'm wondering if it has to do with.
Just the uncertainty about COVID-19 still lingering in certain parts of the world or.
Is there something else like in terms of new business opportunities that otherwise in or are you thinking about buyback.
Buybacks and under what conditions could you not do any buybacks for the rest of the year versus maybe do.
Accelerate versus what you've done in the last few quarters.
Yes, Hi, Jimmy.
It does.
Shown on slide 12 in our presentation and as we've discussed in the past and.
Can we follow up what we view as a very balanced approach to capital management over time looking at deployment in the business opportunities in the transactions that we really like.
The shareholder dividend and also share buybacks.
And we will continue that approach in the future, which will include share repurchases.
Ana mentioned, we've got an active pipeline of transactions across.
Various geographies.
And you know, having some dry powder.
This environment will allow us to take advantage of potential opportunities that are out there, but also again, we will continue to view share repurchases as part of our overall balanced approach to capital management.
Okay.
And then maybe for Jonathan or for and there's been a lot of discussion on sort of the whole dynamic of pulling forward of claims and whether that benefits.
<unk> results in the next few years.
Worse is.
It may be lingering effects of Covid, and long COVID-19 and people, maybe ignoring screenings and stuff and which could cause worse mortality ones.
Ed.
Once the pandemic ends in.
In the next few years do you have any strong views on like whether there's going to be a tailwind or.
Headwind to your margins.
Over the next few years because of the pandemic.
Yes. Thanks for the question Jami This is Jonathan.
I'll talk specifically about the couple of items that you mentioned so as far as pull forward goes we've talked about this in prior quarters, we do expect to see some.
It is difficult to directly identify though and hard to draw conclusions based on one quarter of results that we've seen favorable results this quarter.
One thing I will say, though that we did see that.
Our experience in the U S was notably favorable in the older ages older attained ages, which is consistent with what we've seen.
Higher pandemic deaths in the past.
With respect to screening and that potential impact and delayed diagnosis, we're monitoring that nothing material in our cause adapter and CDC data indicate that that's going to change materially.
As we get further away from the period of the delay which is really back in the first year of the pandemic in 2020.
It's also a logical to assume that the screening process will be catching up and there'll be the further you are from that time period, the less likely that there'll be a material impact as well.
So on balance I think it's.
There's going to be pluses and minuses like you say, but.
Specifically for the items that you noted.
We're not seeing anything material at this point.
Okay, and maybe just for Todd on the buyback point.
I understand your comments on the pipeline, but the.
Our pipeline is stronger now than it was maybe two three quarters ago, because you did buy back a little bit of stock earlier this year.
One again.
Share buybacks will continue it will be part of our overall capital Management, Inc.
But we are seeing some.
These potential opportunities as I mentioned earlier across various geographies.
Yes.
Yeah.
Okay. Thanks.
Okay.
Thank you we'll take our next question from Erik bass with Autonomous research.
Hi, Thank you and your LTE Ti disclosure you show a decline in the hit to retained earnings from the transition date.
To year end 'twenty can you just talk about what's driving this is it restating 2021 earnings higher our movements in interest rates and capital markets or something else and should we expect the retained earnings impact to be smaller by the time of adoption at the end of 2022.
Yes part of the reason for the decrease in the transition adjustment if you look at.
January one 2021 compared to the end of the year in 2021.
That decrease in the retained earnings adjustment that is.
Part of that is due to the higher earnings under <unk> the number.
Current gaps.
The way the LDP iwerks, it smooths out some of the elevated claims related to Covid.
Got it.
Two quick follow ups. There. So one if that were to be the case again I guess it would go down and by the end of 2022, but then also I think based on your <unk> comments, Youre, saying DAC amortization is not changing materially in the earnings for blocks with negative reserves go up prospectively I guess should we conclude that overall year.
Earnings are likely to be higher under the new framework.
So we'll see how the year plays out.
How the calculations.
And also we'll be looking at the year end 2022 balance sheet and looking at the various assumptions that go into the.
Reserve calculations.
Thank you we'll take our next question from John Barnidge with Piper Sandler.
Thank you very much.
If we think back maybe last quarter or a quarter ago.
You talked about as you got more comfortable to health landscape, possibly bringing in excess capital below $1 billion.
Given the results are meaningfully better health landscape remains improved.
How should we be thinking about excess capital coming down further.
And maybe within the framework, how you view annual internal excess capital generation.
Thank you.
Yeah, So we would be comfortable going down below the current.
Level of excess capital and as we've talked about in the past as well. We also continue to look at.
Alternative forms of capital that will make sure we can remain flat.
Flexible as possible as well and we did.
The retro session the middle part of last year, we did it.
Surplus note towards the end of the year and we continue to look at other forms of <unk>.
Efficient alternative capital. So, yes, we would be willing to go down below the $1 billion level.
Given our comfort that we are able to generate.
Capital ongoing through our global platform ex the impact of.
Of Covid.
Thank you and then my follow up.
On the investment income.
Can you maybe size the lift from floaters in the quarter, where you maybe see that project.
And then do you have an early look maybe into how you think variable investment income may perform in the third quarter. Thank you for the opportunity to ask questions.
Leslie would you like to take that one sure sure let me jump in on that so on the first part of your question.
So the floating rate additional impact in the quarter on the non spread portion was roughly.
$3 5 million.
On consolidated debt.
More in the ballpark of $75 million.
With respect here variable investment income question.
And the go forward. So as you know we've been in.
Our robust period this quarter was closer to our expectations, but we've just come out of a very robust real estate environment until we expect some less activity in that going forward and.
And also as you know there has been downward pressure on the equity markets year to date, although bounce back particularly in the.
Things like Russell 2000, this quarter, but nonetheless, I would expect some downward pressure on.
Unrealized so I think that.
The platform long term should continue to deliver.
At the current level, but.
I do expect some downward pressure in the second half of the year from the factors I mentioned.
Thank you, we'll now move onto our next question from Ryan Krueger with K B W.
Hi, Thanks, good morning.
First a follow up on the last question on can you talk about interest rates in general maybe give us a sense of.
How much of a drag the low interest rate environment had been on an annual earnings and maybe how to think about the potential upside in total in the current environment.
Yes.
Yes.
Lastly, if you like I'll take the <unk>.
All forward.
If you look at what we might have expected from net investment income coming into this year the kinds of levels that we had at year end.
Broadly short rates investment grade yields all of that or about 200 higher. So if you think about that kind of magnitude.
The next 12 months I would expect something on the order of $70 million additional net investment income.
Versus what we might have expected coming into the year.
That's helpful is there any but that all but that all drop to the bottom line or is there any offset in other areas.
That was a net military floating rate liabilities and other things that was factored into that estimate.
Got it thanks, and then back to <unk> can you I guess, if you look at the retained earnings impact at year end 'twenty. One can you give us a sense of the piece the magnitude within that.
The coke the impacts of the.
Underperforming cohort compared to negative reserves.
Yes at the end of 2021.
And rough order of.
Magnitude.
The market risk benefits is fairly small I would say maybe around 10% of that.
Total.
The negative reserves or <unk>.
Roughly in the neighborhood of maybe.
<unk>, 40% and then the remainder would be the.
Underperforming co.
Cohorts.
Thank you, we'll now move onto our next question from Tracy <unk> with Barclays.
Good morning, I wanted to go back to the discussion of the dampening aside from claims.
