Q3 2022 Reinsurance Group of America Inc Earnings Call
Welcome to the reinsurance group of America third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Todd Larson Senior Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you.
Good morning, and welcome to Rga's third quarter 2022 conference call.
I'm joined on the call. This morning, with Anna Manning Rga's President.
<unk> Chief Executive Officer.
Leslie Barbie, Chief Investment Officer, Jonathan Porter, Chief Risk Officer, and Jeff Hopson head of Investor Relations.
A quick reminder, about forward looking information and non-GAAP financial measures.
Some of our comments or answers to your questions may contain forward looking statements.
Actual results could differ materially from expected results.
Please refer to the earnings release, we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results.
Additionally, during the course of this call information. We provide may include non-GAAP financial measures. Please see our earnings release earnings presentation quarterly financial supplement all of which are posted on our website.
For a discussion of these terms and reconciliations to GAAP measures.
And now I'd like to turn the call over to Anna for her comments.
Thank you Todd.
Good morning, and thank you for joining our call.
Last night, we reported adjusted operating earnings per share of $5 in 20 states.
Another very strong quarter following the record level of earnings in the second quarter.
Our results. This quarter include favorable performance across many of our segments and businesses.
As well.
This activity and production levels will go bust and encouraging and we have started to see some tangible benefits from higher investment yields.
COVID-19 claim costs were comfortably absorbed.
Our underlying non COVID-19 mortality experience was favorable in many of our markets.
I mean, it's a particular strength this quarter include U S and Latin America traditional.
He is a traditional U S asset intensive.
In the U S and Latin America traditional segment, the individual mortality business performed very well with favorable underlying mortality experience and a modest impact from COVID-19.
The U S group and individual health businesses also performed very well.
In the Asia traditional segment, we continued to see strong overall performance.
Our client centric product development capabilities and underwriting expertise continues to solidify our market leadership in the region.
Reported premium growth was four 9% and 10, 1% on a constant FX basis.
Electing the strong new business activity I mentioned earlier.
We had another good quarter for capital deployment, putting $100 million into in force and other transactions, bringing the year to date total to $351 million.
Our transaction pipeline remains very active and broad based across many risks angiography and.
We expect this good momentum to continue.
This quarters result helped to underscore the substantial additional value and earnings power. We've added in the last few years through focused execution on our strategy and we are in a great position to continue this momentum going forward.
The life insurance industry has proven its value during the pandemic and we expect the increase in demand for protection products to continue.
I believe that our value proposition has been amplified throughout the pandemic as we have worked closely with our clients, helping them navigate through increasing levels of uncertainty.
Further our client centric partnership outlets are translating into more exclusive opportunities as well as additional arrangements combining our value added services and solutions.
These last few years have reinforced the strength of this client strategy.
For example in the U S. Individual markets, we are seeing new business from key clients in recognition of underwriting services that accelerate policy issuance through digital and data solutions.
In addition, all.
Facultative underwriting support which provides valuable capacity to our clients are seeing nice growth sure expanded programs and new clients.
In Asia I am very pleased with work, we just completed for a large market leading client to develop an innovative first to market product providing access to protection that was previously not available.
Because of our Jay's leadership and partnership in the development of this new product will be co promoted within our clients large distribution network, creating value for their distributors and consumers, while also enhancing our James visibility and brand recognition.
In another recent example, our team in Italy closed its largest health deal to date with expected annual reinsurance premiums of over $50 million.
We delivered a novel branch structure to address specific client needs by leveraging the deep market knowledge of our local Italian team combined with the experience and expertise of our global health gene.
These are just a few examples our partnership initiatives with our clients that help to differentiate us.
We're also providing us the ability to better manage competitive dynamics.
Turning to another important earnings growth lever interest rates.
Higher interest rates and investment yields are notable earnings positive for us.
Future cash flows in many of our biometric businesses can be reinvested at higher rates than in the past.
What for US had been a steady headwind over many years is now moving into becoming a measurable tailwind and we would expect to see continued benefits going forward. If these higher rates are sustained.
