Reinsurance Group of America, Incorporated (NYSE:RGA) Q1 2023 Earnings Call Transcript May 5, 2023

Reinsurance Group of America, Incorporated beats earnings expectations. Reported EPS is $5.16, expectations were $3.38.

Operator: Good day. And welcome to the Reinsurance Group of America, Inc. First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Larson, Senior Executive Vice President and Chief Financial Officer. Please go ahead.

Todd Larson: Thank you. Welcome to RGA’s first quarter 2023 conference call. I’m joined on the call this morning with Anna Manning, RGA’s Chief Executive Officer; Tony Cheng, President; Leslie Barbi, Chief Investment Officer; and Jonathan Porter, Chief Risk Officer. As a quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. Some of our comments or answers to your questions may contain forward-looking statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, the information we provide may include non-GAAP financial measures.

Please see our earnings release, earnings presentation and quarterly financial supplement, all of which are posted on our website, for a discussion of these terms and reconciliations to GAAP measures. And now I’ll turn the call over to Anna for her comments.

Anna Manning: Thank you, Todd. Good morning. And thank you for joining our call this morning. Last night, we reported first quarter adjusted operating earnings of $5.16 per share, a strong quarter that included very good performance in many regions and product lines, some nice in-force [indiscernible] and good momentum on organic new business across our markets. I am very pleased with this quarter and with the start to the year. On the capital management front, we had another active and successful quarter, deploying $194 million into in-force and other transactions, and that success was across many of our geographies and products. To provide a little more perspective on the breadth of our wins, we completed deals in Canada, the UK, Europe, Asia and our first U.S. PRT transaction.

We have been in the longevity reinsurance business for close to 15 years. And over those years, have built a sizable and valuable global longevity business. We are an active reinsurer in all the major longevity markets. And in 2023, we expanded our approach and solutions in the U.S. PRT market to include a side-by-side partnership model to capitalize on our strength and expertise on both sides of the balance sheet. We are partnering with a couple of well-established, visible, and high-quality insurance partners with broad access to PRT opportunities including at the very large end of the market. We are active on a number of opportunities in the pipeline, and we are excited and confident that the U.S. PRT market will be an attractive growth segment for RGA going forward.

Beyond U.S. PRT opportunities, our pipelines are very healthy and include opportunities in many markets and different products. In our organic reinsurance business, we see opportunities across the globe. In Asia, we are the leader in combining product development, underwriting and capital solutions and as a result, when many treaties on an exclusive basis. This is timely as we see early signs of a strong rebound in business activity in Hong Kong and throughout Asia as travel fully resumed. In North America, we continue to win new business by leveraging our signature underwriting strength, including facultative services and other targeted underwriting programs and expertise. I believe this breadth of opportunities provides us an advantage as our risk expertise enables us to assess and engage in the more complex risks and structures.

I also believe our global footprint and strong client relationships to provide additional advantages as we can allocate resources to the most attractive opportunities regardless of geography or product. We have an established long history of not only winning transactions, but equally important, a long track record of performance from those transactions. On the asset side, overall investment performance in the quarter was good. Variable investment income was solid, new money rates remained attractive and impairment was modest. We believe that our investment portfolio is well positioned to withstand a more uncertain period going forward. This was a strong quarter across the board and a very good start for our milestone year as we celebrate RGA’s 50th anniversary in 2023.

We are well positioned, our business is resilient and the need for financial protection is clear. Our strategy of creating innovative new solutions is a win for consumers, a win for our clients and a win for RGA. Our clients recognize and respect all that RGA can do to help navigate increasing economic uncertainty, evolving regulatory and accounting changes and shifting consumer needs and competitive dynamics. Partnerships with RGA provide trusted expertise to succeed in these environments. Throughout my time at RGA, I can’t recall another period when we saw this level of opportunity and momentum. And when you add to that, the underlying earnings power in the business and the talented global team, it gives me a great deal of confidence in RGA’s ability to continue to deliver growth and attractive returns to our shareholders.

Thank you for your continued support and interest in RGA, and I will now hand it over to Todd to go over the financial results.