Ill be Ti reserve methodology, so I understand and I believe you alluded to it for the dampening effect to work still needs to be some margin following retrospective unlocking and without getting too specific on margin adequacy by line a cohort by cohort if you could share any high level thoughts on where youre seeing a.
Margin with respect to your assumptions for Cynthia MRV.
Emerging experience.
Yes.
So maybe one way to.
Start by answering that maybe we can just maybe clarify the question is that the way the new financial reporting and reserving works. If you are whats called your net premium ratio is above 100% and thats the.
We can refer to those as the underperforming.
Blocks.
Claim volatility will flow through to the bottom line, it's the cohorts with less.
Net premium ratio is below 100% were.
The elevated claims or claims volatility, we will get muted and spread out over the longer period of time on the life of the underlying policy and treaties.
Okay. That's helpful.
We've also mentioned that Covid losses should become more limited I'm wondering if you're considering any threshold to call out unfavorable or favorable mortality in any given quarter as the 12 EPS impact from Coalbed Pelton comparison favorable mortality experience.
So my guess my question for this quarter will it be.
When you think of mortality.
Required.
Backing out that favorable.
Ian.
Are you talking specifically about U S or U S.
Business just to clarify.
The big one that would be helpful.
Yes.
I can give you some detail so so for our U S individual business.
Our estimate is that excluding the impacts of Covid that are favorable experience in the quarter would have been about $70 million favorable.
That's split roughly 50 50 between large claims and non large claims experience.
Basically we saw across.
Across the board improvement.
Whether you look by attained age of IAC here from the prior quarter, So all quite favorable.
Thank you we'll take our next question from Tom Gallagher with Evercore ISI.
Good morning, Jeff.
I assume you don't have very much SQL exposure in.
In light of the Prudential charge, the other day, but just want to confirm that how should we think about.
Whether you do have any exposure to that type.
Type of product structure.
Hi, This is Todd.
We historically have not reinsured the lapsed lapsed guarantee component of those products is just something that we've never gotten.
Comfortable with from a risk for us.
Active.
We do reinsure the mortality component on some of those products, but it's just the mortality component only and change in lapses really don't have a material impact on that.
<unk> of that risk.
So no we don't.
Rec exposure.
Okay. Okay. Thank you.
Yes.
Along with that change in lapse Asian, Pru mentioned, they also changed their ultimate mortality assumptions as part of the charge.
Just curious how youre thinking about ultimate mortality is that something you are.
You've you are considering changing or.
Overall thoughts on that.
Yes, I guess as far as long term mortality goes we're quite bullish on long term mortality improvement for a number of reasons related to medical advancements genomics other technology changes so at this point.
We haven't.
Made a change to our long term expectation just like all our <unk>.
We regularly review mortality.
And look at assumptions and emergence, but nothing right now.
We'll take our next question from Alex Scott with Goldman Sachs.
The first one I had was just on the <unk> growth.
Local currency basis look pretty good.
Can you help us think through the different dynamics that are driving the top line.
Do you foresee for the next year or two on top line growth across the geographies.
Yes, so maybe.
Okay.
Go ahead Todd.
Okay.
I'll provide additional comments.
You commented on the cross.
Okay. Thanks.
We're still comfortable very comfortable with our what we've been talking about in the past.
Mid to high single digit growth on the premium side, we think it continues to be achievable, but really seen.
Good opportunities.
And all of our different.
Regions on new business opportunities product development.
As some higher production in the U S. So really it's really across the across the board.
We're very pleased with.
The opportunities that we're seeing.
Okay.
If I could add some comments to that thank you for the question.
Let me start and I think we have this conversation.
In prior quarters, but there are large life insurance or maybe more broadly protection gaps in all our markets and they are sizable.
And our life insurance clients, they want to offer protection to not only their existing consumers, but new customers.
And they want to offer good simple affordable products and many of our clients are also leaning toward these capital light models.
So where we can play and are playing a big role because as Tom already mentioned, our product development risk transfer capital efficient solutions, we're already doing that we have many of the tools and capabilities that the clients.
And I see that continuing and so for example.
I've spoken about our underwriting expertise about the depth of that and our facultative business is a big differentiator.
Reinsurance can and do provide that service and also has high barriers to entry.
When I when I look at that and then I <unk>.
Layer on our global footprint, where we have very strong local team. They have extensive local market knowledge they have strong local client relationships.
What that does is it enables us to quickly leverage good ideas between markets and I shared in the past, it's the new ideas on being early to new market opportunities and generally come with stronger margins or are they come with exclusive arrangements, where youre not competing against others and then.
Further add on the very large longevity and pension risk opportunities around the globe as well as other enforced block opportunities again, good growth opportunities and I would add because we're talking about some framework changes, there's a lot happening in capital model.
Around the world and financial reporting models around the World just about every country is in the midst to revising their frameworks now.
Now, we think that that will drive further interest in reinsurance both as a risk and efficient capital management tool, perhaps not immediately as you would expect our focus right now is on implementations when people are busy bedding down all these changes.
Once that gets completed then we would expect clients to turn to look for opportunities to optimize portfolios are rebalanced.
That's clearly what we saw through solvency. One example, in Q and RGA, we have a long history of creating new solutions that respond to the new environment. So you can expect us to continue to do that so really all of that to say.
We see.
The growth opportunities in all parts of our business.
Im confident that we will continue.
To deliver on growth in this organization.
Okay.
I had a sort of high level question on margins I mean, if I sort of look at just <unk> growth and where it's come in through the pandemic and how much higher PFS OS are today and I look back at the kind of <unk> margins you were generating before the pandemic.
The right way to think about the potential earnings power here.
Can we get back to as sort of a full PFM margin. The way that you were earning before I mean is there anything structurally different about the business certainly we don't know whats going off of the covered through October estimates around that but in terms of.
We said COVID-19 aside for a minute.
Can you return back to those levels.
And if so is there a good amount of this earnings beat your sustainable.
Yes, I think.
Hi, I apologize time trying to start again.
So I was just going to comment.
Look back to pre pandemic.
Levels I think are pretax.
Operating income was about $1 2 billion or so.
And throughout the last couple of years, you know throughout the pandemic, we've continued to layer on profitable new business deployed.
Third levels of capital into the into the business. So we feel as you mentioned, excluding any potential impacts of Covid, we still have that earnings power and more going forward and then also.
Given the.
Increasing rate environment that should also be a tailwind as well.
Thank you we'll take our next question from Andrew <unk> with Credit Suisse.
Hey, good morning.
To follow up on a few earlier questions with the LPT I one to three 1% to one 3 billion impact at transition on retained earnings.
Could you, possibly give a little color on.
What types of cohorts.
Were impacted there.
Yeah.
By product.
And vintage.
Well.
As you know.
Lost cohorts, where the net premium ratio was above 100%.
Not giving.
And a lot of detail at this point, we will provide more.
Over time, but there is.
Few select pockets.
Around the globe, we are clearly the.
In the U S. The 99 O four block that we've talked about and been pretty transparent about over the last several years as a component of that adjustment.
Got it thank you for that Todd.
Then.
Jonathan.
There was some discussion a little earlier about.
Non COVID-19.
COVID-19 mortality and certainly this quarter it looks like the frequency and severity.
It was quite favorable.
COVID-19.
I think has been influencing non COVID-19 mortality.
The question is assuming.
COVID-19, dissipate and hopefully anticipate.
B the lag period in which we could still see this sort of COVID-19 influenced.
Indirect more tab.
How long do you think like a year from now you will be in the clear.