We have a great franchise, and we are well positioned around the world. Our business is resilient, we've successfully managed through periods of elevated risk and uncertainty.
And this quarter continues to demonstrate our many strengths.
As I think about the future I'm very encouraged by the dynamics, we are seeing in the underlying life insurance industry and I remain optimistic and confident in our ability to continue to create substantial long term value for our investors.
Thank you for your interest in our J I'll now hand, it over to Todd to review the detailed financial results.
Thanks Anna.
RJ reported pretax adjusted operating income of $452 million for the quarter.
And adjusted operating earnings per share of $5 20 per share, which includes a COVID-19 impact of a dollar per share and a foreign currency headwind of <unk> 15 per share.
We consider this to be a very strong quarter and demonstrates the strength of Rga's earnings power.
We are pleased with the performance across the range of fundamental metrics, such as new business production.
Premium growth capital deployed into transactions underwriting.
Results in investment returns.
The trailing 12 months adjusted operating return on equity was seven 9%.
Which is net of estimated COVID-19 impact of three 9%.
Turning to the segment results listed on slides six and seven of the earnings presentation.
Reported premiums were up 4.9% after adjusting for add this adverse foreign currency impact of $160 million premiums were up 10, 1% on a constant currency basis.
Highlighting good business momentum across our various segments.
Because of the significant currency movements in the quarter I wanted to give you a region by region.
Murray.
Canada traditional reported premium increase of one 2% in constant currency increased five 2%.
EMEA traditional reported an increase of 9% and premiums however in constant currency premiums increased 16, 7%.
Asia Pacific traditional reported a five 4% increase in premiums and at constant currency were up 13, 4%.
Now turning to the segment earnings results.
The U S and Latin America traditional segment results were very strong, reflecting both favorable individual mortality experience and modest COVID-19 claims that totaled approximately $52 million.
Variable investment income was in line with our expectations.
Although below the recent run rate.
The U S individual health business had favorable experience overall, including an assumption update to the disabled life reserve.
Our group business results were above our expectations as most lines performed well.
The U S asset intensive business results reflected favorable overall experience and higher investment spreads are.
Our capital solutions business continues to perform well and within our expectations.
Both the Canada traditional and financial solutions segment results were in line with expectations with COVID-19 claim cost of $3 million.
In Europe , Middle East and Africa segment, the traditional business results reflected unfavorable U K mortality experience.
Partially offset by favorable results in other markets.
COVID-19 claim costs were $5 million for the quarter.
Emea's financial solutions business results were somewhat below expectations, reflecting some client reporting updates.
Turning to our Asia Pacific traditional business.
Asia results reflected favorable underwriting experience across the region.
Absorbing COVID-19 claim costs of $7 million, primarily in Japan.
Australia reported a modest profit in the quarter driven by favorable group experienced and absorbing $1 billion of COVID-19 claim costs.
The Asia Pacific Financial solutions business results were impacted in the quarter due to $21 million in COVID-19 related medical claims in Japan for in home sickness benefits.
But would've been strong otherwise due to new transactions and higher yields.
As you've heard from others in the industry and as Jonathan will shortly discuss we expect the volume of these claims to decrease materially going forward.
The corporate and other segment reported a pretax adjusted operating loss of $56 million.
Higher than our expected quarterly range due to higher general expenses and interest expense I would note that on a year to date basis results are in line within our expected range.
Moving onto investments on slides eight through 10 and our earnings presentation.
The non spread portfolio yield for the quarter was four 4%.
Reflecting variable investment income that was lower than the recent run rate.
So it was positively impacted by.
A much higher new money rates as well as some benefit to existing floating rate securities.
For non spread business.
Our new money rate rose to $5 three 5% in the quarter compared to 3.31% in the fourth quarter of last year.
A fairly good increase in a short period of time.
The new money rate benefited from an increase in both risk free rates and credit spreads.
Looking at our base yield which is before variable investment income we.
We have moved from 3.78% in the fourth quarter of last year to 4.12% this quarter.
Meanwhile, credit impairments were minimal at $14 million and we believe the portfolio is well positioned as we move to a more uncertain economic environment.
