Reinsurance Group of America, Incorporated (NYSE:RGA) Q4 2023 Earnings Call Transcript

Reinsurance Group of America, Incorporated (NYSE:RGA) Q4 2023 Earnings Call Transcript February 2, 2024

Reinsurance Group of America, Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Reinsurance Group of America Fourth Quarter 2023 Earnings Conference Call. All participants’ will be in in listen-only mode. [Operator Instructions] After today’s prepared remarks there will be an opportunity to ask questions. [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.

Todd Larson: Thank you. Welcome to RGA’s fourth quarter 2023 conference call. I’m joined on the call this morning with Tony Cheng, RGA’s President and Chief Executive Officer; Leslie Barbi, Chief Investment Officer; and Jonathan Porter, Chief Risk Officer. A quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. Some of our comments or answers to your questions may contain forward-looking statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ 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. Throughout the call, we will be referencing slides from the earnings presentation, which again is posted on our website. And now I’ll turn the call over to Tony for his comments.

Tony Cheng: Good morning, everyone, and thank you for joining our call. Last night, we reported adjusted operating earnings for the fourth quarter of $4.73 per share, and for the full-year of $19.88 per share. Our adjusted operating ROE, excluding notable items, was 14.4% for the year. The quarter included favorable investment and very strong GFS results along with strong organic new business and in-force transaction volume. Our underwriting experience was in line with expectations across the enterprise. This capped off a very strong year. We are excited with the great momentum in our business with our global platform, positioning us for continued growth and success. We entered 2023 with the priorities of delivering on earnings and ROE targets, as well as accelerating our new business growth all while taking an active and balanced approach to capital management.

We have delivered on all these three priorities: Firstly, we produced record EPS and strong ROE results. Second, as measured by our internal metrics, we produced a record level of new business value, which was up significantly from 2022. You will also see on slide 17 in the earnings presentation that the value of business subject to LDTI increased by more than $3 billion in 2023, primarily attributable to new business won during the year. In addition to the volume, I am also very pleased with the breadth and quality of the new business we delivered. We had strong results across many of our businesses and geographies with a significant percentage of our new business under exclusive arrangements. These types of arrangements create greater strategic value, which gets shared between our clients and RGA.

And the third priority we delivered on was our active and balanced capital management. During the quarter, we deployed $346 million of capital into in-force transactions, bringing the year-to-date total to a record $933 million. We were active across the globe with the U.S., Asia and EMEA, all contributing to our in-force transaction success. In addition to supporting our clients through deploying capital into our business, we also returned $419 million to shareholders via dividends and buybacks during the year. Finally, we launched Ruby Re, further diversifying our sources of capital to fund our exciting future growth. Our optimism for the future is fueled by our continued success in our four areas of notable growth that we have previously communicated.

Starting with our longevity and PRT business. In the U.S. PRT market, we closed our third transaction. In a very short period of time, we have established ourselves as an active and key player in this market, and we are optimistic about our prospects going forward. In the U.K. longevity space, where RGA is a clear market leader, the team has had an outstanding year, innovating in various segments of the longevity market. Based upon the current environment for global longevity business, we expect 2024 to be another very active and productive year. In our Asia Traditional segment, we continue to see positive results, bringing product development and underwriting solutions to our clients to help fuel their growth and share in their success. In China, in the fourth quarter, we launched a simplified issue medical product with a major insurer to complement the successful critical illness product we spoke about during Investor Day.

In Hong Kong, we launched a product with a market leader to provide a more inclusive form of critical illness to individuals that could not previously gain coverage. This supports our purpose of making financial protection accessible to all whilst furthering our business strategy. In our third area of notable growth, the asset-intensive business in Asia we executed transactions that combined our strength of product development with coinsurance and continued to innovate across the region to support a very active transaction pipeline. And finally, in U.S. Traditional, we closed some nice in-force blocks in Q4 and also partnered with our clients and distribution entities to drive profitable new business growth. As announced, we also made an investment to further our capabilities to support clients in digital underwriting and fulfill their purpose of closing the protection gap in the middle market.

I would be remiss not to also mention the collective group of all our other businesses where we have incredibly talented teams and market-leading positions. For example, we were able to finalize an attractive asset intensive transaction in the U.S., due to our long-term client relationship and reputation for execution certainty. In addition, we announced yesterday an asset transaction in Belgium, and we are hopeful of seeing other transactions across Europe, similar to what we have seen in Asia and North America. As proud as I am about all these accomplishments, I am even more excited about the future, building on our strong foundation created by the talent, expertise and integrity of all our people around the world. Reflecting this positive outlook, we have updated our financial targets, as shown on slide 18.

We have provided new earnings run rates and reiterated our intermediate EPS growth targets on this higher base. In addition, we increased our expected ROE range to 12% to 14%. I am clearly confident in our ability to continue to deliver growth at attractive returns to our shareholders for many years to come. Our growth prospects are built on our core principles of strong risk management combined with our entrepreneurial spirit to create new innovative solutions and share with our partners in their success. Thank you for your interest in RGA, I will now turn it over to Todd to discuss the financial results.