I won't expect anymore.
Claims given lack of medical checkups and so forth.
Yes, thanks for the question Andrew.
To put a precise timeline is very challenging as I'm sure you can appreciate.
One of the thing that.
But which is encouraging is when we saw negative excess mortality in the U S. This quarter. So again, the CDC data isn't complete yet, but it looks like.
After backing out the impact of Covid, but mortality is actually slightly more favorable than what has been sort of the historic run rate based on the CDC reporting.
So.
That helps I think support our belief that most of the general population excess mortality that we've been seeing over the course of the pandemic is directly or indirectly related to COVID-19.
And therefore, we would expect a significant normalization as COVID-19 deaths come down.
We did talk earlier about the potential for.
Impacts of delayed diagnosis and things and as I said before I think the further we get away from that delayed period, but less of an impact that there'll be.
And of course, there's other pluses and minuses as well in the mix that are not directly COVID-19 related but.
I'd say on balance.
Again, we haven't seen anything sort of materially emerging yet on on.
The delayed diagnosis item.
And then <unk>.
Andrew if I could.
Maybe circle back to your question on the LD Ti.
I commented in my opening comments.
On day, one reserves can only be increased I just want to emphasize that.
The majority of our businesses do have very significant positive.
Margins in those that.
Significantly.
Sure.
Difficultly in excess of any of the retained earnings reserve adjustments. We made at the transition date now we've got a very long term business is a very large block and we have substantial margins on the balance sheet that will be realized going forward.
Thank you we'll take our next question from Michael Let's see.
Hey, guys. Thanks for the question.
I'm just thinking about the potential for COVID-19 to morph into endemic idea and I guess I'm just wondering if you guys have like.
A set number of years of experience or an idea of how long you might it.
It might take you to form the view that you should adjust.
Mortality assumptions.
And then incorporate those in new business or existing business.
Yes. Thanks for the question this is Jonathan.
Again, let me just start by reiterating that we're encouraged by the favorable trends we've seen over the last few quarters and I think consistent with.
Expert views, we do expect to see future variants and ways of infections and hospitalizations, but we also expect that mortality impacts will be much lower than what we've seen in the past for the reasons I mentioned in my prepared remarks, we look at a range of scenarios into the future.
We have been and we will continue to reflect kind of the uncertainty and the expectation in our pricing. So we definitely have made adjustments to prices for new business. We've made adjustments to our approach to underwriting to ensure that we are.
Avoiding anti selection risk relative to Covid and updating based on the newest medical information. So we definitely have been managing the business proactively over the last few years and we'll continue to do so as new data emerges that we need to take into account.
Okay, maybe maybe just following up on existing business have you been adjusting any pricing.
Or.
Is there a certain level of mortality or number of bidders that you might need to see before you do that.
Yes.
Thinking of just broadly changes in mortality any change that causes an impact of mortality I mean to the extent that we see that it is material and longer lasting.
We will review those impacts on a client by client basis and take action using the options we have available.
<unk>. So this is a regular process that we go through.
Quarterly or.
At least probably to take to take an assessment of that.
Again, we have taken some actions in the past various reasons and we will continue to use that as an option in the future.
Thank you, we'll now move onto our next question from Dan Bergman with Jefferies.
Hi, Thanks, Good morning, I guess with the block deal activity pretty elevated for a few quarters now I wanted to see if there's any more color you can provide on the types of blocks are you acquiring whether by size types of risks geography, and also any update or change in the competitive environment, among acquirers and any differences there between what youre seeing on the asset intense.
Side versus more kind of core mortality blocks.
Yes, hi, Thanks for the question, Dan Let me start with the deals in the second quarter. So.
So we won deals in Asia on savings products and the deals there were in part driven by statutory release of.
Of our clients. We also completed U S asset intensive deal on a deferred annuity block.
Worth noting.
During the quarter is that some of these deals were done on an exclusive basis right from the start.
We're working on follow on transactions with some of the clients and potentially other clients working on similar deals now no guarantees, but we are active and I believe we're in good shape to continue to win deals as well as mentioned in my prepared remarks, we've gotten off to a good start so far this year.
Pretty much on pace with last year, which was a record year for us in terms of competition specifically on deals.
Remains very competitive.
I would say, particularly on the U S asset intensive deals.
Competition.
Our experiences competition varies depending on the size of the deal and the underlying risks. So typically we would have less competition on larger and more complex risks and then less competition. The more there is insurance from biometric risks that are in the deal relative to same market risks.
Demand remains overall very good.
We feel we're a good competitor and we're in good shape, we havent good competitive position you've seen us continue to win deals.
And I would say that we win deals for some of the factors in many of the factors I have spoken about in the past so it's not just about price.
That expertise that we've spoken about at all levels of local regional global it surround relationships and deal certainty in our structuring ability and the strength of our counterparty.
Long term commitment to this business and I think if you were to ask our clients.
They select us why they choose to partner with RGA.
Im confident that what Youll hear exactly the same things that you said, great partner deep risk experts creative and innovate.
<unk> oriented.
And we deliver on our promises we execute when we say that we're going to execute so pipelines are very good right across.
We're very active and we continue to win deals.
Got it that's really helpful. Thank you I guess, maybe switching gears a little bit just to follow up on your commentary regarding Alex's question on premium growth.
Now that we're further into the pandemic are you seeing any increased demand from primary life insurance companies.
<unk> their reinsurance coverage given all the recent volatility and pressure on mortality results due to Covid I guess in other words are you seeing or would you expect any uptick in session rates relative to recent historical levels is there any commentary on what youre seeing there would be helpful.
Yes.
Specifically with respect to session right.
Havent seen.
A lot of movement and session rates they've been realm.
Relatively.
Flat, a little up maybe but but remember session is not session rates are not the only lever of growth for us.
So in addition to reinsurance session rates the underlying market growth is.
Is a growth lever for us if you hold session rates flat and then the third lever for us Israeli market share.
Our ability to gain more.
The reinsurance that's taken to market and I'll I'll tie this back to earlier comments around exclusives and bringing ideas to clients.
Our history and our success about being early and leveraging new ideas that translates into exclusive arrangements, where all the reinsurance comes to us. So we're not competing for that business on a pool basis.
My question really is around session rates or something too.
The attention to but they're not the only things that drive our growth.
Thank you, we'll now take a follow up from Ryan Krueger with <unk>.
Hi, Thanks, I just wanted to clarify one thing.
So I guess on earnings posted LPTA.
The removal of pad.
Combined with.
Not much of a change in the pattern for DAC amortization and.
The adjustments you've made to retained earnings it seems like.
So we have to make future GAAP, earning higher for some period of time post <unk>.
Confirm that I'm thinking about that right.
Yeah.
Certainly in the early durations here I think that's right because we know.
Some of the existing pads will start being released and then as I.
You mentioned on new business, we won't be studying up.
Provision for adverse deviation, so the margin should be a little bit higher early on.
Okay. Thanks, I just wanted to clarify.
Yes.
Thank you and we'll take another follow up from Michael <unk> with Citi.
Thanks for the follow up guys just quickly.
<unk> had a slide and don't worry this isn't going to be about their mortality charge.
Turning to slide that.
I would like to point to showing the longevity offset that they have that balances off mortality earnings.
I was just thinking I think this has been at least since I've covered you guys kind of like a characteristic that you've discussed at an investor days in.
In terms of your business model and so we didn't really see it.