As shown on slides 11, and 12 of our earnings presentation, our capital position remains strong.
We ended the quarter with excess capital of approximately $1 $3 billion, which includes an incremental increase from the recent hybrid debt issuance.
We deployed $100 million of capital into enforced and other transactions.
And continue to see very attractive deal pipelines.
We also returned a total of $75 million of capital.
To shareholders through share repurchases and dividends.
We believe our well diversified global platform and underlying earnings power positions us to continue to support our clients and deliver attractive financial returns to our shareholders over time.
I will now turn the call over to Jonathan Porter, our Chief risk Officer.
Thanks, Todd overall.
Overall non COVID-19 claims experience was favorable this quarter with notable positive contributions in the U S and Asia Covid.
COVID-19 claim costs were moderate with an estimated impact of $89 million this quarter down significantly from the $485 million reported in the same period last year.
Turning first with U S individual mortality strong overall underwriting results reflect favorable non COVID-19 large claims experienced in the quarter.
Estimated COVID-19 claim costs of $45 million and U S. Individual mortality were $11 million per 10000 general population deaths at the low end of our rule of thumb range.
This result is consistent with the continuing trend of a declining proportion of general population deaths at ages below 65.
Where there is more life insurance exposure.
Turning to Asia Pacific as Todd mentioned, COVID-19 related medical claims in Japan were elevated this quarter with combined claim cost estimate of $34 million split.
The split between our traditional and financial solutions segments.
This result was driven by an unprecedented number of COVID-19 infections in.
In the Japanese general population, which saw an average reported daily case count of 130000 in the quarter combined with the government supported industry practice of paying claims on hospital benefit policies for at home care to reduce potential pressure on the medical system.
Looking ahead, we expect that future medical claim costs in Japan will be materially reduced for two reasons.
First new infections have dropped significantly in the general population with case counts, averaging 33000 per day in October and second effective September 26th the government of Japan changed requirements. So that COVID-19 related at home medical claims will only be covered for a subset of the most at risk individuals the elderly.
<unk> pregnant women and those with preexisting medical conditions.
We expect that this change of definition will further reduce go forward medical claims by approximately two thirds.
Total COVID-19 claim costs on all other businesses totaled $10 million with nothing material to note by country or segment.
We remain optimistic about the favorable trends in COVID-19 claim costs and although there is still uncertainty on how the pandemic levels. We believe that future impacts will continue to diminish and be manageable.
This concludes our prepared remarks, we would now like to open it up for questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Erik bass with Autonomous Research. Please go ahead.
Hi, Thank you. So you've now delivered two quarters in a row with ROE is well above 10% and I realize there are a lot of moving pieces, but given where interest rates are and the capital that you've been able to deploy the last couple of years should we think about your historical ROE targets of 10% to 12% being a reasonable expectation for the go forward earnings power.
Oh, Hi, good morning, this is Todd.
Yeah, No. We're proud of the strong results we've achieved the last couple of quarters.
So again highlights the positive momentum.
Our business and our successful execution in all of our our strategy.
B, we do have some seasonality and some variances that are both positive and negative so I'd be careful just.
Simply extrapolate out the two strong quarters without.
Some are looking at a little bit it will close.
Closer, but you know given the.
Capital, we've been able to deploy over the course of the last couple of years.
No the underlying earnings power you know that we have we're not going to.
We will update some of our targets as we get into next year under the new financial reporting bases, but I would say you know based on what we're seeing definitely there is some upward pressure on what we can deliver on the from the ROE up.
Front, if things continue the way they are.
Thank you and then maybe a question for Jonathan just hoping you could talk a little bit more about the mortality experience in the U S. This quarter and as Covid cases are coming down and you're starting to get more data are you seeing non COVID-19 mortality trends normalize as well and does this change or inform your view at all about sort of a pull forward.
Of claims that May have happened during the pandemic.
Yeah sure Eric.
So first I mean.
As we noted it was a good quarter for experience in U S mortality individual mortality, which is great to see.
A lot of the non COVID-19.
Gains this quarter were driven by large claims positives so lower than expected large claims which is the main contributor as far as excess mortality goes we did see an increase in the general population excess mortality. According to CDC data this quarter.