Todd Larson: Thanks, Anna. Before commenting on results, there are a couple of items I would like to mention. First, effective January 1, we adopted the new long-duration targeted improvement accounting standard, or LDTI. In April, we provided a recasted 2022 quarterly financial supplement and a presentation that reflected the adoption of LDTI. We believe that over time, the new accounting standard will provide better insight into RGA’s long-term business performance and along with the new disclosures, provide additional transparency to investors. Second, you may have noticed that we did not make specific reference to COVID in our quarterly materials. COVID impacts have diminished and the reliability of COVID reporting continues to decline.

Going forward, we will address our quarterly results without breaking COVID out separately. Turning to the quarter’s results. RGA reported pretax adjusted operating income of $456 million for the quarter and adjusted operating earnings per share of $5.16, which includes a foreign currency headwind of $0.18 per share. The trailing 12 month adjusted operating return on equity was 11.2%. Excluding the 2022 assumption changes referred to as notable items, the trailing 12 month adjusted operating return on equity was 13.1%. We are pleased with the strong quarterly result and in other key metrics such as new business production, constant currency premium growth, the capital deployed into in-force and other transactions and investment results. Reported premiums were up 7.3% for the quarter.

After adjusting for adverse foreign currency impact, premiums were up 10.8% on a constant currency basis. We continue to see good momentum across our business segment. Turning to the quarterly segment results, starting on Slide 6 in our earnings presentation that can be found on RGA’s investor relations website. The U.S. and Latin America Traditional segment reflected favorable overall results in our Individual Mortality business, primarily due to in-force management actions and higher investment income. Our individual mortality claims frequency was favorable, consistent with the general population data that showed a declining impact of COVID-19 and negative non COVID-19 excess mortality, likely due to an early peak of the flu season in the fourth quarter of last year.

These positives were partially offset by unfavorable large claims volatility in certain cohorts with the net premium ratio over 100%. Noting experience on these cohorts is reflected currently in income. Individual Health and Group business both had favorable experience, including favorable mortality in our Group business. The U.S. Asset Intensive business results were strong, reflecting favorable investment spreads, including higher yields on floating rate securities. And our U.S. Capital Solutions business continues to perform in line with our expectations. The Canada Traditional results were in line with expectations and the Financial Solutions business reflected favorable longevity experience. In Europe, Middle East and Africa segment, the Traditional business results reflected moderately unfavorable experience, primarily due to the estimated mortality and morbidity claims of $8 million related to the earthquake in Turkey.

EMEA’s Financial Solutions business reflected favorable longevity experience. Turning to our Asia-Pacific Traditional business. Results reflected favorable overall experience across the region. The Asia-Pacific Financial Solutions business performed well reflecting contributions from recent strong new business activity. The Corporate and Other segment reported a pre-tax adjusted operating loss of $25 million less than the expected quarterly range, primarily due to higher investment income. Moving on to capital management, as shown on Slides 12 and 13 of our earnings presentation. Our capital and liquidity positions remain strong and we ended the quarter with excess capital of approximately $1.4 billion. In the quarter, we deployed $194 million of capital into in-force and other transactions and continue to see a very healthy pipeline.

We also returned a total of $103 million of capital to shareholders through $50 million of share repurchases and $53 million in dividends. We expect to remain active in deploying capital into in-force and other transactions and returning excess capital to shareholders through dividends and share repurchases. I will now turn the call over to Leslie Barbi, our Chief Investment Officer; and she will discuss current market conditions and our investment results.

Leslie Barbi: Thanks Todd. We had favorable investment results in the first quarter across investment income, new money rates and credit performance. On Slide 8 in the presentation, we show that the non-spread portfolio yield for the quarter was 4.71%, reflecting solid variable investment income and higher yield. Looking at the base yield meaning before variable investment income, the non-spread portfolio increased to 4.45%, up from 3.8% in the first quarter of last year. Our new money rate in the first quarter was 5.56%, well above the portfolio base yield, so new money and reinvestments at current levels continue to support a higher portfolio yield. EII was modestly above our expectations coming from real estate joint ventures.