<unk> offset mortality during Covid I think longevity was in UK pension area, but didn't really help us much and maybe it's the age delta between your mortality and longevity.
In the U S and such but just wondering if you've thought about or discussed, making some sort of shift to improve that hedge aspect in the future.
Yes.
Okay.
Hi, it's Jonathan maybe I'll start Mike, Yes, So I think if you go back to our Investor day presentation in December .
One of the areas that we see quite a bit of growth opportunity and well it looks like first of all we see growth opportunities everywhere, but we see particularly strong growth opportunities in the.
U S PRT space, which are the longevity risk.
And I think we included a slide in there that showed our distribution of of core biometric risks, you see mortality and morbidity and longevity and we do expect over the course of our five year strategy to grow that portion of longevity and again. The reason for the growth is that Theres a lot of good margin here, there's a lot of growth opportunity, but as an added.
Benefit like you've pointed out we will see better diversification both from an earnings perspective, and also a capital perspective.
Okay. So it's sort of gradual over the over five years.
Yes, yes, I think so I guess I can't off the top of my head I can't remember the exact number it's in the slide but I think our longevity, our proportion of our those biometric risks or longevity is I think it's roughly doubling give or take over the next five years is as it grows at a faster rate than our other businesses are growing.
Alright, Thank you guys.
Okay.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to Mr. Larson for any additional or closing remarks.
Well everyone. Thank you for your continued interest and support and RGA and that concludes our second quarter call. Thank you very much.
Thank you and that does conclude today's conference. We thank you all for your participation.
You may now disconnect.
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Good day and welcome to the reinsurance group of America second quarter 2022 results Conference call. Today's call is being recorded at this time I would like to introduce Mr. Ted Larson Senior Executive Vice President and Chief Financial Officer, and MS. Anna Manning, President and Chief Executive Officer. Please go ahead Mr. Lawrence.
Sure.
Thank you.
Good morning, and welcome to Rga's second quarter 2022 conference call.
Joining on the call. This morning, with Anna Manning, Rga's, President and Chief Executive Officer.
Leslie Barbie Chief investment Officer John .
Jonathan Porter, Chief Risk Officer, and Jeff Hopson head of Investor Relations.
Now a quick reminder, about forward looking information GAAP financial measures.
Some of our comments or answers to your questions may contain forward statements.
Actual results could differ materially from expected results.
Please refer to the earnings release, we issued yesterday for 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 wreck patients to GAAP measures.
And now I'll turn the call over to <unk> for her comments.
Good morning, and thank you for joining our call. This morning last night, we reported adjusted operating earnings per share of $5 78.
This was a record level of earnings for Us and importantly, it included strong contributions from many of our business segments.
In addition growth in organic new business, Let's go ahead, and we had another active quarter for capital deployment into in force and other transactions.
We also saw Covid claims come down substantially.
Underlying non COVID-19 mortality was favorable in most markets.
And while uncertainty remains we expect future COVID-19 impact to continue to be more limited given the protection provided by vaccination from prior infection and by the continued development of new vaccines and treatments.
I think this quarter point too many positive signs of the strength of our underlying business.
Rents on new business, and the continuing attractive pipeline of growth opportunities.
Turning to some further highlights in the quarter.
The U S and Latin America traditional business had an excellent quarter.
Individual mortality experience was very favorable with both claims frequency and severity better than expected and premium growth reflected solid underlying demand.
What was the traditional business also had an excellent quarter with favorable underwriting experience across the region and I'm very pleased with the range of new business activities.
<unk> product development and other client partnership initiatives that will allow us to continue to deliver profitable growth into the future.
Our global financial solutions business also delivered another strong quarter across all their business segments and geographies.
The Asia business saw measurable GFS earnings growth, reflecting our success over the past couple of years and deploy meaningful amounts of capital into in force block transactions.
Further our capital deployment of $121 million into in force and other transactions plus that puts us roughly on pace to match last years record capital deployment levels.
Our pipelines remain active and broad based across risks and geography and momentum is good as we stand here halfway through the year.
Our reported premium growth was four 3% and eight 1% on a constant FX basis and.
And we continue to see favorable dynamics for insurance products and many of our traditional markets and strong demand from clients for our insurance risks and capital reinsurance solutions.
Our investment results were favorable overall, reflecting the benefit of higher new money yields.
<unk> higher yields would become a meaningful benefit going forward.
I'm also pleased to report that we increased our quarterly dividend by nearly 10%, reflecting our confidence in the strength and sustainability of Rga's underlying earnings.
We have a great franchise and are very well positioned around the world. We've demonstrated that we can successfully manage through periods of elevated uncertainty and change.
Makes me confident in our ability to continue to create substantial long term value for our investors.
Thank you for your interest in RGA and I'll hand, it over to Todd to review the financial results.
Thanks Anna.
<unk> reported pre tax adjusted operating income of $505 million for the quarter and adjusted operating earnings per share of $5 78.
Which includes a negative COVID-19 impact of <unk> 12 per share.
The foreign currency headwind of <unk> 16 per share.
We consider this to be a very strong quarter a record one as Ana has already mentioned.
If <unk> tax rate for the quarter was 22, 5%.
Just below the expected range of 23% to 24%.
Turning to the segment results listed on slide six and seven of our earnings presentation reported premiums were up four 3%.
After adjusting for the adverse foreign currency impact of $119 million premiums were up eight 1%.
Because of the significant currency.
Quarter I wanted to give you a region by region summary.
Canada traditional reported a premium increase of four 3% in constant currency increased 8%.
EMEA traditional reported a decrease of one 4% at BMS.
However in constant currency premiums increased.
9%.
Asia Pacific traditional reported a three 9% increase in premiums and in constant currency were up 10, 2%.
We are pleased to see the good momentum in our business.
Now turning to the segment, earning results.
U S and Latin America traditional segment results were very strong.
Reflecting both favorable non COVID-19 and COVID-19 individual mortality experience.
Jonathan will provide further details in a few minutes.
Variable investment income was in line with expectations, although below the recent run rate.
The U S individual health business had favorable experience overall.
Our group business result was slightly below our expectations, reflecting unfavorable morbidity claim experience offset by positive development on the Covid <unk>.
The U S asset intensive business results reflected favorable overall experience.
The U S capital solutions business reported very strong results.
Due to a treaty recapture fee of approximately $49 million.
The Canada traditional segment results reflected unfavorable individual life mortality experience.
Due to the quarterly volatility from an AD from an above average level of large claims and.
And the impact of COVID-19 claim cost of.
$1 billion.
Canada Financial solutions segment results were in line with expectations.
In the Europe , Middle East and Africa.
The traditional business results reflected unfavorable UK mortality experience, partially offset by favorable results in other markets.
COVID-19 claim costs were $5 million quarter.
Emea's financial solutions had a good quarter, reflecting favorable longevity experience.
Turning to our Asia Pacific traditional business.
Asia results reflected favorable underwriting experience across the region.
And absorbed COVID-19 claim cost of $3 million.
Australia reported a small loss for the quarter.
Due to a $4 million of COVID-19 claim costs.
The Asia Pacific Financial solutions business results were very strong, primarily reflecting business growth and favorable investment yields.
Partially offset by $4 million of COVID-19 claim cost.
The corporate and other segment reported pretax adjusted operating loss of $5 million.
Better than our quarterly average run rate due to higher net investment income, including the positive impact from limited partnership investments.
Moving onto investments on slides eight through 10 and our earnings presentation.
The non spread portfolio yield for the quarter was $4 six 3%.