We didn't see this translate into material impact in our claims numbers, though for the U S individual business and again any amount that would have been in there would've been more than covered by the favorable experience on large claims.
One other point to note is we did have favorable experience in our U S group mortality results as well. So I think all of those point to excess mortality not being a major driver for us this quarter.
Thinking about the pull forward of mortality.
It is likely we are getting some benefit from this we believe it's still a modest tailwind also so we haven't changed our view on this from prior quarters.
And it will be spread out over a number of future years, you know of course, it's difficult to estimate exactly what that pull forward is given some of the variables involved in the calculations.
But yeah.
Yeah, I do think that will help create some tomorrow mentum I think if we think about COVID-19 evolving going into 2023, I would still expect that we're going to see a net headwind from COVID-19, even after taking into account that pull forward benefit that we might be seen.
And our next question will come from Dan Bergman with Jefferies. Please go ahead.
Thanks, Good morning.
I guess with all the moving pieces I wanted to see if you could help quantify some of the variances in U S. Traditional this quarter, including how.
How underwriting results compared to your expectations in individual.
Group and the individual health businesses as well as that.
Individual health assumption update that you mentioned and just given the recent premium growth and the benefit you hear hopefully seeing from higher interest rates and any updated thoughts on the run rate annual earnings level, you would expect in U S traditional would be helpful.
This is Todd I guess I can start and please anybody can chime in maybe I think you asked about the individual health.
Hum.
Our assumption updates I'll, maybe I'll address that one first is that.
In normal course, we always look at and our underlying assumptions and this relates to the disabled life reserve, which is based on the best estimate best estimate assumptions and we did a fairly comprehensive review of the assumptions that go into that.
The reserve calculation and we.
We ended up updating the termination in utilization rates that resulted in.
Positive.
Adjustment to the income.
On the U S traditional style.
Side, we had a what we review as you know positive variances from both Covid.
And non Covid experience.
A portion of the positive on the non COVID-19 related to the.
The amount of large claims that we I guess it didn't receive in the in the quarter and as we've talked about in the past you know the large claims can create some volatility.
On a period to period, but over time, they're real fairly.
Fairly predictable.
Got it and just maybe just a follow up in terms of those underwriting variances is there anything you can give in terms of quantifying like how how those came in relative to what you would expect in a normal quarter.
Yeah, we're not providing sort of our overall new.
Run rate at this point.
But we will.
We'll provide some good new targets as we get into next year.
I would just comment that certainly the higher interest rates will be a positive will be.
A tailwind so the overall U S traditional business as well as you know the underlying.
Business, excluding the Covid impacts is performing quite.
Quite well so you know.
I think we hopefully should see some positive <unk>.
Impacts as we go forward.
Hey, I got it correctly I thought I'd chime in as well since you asked about the the tailwind from.
Interest rates and <unk>.
Last quarter, we had given an estimate of $70 million more income right.
Or over the next 12 months given given the rise in rates during the day.
And certainly rates continued to rise so we would up that estimate over next 12 months <unk>.
$30 million or so so call. It 100 million over next 12 months from if we stay at the current level.
Another $30 million.
Although that's for the non spread overall market.
And our next question will come from Ryan Krueger with K B W. Please go ahead.
Thanks. Good morning. My first question was just to follow up on the last comment.
Is the 100 million over the next 12 months is that incremental from from here in other words right.
Not from kind of flat is it is it forward looking.
Over the next 12 months from today.
B.
Incremental from where we are now.
I would I would look at the additional interest rate move so that would be the additional 30 million herself.
But over the next 12 months 100, Oh, yes, so, but we had already been expecting some of that a quarter ago.
Understood understood.
And then other question was could.
Could you Asia had really strong earnings.
Can you give any sense of.
I guess any anything in terms of kind of where you would expect run rate earnings in that business to be or how much how favorable the results were in that business this quarter.
Brian It's Todd we're not.
Updating the run rate at this point, we're still in.
And that $45 million to $50 million a quarter for on the traditional side. We did have a very strong quarter in Asia. This.