We continue to benefit from higher yields on floating rate securities and cash. Also, we have taken advantage of the environment over the last year with actions such as extension trades and more recently swapping some of our floating rate assets to fixed rates in order to lock in attractive yields for a longer period of time. We believe the portfolio is well positioned to withstand a more uncertain period going forward. Slide 9 of the earnings presentation covers the investment portfolio. Our investment strategy balances risk and return to build a portfolio to weather cycles and produce long-term value. Our overall portfolio credit quality was steady to slightly improving and has an average rating of A. Over 94% of the portfolio is investment grade rated and our high-yield holdings are primarily in the BB category.

Credit performance was strong in the first quarter, ratings upgrades outpaced ratings downgrades and impairments were modest at $41 million. Moving to Slide 10 and 11; we’ve added additional information to our earnings presentation on commercial real estate and on office exposure in particular. Our portfolio is structured to provide us with solid returns and a lot of protection. We have an experienced team that has managed well through cycles and they originate the loans that we put in our portfolio with eight regional offices that give us boots on the ground intelligence and surveillance. We hold $6.9 billion of Commercial Mortgage Loans or CML. The portfolio is high quality. The 56% average LTV means there’s generally a lot of equity ahead of our loans that would absorb property price declines before our loan amounts would be at risk.

Valuations are reviewed at least annually. We further mitigate risk with a well-laddered maturity profile. Only 2% of the CMLs mature in the balance of this year and 6% mature in 2024. Another strong sign is that there’s just one delinquent loan in the portfolio as of March 31st. That’s one loan out of about 700 and represents less than 0.3% of the commercial mortgage loan portfolio. The office portion of the CML portfolio is $1.7 billion. Our strategy focuses on suburban office properties, not skyscrapers and major city central business district. The office portfolio has an average LTV of 57% and is diversified across more than 150 loans with an average loan size of about $11 million. Our investments are located across more than 50 metropolitan statistical areas providing strong geographical diversification as well.

We are realistic about the environment, and as you would expect from RGA, we are actively monitoring our office portfolio and our process includes proactive engagement with borrowers as maturities or lease expirations approach or where we see changing portfolio metrics. While this environment of transition in office use presents some market challenges, I’m confident that we have the portfolio, people and process to navigate through this period of adjustments. In summary, our overall investment results have continued to be strong. Our strategic approach to investments, the quality of the portfolio, our diligent underwriting and our proactive surveillance and actions give me confidence that we are well prepared to manage through changing market conditions.

And now I will pass it back to Todd.

Todd Larson: Thanks Leslie. To summarize, we are pleased with the strong start to the year, the strength of our business and underlying earnings power. And now we’d be happy to open it up for your questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Jimmy Bhullar with J.P. Morgan. Please go ahead.

Operator: Thank you. The next question comes from John Barnidge with Piper Sandler. Please go ahead.

Operator: The next question comes from Ryan Krueger with KBW. Please go ahead.

Operator: Next question comes from Andrew Kligerman with Credit Suisse. Please go ahead.

Operator: The next question comes from Dan Bergman with Jefferies. Please go ahead.

Operator: The next question comes from Tracy Benguigui with Barclays. Please go ahead.

Operator: Our next question comes from Tom Gallagher with Evercore. Please go ahead.

Operator: The next question comes from Alex Scott with Goldman Sachs. Please go ahead.

Operator: The next question comes from Erik Bass with Autonomous Research. Please go ahead.

Operator: The next question comes from Mark Dwelle with RBC. Please go ahead.

Operator: The next question comes from Mike Ward with Citi. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference over to Anna Manning, Chief Executive Officer for any closing remarks.

Anna Manning: [Indiscernible] and your continued interest in RGA. This is a strong quarter demonstrating the substantial earnings power in our business. We are a global leader. We’re well positioned in our markets to capitalize on the growth opportunities that we’ve highlighted through the course of this call. And I remain confident that RGA will continue to deliver substantial long-term value for our shareholders. So thank you. And that concludes our first quarter call.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.