Reflecting variable investment income that was in line with expectations as well as the positive impact from higher.
<unk>.
And we have achieved in the first two quarters and then some benefit to existing floating rate securities.
Where non spread business, our new money rate rose to five 6% in the quarter compared to $3 eight 1% first quarter.
The new money rate benefited from an increase in both risk free rates.
And public credit spreads as well as private investment nation activity.
Additionally, in the quarter credit impairments were modest and totaled $16 million.
We believe the portfolio is well positioned as we move through.
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 billion.
We deployed $121 million into in force and other transactions.
$49 million to shareholders through dividends.
And as Ana mentioned, we increased the quarterly dividend dividend by nearly 10%.
I will now turn the call over to Jonathan Porter, our chief risk officer to provide some additional comments.
Thanks Todd.
<unk> 19 general population deaths were down this quarter and all of our key markets compared to the first quarter reported general population deaths were down almost 80% in the U S, 40% in Canada and 10% in the UK.
Our claims experience was consistent with these population trends as our estimated COVID-19 claim costs are at their lowest level of the pandemic.
As shown on slide 13 U S. COVID-19 general population deaths were approximately 32000 in the quarter the lowest quarterly level since the start of the pandemic.
Although CDC reporting isn't yet complete there was a negligible level of excess non COVID-19 mortality in the U S General population in Q2.
Finally, we have now seen three consecutive quarters of a declining proportion of general population deaths at ages below 65 ages, where there is more life insurance exposure.
Turning to our U S individual mortality results non COVID-19 experience was favorable due to both a lower frequency of claims and a lower average claim size.
And COVID-19 mortality experience was a net positive in the quarter due to a $40 million of favorable development of prior period IV NR.
Excluding the benefit of this IV in our adjustments COVID-19 claim costs were approximately $9 million per 10000 general population deaths below the low end of our expected range.
We have now seen a decline in our COVID-19 claim cost per 10000 general population deaths in the U S for three consecutive quarters reflective of the trend and the lower proportion of general population deaths and working ages.
To the extent that this trend continues we would expect to be at the lower end of our range in future quarters.
Total COVID-19 claim costs on all other business outside of the U S. Individual mortality was modest and is broken out by reporting segment on slide six.
We are very encouraged by the favorable trends in COVID-19 claim costs that we have seen over the past several quarters.
Although there is still uncertainty on how the pandemic will evolve we believe that future impacts will continue to be manageable.
Evidence suggests that COVID-19 has moved into an endemic phase and will continue to impact future mortality, although to a much lesser extent has been seen over the past two and a half years popular.
Population immunity is higher due to vaccinations and significant levels of prior infection, and new vaccines and treatments will continue to improve overtime.
I'll now hand, it back to Todd.
Okay.
Thanks, Jonathan.
I'd like to pivot the discussion of the long too long duration targeted improvements or Ti.
As we move closer to the January one 2023 effective date.
I want to discuss some of the high level impacts of the new financial reporting standard.
Please note that the information, we disclosed our estimates and could differ upon final adoption.
<unk> has many positive features relative to current U S GAAP.
And we believe the financial community will come to appreciate the new standard overtime.
We also believe and we will provide further insight into the performance and value of Rga's long term business.
There are five key points that are important to emphasize.
First the economics of Rga's business remain unchanged.
Second reserves reflect best estimate assumptions, which will be updated on a regular basis.
Third that transition.
<unk> can only be increased.
For the transition adjustment to retained earnings.
It will lead to higher future income.
And finally earnings volatility from quarterly claims fluctuations will be reduced.
Now moving to some of the specific impacts to the balance sheet.
As shown on slide 18 of our earnings presentation.
We estimate a decrease to retained earnings at December 31.
2021, a $500 million to $800 million.
There are a few elements and this adjustment.
First <unk>.
<unk> requires necessitate a profitability at a lower level of granularity.
It requires the recognition of loss cohorts, while not recognizing the gain position in other cohorts.
It is important to note that we have a limited number of loss recognition cohorts and have substantial margins in the rest of our business that we expect will produce material future earnings.
A second component to this adjustment is the elimination of negative reserves on cohorts, which have had very strong performance.
This primarily relates to our longevity business and it is required that these reserves be adjusted to zero at transition.
The decrease in retained earnings from eliminating the negative reserves that transition will flow into future earnings.
And third a small portion of the adjustment relates to market risk benefit.
Additionally, there are also adjustments the LCI unlocking reserve discount rates.
Currently reserve discount rates are generally locked in at issue, whereas under LD Ti reserve discount rates will be reflective of current interest rates and ALC will be adjusted accordingly.
We estimate that this adjustment will decrease LCI.
Three point to the $5 2 billion as of December 31, 2021.
The new reserve liability component of LCI.
When combined with the existing unrealized gain or loss investment component.
Our results in <unk> that is both smaller and less volatile.
Moving to earnings emergence.
U S. GAAP claims were the main driver of our operating income volatility.
However, under <unk> earnings volatility from claims variability will be significantly muted compared to current financial reporting.
Thus, we expect our income under L DTI to be less volatile.
Absent any reserve assumption changes.
Additionally, we expect to recognize slightly more earnings in early years on new business due to the removal of the provision for adverse deviation and reserves.
To conclude we feel the new standard will provide better insight into Rga's long term performance.
And along with the new disclosures to provide additional transparency to investors.
Thank you for your interest in RGA and we'll now.
I'll open the call for questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to let your signal to reach our equipment also we do ask that you. Please limit yourself to one question and one follow up before reentering the queue. Once again it is star one if you would like to ask a question.
<unk>.
We'll take our first question from Jimmy <unk> with Jpmorgan. Please go ahead.
Hey, good morning, I had a couple of questions. The first one's for Dod on buybacks.
So you had bought back stock in the last quarter, but nothing this quarter and I'm wondering if it has to do with.
Just the uncertainty about COVID-19 still lingering in certain parts of the world or.
Is there something else like in terms of new business opportunities or otherwise or are you thinking about buyback.
Buybacks and under what conditions could you not do any buybacks for the rest of the year versus maybe two.
Accelerate versus what you've done in the last few quarters.
Yes, Hi, Jimmy.
Alright.
Shown on slide 12 in our presentation and as we've discussed in the past and.
Can we follow up what we view as a very balanced approach to capital management over time looking at deployment in the business opportunities in the transactions that we really like.
The shareholder dividend and also share buybacks.
And we will continue that approach in the future, which will include share repurchases.
Ana mentioned, we've got an active pipeline of transactions across.
Various geographies.
And you know, having some dry powder.
This environment will allow us to take advantage of potential opportunities that are out there, but also gamble continue to view share repurchases as part of our overall balanced approach to capital management.
Okay.
And then maybe for Jonathan or for and there's been a lot of discussion on sort of the whole dynamic of pulling forward of claims and whether that benefits.
Your results in the next few years.
Worse is.
It may be lingering effects of Covid, and long COVID-19 and people, maybe ignoring screenings and stuff and which could cause worse mortality ones.
Ed.
Once the pandemic ends and.
In the next few years do you have any strong views on like whether there's going to be a tailwind or.
Headwind to your margins.
Over the next few years because of the pandemic.
Yes. Thanks for the question Jami This is Jonathan.
I'll talk specifically about a couple of items that you mentioned so as far as pull forward goes we've talked about this in prior quarters, we do expect to see some.