This quarter and I'd say about half of that variance from the run rate was you know underlying experience favorability and then the other half was again alright.
Periodic basis, we update our models and assumptions.
Across all the different regions.
Regional and that contributed a positive impact of about half of that variance about half experience have assumption modeling updates and also client reporting updates.
And our next question comes from John Barnidge with Sandler O'neill. Please go ahead.
Thank you very much.
Seeing strong top line growth and opportunities for in force block transactions.
Can you maybe dimension, how much of that 10% constant currency is rate versus new business. Thank you.
Yeah.
I would say a good part of the 10%.
Some of it relates to the the enforced.
But most of it would be.
From a the impact of both organic new business in any transactional transact anything that we've done on the transactional side that would come with.
Premiums were still.
Comfortable with the overall target that we provided in the past that that mid to high single.
High single digits, but we continue to see some good momentum now across the various <unk>.
Geographies and.
Good appetite for production protection products and continuing to work closely with our.
Clients on product development opportunities.
Thank you very much and then my follow up question.
Provided a L DTI commentary on impacted the balance sheet, but we started to hear others talk about the earnings benefit or headwind from it.
How are you thinking about it impacting you from an earnings perspective.
As we think about it at the very least from a conceptual standpoint. Thank you.
Yeah from a.
I'll answer it I will answer it from a conceptual standpoint, because we're not prepared to provide any numbers.
At this point, but as.
As far as you know when we add on new business, we won't be including provisions for adverse deviation in the reserves are anymore. As we do under old GAAP. So I would think that would be a positive to that.
Corporate earnings on on new business than we did for the transition balance sheet need to eliminate.
Some of what we call negative reserves, primarily on the longevity.
No that should come back through our income over time.
We don't expect.
A significant impact from changes in the the DAC amortization, but I'd say those other areas that should be.
It should be a positive, but again, it's difficult to quantify at this time.
And our next question will come from Jimmy Buhler with J P. Morgan. Please go ahead.
Hey, good morning, So first I had a question for Todd on share buybacks.
You are you've sort of resumed activity, but it's been fairly modest the last few quarters I'm wondering if that has to do bid just ongoing uncertainty with COVID-19 or is it more of a reflection of.
Just the opportunity that you're seeing in terms of deal pipeline and growth in the business.
Yeah. Thanks, Jamie Yeah, Yeah. So we did have a.
Increase in the excess capital position quarter after quarter, but that was primarily we did the hybrid transaction back in September and we got a pretty strong receptivity. The day, we went out for that offering so.
We decided to upsize it a little bit above what we needed to refinance an existing security and so that was really why that the excess increased during the quarter. The net income.
For the quarter pretty much funded organic growth in transactional activity and the dividends and share repurchases I think.
As far as the level of share repurchases I think you've seen over time, we've been fairly balanced, but we're we're pretty optimistic and we're seeing an attractive.
<unk> pipeline across all of our <unk>.
Our different geographies right now and I think as we've been pretty consistent in the past, we like deploying the capital to go back into the back into the business, where the transactions, we can get an appropriate return and support are our clients.
Yeah, and Todd if I can if I can add them. We we do see very strong pipelines and strong demand for what we do and what we deliver and my prepared remarks I shared some examples and really it's pointing to two of them.
Strong pillars of our strategy, which are that create and partnership pillars of our strategy.
Working directly with clients, creating either new products, our new underwriting processes journeys.
And and what that does is it moves us from having to compete to being an exclusive arrangements and so if you think about you know our growth our growth levers really come from three different dimensions. One is just the underlying growth in the life insurance industry.
The second is growth and session rates in the third is growth in our market share well in instances, where we're exclusive we're really hitting on all three levers, we're helping clients grow their business grows so grows the underlying market.
And we're essentially getting a 100% of the of.
The reinsurance market share on that because we're an exclusive so so strong demand.
We're really well positioned right around the globe and I expect the momentum we expect the momentum to continue as we go forward.