It is difficult to directly identify though and hard to draw conclusions based on one quarter of results like we've seen favorable results this quarter.
One thing I will say, though that we did see that.
Our experience in the U S was notably favorable in the older ages older attained ages, which is consistent with what we've seen.
Higher pandemic deaths in the past.
With respect to screening and that potential impact and delayed diagnosis, we're monitoring that nothing material in our cause adapter and CDC data yet indicates that that's going to change materially.
As we get further away from the period of the delay which was really back in the first year of the pandemic in 2020.
It's also a logical to assume that the screening process will be catching up and there'll be the further you are from that time period, the less likely that there'll be a material impact as well.
So on balance I think it's.
There's going to be pluses and minuses like you say, but.
Specifically for the items that you noted.
And I've seen anything material at this point.
Okay, and maybe just for Todd on the buyback point.
I understand your comments on the pipeline, but.
The pipeline is stronger now than it was maybe two three quarters ago, because you did buy back a little bit of stock earlier this year.
One again.
Share buybacks will continue it will be part of our overall capital management.
But we are seeing some.
These potential opportunities as I mentioned earlier across various geographies.
Okay.
Okay. Thanks.
Okay.
Thank you we'll take our next question from Erik bass with Autonomous research.
Hi, Thank you and your LTE Ti disclosure you show a decline in the hit to retained earnings from the transition date.
To year end 'twenty can you just talk about what's driving this is it restating 2021 earnings higher or movements in interest rates and capital markets or something else and should we expect the retained earnings impact to be smaller by the time of adoption at the end of 2022.
Yes part of the reason for the decrease in the transition adjustment if you look at.
January one 2021 compared to the end of the year in 2021.
That decrease in the retained earnings adjustment that is.
Part of that is due to the higher earnings under <unk> the number.
Current gaps.
The way the LDP iwerks, it smooths out some of the elevated claims related to Covid.
Got it.
Two just quick follow ups. There. So one if that were to be the case again I guess it would go down by the end of 2022, but then also I think based on your <unk> comments, Youre, saying DAC amortization is not changing materially in the earnings for blocks with negative reserves should go up prospectively I guess should we conclude that overall year.
Earnings are likely to be higher under the new framework.
Yeah, we'll see how the year plays out.
Now the calculations.
And also we'll be looking at the year end 2022 balance sheet and looking at the various assumptions that go into the.
Reserve calculations.
Thank you we'll take our next question from John Barnidge with Piper Sandler.
Thank you very much.
If we think back maybe last quarter or a quarter ago.
You talked about as you got more comfortable to health landscape, possibly bringing in excess capital below $1 billion.
Given the results are meaningfully better health landscape remains improved.
How should we be thinking about excess capital coming down further in.
And maybe within the framework, how do you view annual internal excess capital generation.
Thank you.
Yeah. So.
Would be comfortable going down below the current.
The level of excess capital and as we.
Talk about in the past as well. We also continue to look at alternative forms of capital that will make sure we can remain.
Lapsable as possible as well and we did.
The retro session. The middle part of last year, we did have a surplus note towards the end of the year and we continue to look at other forms of efficient alternative capital. So yes, we would be willing to go down below the $1 billion level.
Given our comfort that we are able to generate.
Capital ongoing through our global <unk>.
That form ex the impact of.
Of Covid.
Thank you and then my follow up.
On the investment income.
Can you maybe size the lift from floaters in the quarter, where you maybe see that project.
And then do you have an early look maybe into how you think variable investment income they performed in the third quarter. Thank you for the opportunity to ask questions.
Leslie would you like to take that one sure sure let me jump in on that so on the first part of your question.
So the floating rate additional impact in the quarter on the non spread portion was roughly.
$3 5 million.
On consolidated debt.
More in the ballpark of $75 million.
With respect here variable investment income question.
And the go forward so.
As you know we've been in.
Our robust period this quarter was closer to our expectations, but we've just come out of a very robust real estate environment. So we expect some less activity in that going forward and.
And also as you know there has been downward pressure on the equity markets year to date, although bounce back particularly in the.
Yes.
Things like Russell 2000, this quarter, but nonetheless, I would expect some downward pressure on.
Unrealized so I think that.
The platform long term should continue to deliver.
At the current level, but.
I do expect some downward pressure in the second half of the year from the factors I mentioned.
Thank you, we'll now move on to our next question from Ryan Krueger with K B W.
Hi, Thanks, good morning.
First a follow up on the last question on can you talk about interest rates in general maybe give us a sense of.
How much of a drag the low interest rate environment had been on the annual earnings and maybe how to think about the potential upside in total in the current environment.
Yeah.
<unk>.
Lastly, if you'd like I'll take the go forward.
Okay.
If you look at what we might have expected from net investment income coming into this year the kinds of levels that we had at year end.
Broadly short rates investment grade yields all of that or.
200, higher so if you think about that kind of magnitude.
The next 12 months I would expect something on the order of $70 million additional net investment income.
Versus what we might have expected coming into the year.
That's helpful is there any but that all that all drop to the bottom line or is there any offset in other areas.
That was a net <unk> floating rate liabilities and other things that factored into that estimate.
Got it thanks, and then back to <unk> can you I guess.
You look at the retained earnings impact at year end 'twenty. One can you give us a sense of the magnitude within that.
The impact of.
The underperforming cohorts compared to negative reserves.
Yes at the end of 2021.
And rough order of.
Magnitude.
The market must benefits is fairly small I would say maybe around 10% of that.
Total.
The negative reserves or on the <unk>.
Roughly in the neighborhood of maybe.
<unk>, 40% and then the remainder would be the.
Underperforming co.
Cohorts.
Thank you, we'll now move on to our next question from Tracy <unk> with Barclays.
Good morning, I wanted to go back to the discussion of the dampening effect from claims on Dr. Avi Ti reserve methodology, So I understand and I believe you alluded to it for the dampening effect to work still needs to be some margin following retrospective unlocking and without getting too specific on.
Margin adequacy by line cohort by cohort if you could share any high level thoughts on where you are seeing a margin with respect to your assumptions for the RMR rethink emerging experience.
Yes.
So maybe one way to.
Start by answering that maybe we can then just maybe clarify.
And is that the way.
Hey.
<unk> financial reporting and reserving works. If you are whats called your net premium ratio was above 100% and thats the.
We can refer to those as the underperforming blue.
Blocks.
Claim volatility will flow through to the bottom line, it's the cohorts with less.
Net premium ratio is below 100% were.
The elevated claims of the claims volatility, we will get muted and spread out over the longer period of time on the life of the underlying policy and treaties.
Okay. That's helpful.
Paul.
You've also mentioned that Covid losses should become more limited I'm wondering if you're considering any threshold to call out unfavorable or favorable mortality in any given quarter.
The 12 EPS impact from Covid Pelton comparison favorable mortality experience.
So my guess my question for this quarter will it be when you think of mortality.
Backing out that favorable.
Experian.
Are you talking specifically about U S or U S.
<unk>.
To clarify.
Did they go on that would be helpful. Yes. So I can give you some detail so so for our U S individual business.
Our estimate is that excluding the impacts of Covid that are favorable experience in the quarter would have been about $70 million favorable.
And that's split roughly 50 50 between large claims and non large claims experience.
Basically we saw.
Cross the board improvement, whether you look by attained age of IAC here from the prior quarter so quite.
Quite favorable.
Thank you we'll take our next question from Tom Gallagher with Evercore ISI.
Sure.
Good morning, Jeff.
I assume you don't have very much SQL exposure.
In light of the Prudential charged the other day, but just want to confirm that how should we think about.
Whether you do have any exposure to that type.
Type of product structure.
Hi, This is Todd.
We historically have not reinsured to lapse that lapse guarantee component of those products is just something that we've never gotten.
Comfortable with from a risk.
Active.
We do reinsure the mortality component on some of those products, but it's just the mortality component only and change in lapses really don't have a material impact on that.
<unk> of that risk.
So no we don't.
Rec exposure.
Okay. Okay. Thank you.
Yes.
Along with that change in lapse Asian, Pru mentioned, they also changed their ultimate mortality assumptions as part of the charge.
Just curious how youre thinking about ultimate mortality is that something you are.
You've you are considering changing or.
Overall thoughts on that.
Yes.
Yes, I guess as far as long term mortality goes we're quite bullish on long term mortality improvement for a number of reasons related to medical advancements genomics other technology changes so at this point.
We haven't.
Made a change to our long term expectation just like all of our business we regularly review mortality.
And look at assumptions and emergence, but nothing right now.
We'll take our next question from Alex Scott with Goldman Sachs.
The first one I had was just on the <unk> growth.
Local currency basis look pretty good.
Can you help us think through the different dynamics that are driving the top line.
What you foresee for the next year or two on top line growth across the geographies.
Yes, so maybe.
Okay.
Go ahead Todd.
Okay.
I'll provide additional comments.
You commented on the cross.
Okay. Thanks.
We're still comfortable very comfortable with our what we've been talking about in the past.
Mid to high single digit growth on the premium side, we think continues to be achievable, but really seen.
Good opportunities.
And all of our different.
Regions on new business opportunities product development.
Asia, some higher production in the U S. So really it's really across the across the board.
We're very pleased with.
The opportunities that we're seeing.
Okay.
If I could add some comments to that and thank you for the question.
Let me start and I think we have this conversation.
In prior quarters, but there are large life insurance or maybe more broadly protection gaps in all our markets and they are sizable.
And our life insurance clients, they want to offer protection to not only their existing consumers, but new customers.
And they want to offer good simple affordable products and many of our clients are also leaning towards these capital light models.
So that we can play and are playing a big role because as Tom already mentioned, our product development risk transfer capital efficient solutions, we're already doing that we have many of the tools and capabilities that the clients.
And I see that continuing and so for example.
I've spoken about our underwriting expertise about the depth of that and our facultative business is a big differentiator.
Reinsurance can and do provide that service and also has high barriers to entry.
When I when I look at that and then I <unk>.
Layer on our global footprint, where we have very strong local team. They have extensive local market knowledge they have strong local client relationships.
What that does is it enables us to quickly leverage good ideas between markets and I shared in the past. It's the new ideas are being early to market opportunities and generally come with stronger margins or are they come with exclusive arrangements, where youre not competing against others and then.
Further add on the very large longevity and pension risk opportunities around the globe as well as other enforced block opportunities again, good growth opportunities and I would add because we're talking about some framework changes, there's a lot happening in capital model.
Around the world and financial reporting models around the world just about every countries and limits for revising their frameworks now.
We think that that will drive further interest in reinsurance both as a risk and efficient capital management tool, perhaps not immediately as you would expect our focus right now is on implementations where people are busy betting down all these changes.
Once that gets completed then we would expect clients to turn to look for opportunities to optimize portfolios are rebalanced.
That's clearly what we saw through solvency one in solvency too and RGA, we have a long history of creating new solutions that respond to the new environment. So you can expect us to continue to do that so really all of that to say.
We see.
<unk> have growth opportunities in all parts of our business.
Confident that will continue.
To deliver on growth in this organization.
I had a sort of high level question on margins I mean, if I sort of look at just <unk> growth and where it's come in through the pandemic and how much higher <unk> are today and I look back at the kind of <unk> margins you were generating before the pan.
I mean is that the right way to think about the potential earnings power here.
Can we get back to as sort of a full pf margin. The way that you were earning before I mean is there anything structurally different about the business certainly we don't know whats going over the Covid through October estimates around that but in terms of.
If reset COVID-19 aside for a minute.
Can you return back to those levels.
And if so is there a good amount of this earnings beat your sustainable.
Yes.
Thanks.
Hi, I apologize time trying to start again.
So I was just going to comment.
Look back to pre pandemic.
Levels I think are pretax.
Operating income was about $1 2 billion or so.
And throughout the last couple of years, you know throughout the pandemic. We've continued to layer on profitable new business deployed record levels of capital into the into the business. So we feel as you mentioned, excluding any potential impacts of Covid, we still have that earnings power and more.
Going forward and then also.
Given the <unk>.
Increasing rate environment that should also be a tailwind as well.
Thank you we'll take our next question from Andrew <unk> with Credit Suisse.
Hey, good morning, we'd like to follow up on a few earlier questions with the LTE Ti one to three one to one 3 billion impact at transition on retained earnings.
Could you, possibly give a little color on.
What types of cohorts.
Were impacted there.
Yeah.
By product.
And vintage.
But.
As you know.
<unk>.
Lost cohorts, where the net premium ratio was above 100%.
Not giving.
And a lot of detail at this point, we will provide more.
Over time, but.
Few select pockets.
Around the globe clearly the.
In the U S. The 99 O four block that we've talked about and been pretty transparent about over the last several years as a component of that adjustment.
Got it thank you for that.
Then.
Jonathan.
There was some discussion a little earlier about.
Non COVID-19 more.
Non COVID-19 mortality.
Certainly this quarter it looks like the frequency and severity was quite favorable.
COVID-19.
I think has been influencing non COVID-19 mortality.
Question is assuming.
COVID-19, dissipate and hopefully anticipate what might be the lag period in which we could still see this sort of COVID-19 influenced.
Indirect more tab.
How long do you think like a year from now you will be in the clear and good.
I won't expect anymore.
Claims given lack of medical checkups and so forth.
Yes, thanks for the question Andrew.
To put a precise timeline is very challenging.
You can appreciate.
One of the thing that.
That which is encouraging is when we saw negative excess mortality in the U S. This quarter. So again, the CDC data isn't complete yet, but it looks like.
After backing out the impact of Covid, but mortality is actually slightly more favorable than what has been sort of the historic run rate based on the CDC reporting.
So.
That helps I think support our belief that most of the general population excess mortality that we've been seeing over the course of the pandemic is directly or indirectly related to COVID-19.
And therefore, we would expect a significant normalization as COVID-19 deaths come down.
We did talk earlier about the potential for.
Impacts of delayed diagnosis and things and as I said before I think the further we get away from that delayed period, but less of an impact that there'll be.
And of course, there's other pluses and minuses as well in the mix that are not directly COVID-19 related but I.
I'd say on balance.
Again, we haven't seen anything sort of materially emerging yet on.
On the delayed diagnosis item.
And then thank you.
Andrew if I could.
Can you circle back.
Your question on the LD Ti.
Commented in my opening comments.
On day, one reserves can only be increased I just want to emphasize that.
The majority of our businesses do have very significant positive mark.
Margins in those that.
Significantly at all.
Significantly in excess of any of the retained earnings reserve adjustments, we made at the transition date.
<unk> got a very long term business is a very large block and we have substantial margins on the balance sheet that will be realized going forward.
Thank you we'll take our next question from Mike Ward with C.
Hey, guys. Thanks for the question.