Okay. Thanks, and then maybe for Jonathan on and Covid claims, we had seen a spike in cases and deaths in Japan, because it cool a bit and then obviously it subsided. So at the end of a close to the end of the quarter as you think about and you mentioned the hospitalization and deemed hospitalization related claims.
You think about the reporting that those are I think in some cases, there tends to be a little bit of a lag in reporting in in foreign countries would you have caught up to all of that and assumed an IV in iron ore some component in your reported.
Yes.
Charge that we took related to the Japan Medical claims this quarter was primarily IV and I'm almost all IV and are just given the lag in reporting that you mentioned.
We're quite comfortable with our methodology and process for for setting up that level of IP in our and I believe subsequent to the quarter was actually received some statements that have sort of given us no reason to be concerned about the level that we set up so so overall I think we're.
We're very confident with the with the estimate that we have there.
Yeah.
Again, if you have a question. Please press star then one to join the queue.
Our next question will come from Alex Scott with Goldman Sachs. Please go ahead.
Hum.
First question I had is just on the longer term mortality expectations. I think you guys have talked in recent quarters about you know having an ongoing study as you know just expectations for longer term mortality and implications of Covid. So I just wanted to see if you could provide any kind of update on that any ship.
In one way or the other of your thinking there.
Okay.
Yeah, Hi, Alex it's Jonathan.
No no change to our views that we've talked about.
In the last quarter I.
I think we continue to be encouraged by the favorable trends, we're seeing in COVID-19 claims.
You know from what we've seen over the last couple of quarters, I think consistent with expert to use we do expect future variance in waves of infections and hospitalizations to continue but at a declining rate as.
As we as we go ahead.
The you know I think there's also a wide range, obviously around depending on what assumptions you used for the various underlying projections that you do.
But I think we remain bullish on long term mortality improvement.
Overall.
Got it okay, thanks and the.
The other question I just wanted to ask you was on Ah <unk> Ah yeah.
I think.
I'm sure you're well aware, we've had some volatility from some of the primaries in terms of somebody's Universal life book. So I just wanted to a confirm like any exposure you have there and be any appetite for potentially doing reinsurance. If you know assumptions have been level set to the right place now.
Yeah.
Thanks for that question I'll start and then I'll offer up.
To my colleagues if they have anything to add so Alex let me start with <unk>.
We've looked at this risk in the past both from our flow new business basis, our traditional reinsurance.
Insurance and on an in force block basis.
And as we've discussed with you before we haven't been able to get comfortable with the risk return profile. You know the bid ask spread is just too wide and so we haven't participated that is not a risk that we have on our books right now.
And I'll point out that it's really no different to what we've done on some other risks or when there are other unfavorable market dynamics at least as we deem them to be unfavorable.
If the opportunity doesn't pass that.
Pass our risk return filter and then we will be patient and we'll watch and we'll monitor changes. So so we can do this because a they're a global reinsurer, we have both flow reinsurance and in fact, we're one of the leaders in flow reinsurance and enforce blocks. So our we have many growth levers to pull.
Means that we aren't overly reliant and we are patient and disciplined now.
<unk> moved they change and as they do we'll look at it again, we'll check to see if tino risk return trade offs are more attractive.
Also look at other factors like the competitive dynamics.
What the likely sell side drivers, maybe and and you know frankly, whether we're a good partner given all of those things and then act. Accordingly. So that's what you can expect from US on the go forward on this risk on the actual risk itself, we don't have the policyholder.
But I will remind you that we have the mortality associated we we provide regular wire T type of mortality protection on these products.
Got it thank you.
This will conclude our question and answer session I.
Now I'd like to turn the conference back over to an amazing for closing remarks.
Thank you for your questions and as we've noted throughout this call. This was a strong quarter and we are very pleased with the demonstrated earnings stream that is coming through especially in the last two quarters.
We have a resilient and valuable platform. Our teams are highly engaged and excited working closely with clients to bring solutions to address the protection needs highlighted by the pandemic.
So let me end by repeating how optimistic and confident I remain in our ability to continue to create substantial long term value for our investors.
You for your continued interest in <unk> and that concludes our third quarter call.
The conference has now concluded. Thank you very much for attending today's call. You may now disconnect your lines.