I'm just thinking about the potential for COVID-19 to morph into an endemic idea and I guess I'm just wondering if you guys have like.
A set number of years of experience or an idea of how long you might.
It might take you to form the view that you should adjust.
Mortality assumptions.
And then incorporate those in new business or existing business.
Yes. Thanks for the question this is Jonathan.
Again, let me just start by reiterating that we're encouraged by the favorable trends we've seen over the last few quarters and I think consistent with.
Expert views, we do expect to see future variants and ways of infections and hospitalizations, but we also expect that mortality impacts will be much lower than what we've seen in the past for the reasons I mentioned in my prepared remarks, we look at a range of scenarios into the future.
We have been and we will continue to reflect kind of the uncertainty in the expectation.
In our pricing. So we definitely have made adjustments to prices for new business, we've made adjustments to our approach to underwriting to ensure that we are.
Avoiding anti selection risk relative to Covid and updating based on the newest medical information. So we definitely have been managing the business proactively over the last few years and we'll continue to do so as new data emerges that we need to take into account.
Okay, and maybe maybe just following up on existing business have you been adjusting any pricing.
Or.
Is there a certain level of mortality or number of bidders that you might need to see before you do that.
Yes, I think.
Thinking of just broadly changes in mortality any change that causes an impact of mortality I mean to the extent that we see that it is material and longer lasting.
We'll review those impacts on a client by client basis and take action using the options we have available.
<unk>. So this is a regular process that we go through.
Quarterly or.
At least probably to take a to take an assessment of that.
Again, we have taken some actions in the past various reasons and we will continue to use that as an option in the future.
Thank you, we'll now move on to our next question from Dan Bergman with Jefferies.
Hi, Thanks, Good morning, I guess with the block deal activity pretty elevated for a few quarters now I wanted to see if there's any more color you can provide on the types of blocks, you're acquiring whether by size types of risks geography, and also any update or change in the competitive environment, among acquirers and any differences there between what youre seeing on the asset.
Hence a side versus more kind of core mortality blocks.
Yes, hi, Thanks for the question, Dan Let me start with the deals in the second quarter.
So we won deals in Asia on savings products and the deals there were in part driven by statutory release.
Of our clients. We also completed a U S asset intensive deal on a deferred annuity block.
Worth noting.
During the quarter is that some of these deals were done on an exclusive basis right from the start.
And we're working on follow on transactions with some of the clients and potentially other clients working on similar deals now no guarantees, but we are active and I believe we're in good shape to continue to win deals as well as mentioned in my prepared remarks, we've gotten off to a good start so far this year.
We're pretty much on pace with last year, which was a record year for us in terms of competition specifically on deals.
Remained very competitive.
I would say, particularly on the U S asset intensive deals.
Competition.
Our experiences competition there is depending on the size of the deal and the underlying risks. So typically we would have less competition on larger and more complex risks and then less competition. The more there is insurance from biometric risks that are in the deal relative to same market risks.
Demand remains overall very good.
We're a good competitor and we're in good we have a good competitive position you've seen us continue to win deals.
And I would say that we win deals for some of the factors in many of the factors Ive spoken about in the past. So it's not just about price it's.
That expertise that we've spoken about at all levels of local regional global it surround relationships and deal certainty in our structuring ability and the strength of our counterparty.
Long term commitment to this business and I think if you were to ask our clients.
Why they select us why they choose to partner with RGA.
Im confident that what Youll hear exactly the same things that you said, great partner deep risk experts creative and innovate.
Solution oriented.
And we deliver on our promises we execute when we say that we're going to execute so pipelines are very good right across.
We're very active and.
We continue to win deals.
Got it that's really helpful. Thank you I guess, maybe then switching gears a little bit just to.
Follow up on your commentary regarding Alex's question on premium growth.
Now that we're further into the pandemic are you seeing any increased demand from primary life insurance companies.
Raising their reinsurance coverage given all the recent volatility and pressure on mortality results due to Covid I guess in other words are you seeing or would you expect any uptick in session rates.
Recent historical levels is there any commentary on what youre seeing there would be helpful.
Yes, yes.
So specifically with respect to session rate, we haven't seen.
A lot of movement and session rates they've been.
Relatively.
Flat, a little up maybe but but remember session is not session rates are not the only lever of growth for us.
So in addition to reinsurance session rates the underlying market growth is.
As a growth lever for us.
Session rates flat and then the third lever for us Israeli market share.
Our ability to gain more of that reinsurance that's taken to market and I'll I'll tie this back to earlier comments around exclusives and bringing ideas to clients.
Our history and our success about being early and leveraging new ideas that translates into exclusive arrangements, where all the reinsurance comes to us. So we're not competing for that business on a pool basis. So my question really is around session rates or something too.
Pay attention to but they're not the only things that drive our clubs.
Thank you, we'll now take a follow up from Ryan Krueger with <unk>.
Hi, Thanks, I just had wanted to clarify one thing.
I guess on earnings post LPTA.
The removal of pad.
Combined with.
Not much of a change in the pattern for DAC amortization and.
The adjustments you've made through retained earnings it seems like.
Fortunately have to make future GAAP earnings higher for some period of time post <unk>.
To confirm that I was thinking about that right.
Yeah.
Certainly in the early durations here I think that's right because we know.
Some of the existing pads will start being released and then as I mentioned.
You mentioned on new business, we won't be studying up.
Provision for adverse deviation, so the margins should be a little bit higher early on.
Okay. Thanks, I just wanted to clarify.
Yes.
Thank you and we'll take another follow up from Mike Ward with C.
Thanks for the follow up guys just quickly.
<unk> had a slide and don't worry this isn't going to be about their mortality charge.
Turning to slide that did they like to point to showing the longevity offset that they have that balances off mortality earnings.
I was just thinking I think this has been at least since I've covered you guys kind of like a characteristic that you've discussed at an investor days.
In terms of your business model and so.
No we didn't really see it.
Offset mortality during Covid I think longevity was in UK pension area, but didn't really help us much and maybe it's the age delta between your mortality and longevity.
In the U S and such but just wondering if you've thought about or discussed, making some sort of shift to improve that hedge aspect in the future.
Yes.
Okay.
Hi, it's Jonathan maybe I'll start.
Yes, So I think if you go back to our Investor day presentation in December .
One of the areas that we see quite a bit of growth opportunity and while it looks like first of all we see growth opportunities everywhere, but we see particularly strong growth opportunities in the.
U S PRT space, which are the longevity risk.
And I think we included a slide in there that showed our distribution of.
Core biometric risks, you see mortality and morbidity and longevity and we do expect over the course of our five year strategy to grow that portion of longevity and again. The reason for the growth is that theres a lot of good margin here Theres a lot of growth opportunity, but as an added benefit like you've pointed out we will see better diversification both from a.
Earnings perspective, and also a capital perspective.
Okay. So it's sort of gradual over the over five years.
Yes, yes, I think so I guess I can't off the top of my head I can't remember the exact number it's in the slide but I think our longevity, our proportion of our those biometric risks or longevity is I think it's roughly doubling give or take over the next five years is as it grows at a faster rate than our other businesses are growing.
Yeah.
Alright, Thank you guys.
Okay.
Thank you and that does conclude today's question and answer session I would like to turn the conference back over to Mr. Larson for any additional or closing remarks.
Well everyone. Thank you for your continued interest and support and RGA and that concludes our second quarter call. Thank you very much.
Thank you and that does conclude today's conference. We thank you all for your participation.
You may now disconnect.