Todd Larson: Thanks, Tony. Moving to the quarterly results, RGA reported pretax adjusted operating income of $386 million for the quarter and adjusted operating earnings per share of $4.73. For the full-year, we reported record adjusted operating earnings per share of $19.88. For the year, adjusted operating return on equity, excluding notable items, was 14.4% we are very pleased with the strong results, as well as very strong new business volumes and capital deployment. Investment results for the quarter remained favorable. Reported premiums were up 19.2% for the quarter. For the year, premiums totaled $15.1 billion, representing an increase of 16.3% on a constant currency basis. The increase includes $500 million in premium from a U.S. PRT transaction in the fourth quarter, PRT premiums for the full-year totaled $1.5 billion.

As Tony mentioned, we have strong momentum in new business activity and expect to continue to see attractive premium growth over time. The effective tax rate for the quarter was 18.2% on pretax adjusted operating income. Below the expected range, primarily due to the distribution of earnings across the globe and generation of certain tax credits. The effective tax rate for the full-year was 21.5% on pretax adjusted operating income. Turning to the quarterly segment results, starting on slide seven in our earnings presentation. The U.S. and Latin America Traditional segment results reflected favorable group and individual health experience and slightly unfavorable claims experience and client reporting adjustments in individual life which had a larger financial impact due to the mix of experience between capped and uncapped cohorts.

As we’ve previously discussed, under LDTI, experience on cap cohorts as reported in the current period. For uncapped cohorts, a portion of the underlying mortality experience is reported in the current period earnings and the remaining experience is spread into the future periods. On a year-to-date basis, the underlying experience in the Individual Life business was favorable. The U.S. asset intensive business results were strong reflecting higher investment spreads, including those on floating rate securities. And our Capital Solutions business continues to perform in line with our expectations. The Canada traditional results reflected unfavorable group claims experience and impact from a one-time item of approximately $8 million. The Financial Solutions business reflected favorable longevity experience.

In the Europe, Middle East and Africa segment, the traditional business results reflected unfavorable mortality experience, most of which was recognized in the current quarter. This was partially offset by a positive impact on new business in Continental Europe. EMEA’s Financial Solutions business reflect results reflected favorable longevity and other experience, including improvements in reporting. Turning to our Asia Pacific traditional business. Results reflected favorable underlying claims experience, a small portion of which was recognized in the current period. Asia Pacific Financial Solutions business reflected favorable investment spreads and strong new business. The Corporate and Other segment reported a pretax adjusted operating loss of $23 million.

Less than the expected quarterly range, primarily due to higher investment income. Moving on to investments on slides 10 through 13. The non-spread portfolio yield for the quarter was 4.86%, reflecting higher yields. For the non-spread business, our new money rate rose to 6.65%, reflecting a higher allocation to private assets in the quarter. Credit impairments were minimal and we believe the portfolio is well positioned as we move through ongoing economic uncertainties. Related to capital management, as shown on slides 14 and 15, our capital and liquidity positions remain strong. We ended the quarter with excess capital of approximately $1 billion. In the quarter, we deployed $346 million of capital into in-force transactions bringing the year-to-date total to a record $933 million.

In the quarter, we also returned a total of $106 million of capital to shareholders through $50 million of share repurchases and $56 million in dividends. We expect to remain active in deploying capital into attractive growth opportunities in our organic flow and in-force block transactions and returning excess capital to shareholders through dividends and share repurchases. As Tony previously mentioned, during the quarter, we successfully launched Ruby Re, a Missouri domiciled third-party reinsurance company. Alternative capital has been part of RGA’s capital management strategy for a long time, and Ruby Re is another source of capital to support our growth. As part of the launch, RGA executed an initial retrocession of $2.5 billion of existing liabilities.

During the year, we continued our long track record of increasing book value per share. As shown on slide 16, our book value per share, excluding AOCI, increased to $144, which represents a compounded annual growth rate of 10.4% since the beginning of 2021. A metric I want to highlight is the value of business subject to LDTI as presented on slide 17. This represents expected unrealized underwriting margins, which demonstrates the long-term value of this business. We introduced this metric back in June at our Investor Day. The unrealized underwriting margin is calculated as the expected present value our future premiums, less present value of claim benefits and treaty allowances for the part of our business with reserves subject to LDTI financial reporting.

These values are derived from the cash flows used to determine reserves, which are based on current expectations and are reviewed as part of the annual audit. During 2023, this value increased to approximately $27 billion, up $3 billion or 15% from the end of 2022. The primary driver was the strong new business written during the year. To summarize, based on our current expectations, over $27 billion of pretax unrealized underwriting margin exists for the business that is already on our books. While these margins don’t consider investment income or general expenses, they are expected to significantly contribute to future earnings. I want to emphasize again the current measure only contains business subject to LDTI and excludes certain asset-intensive and short duration business.

As we’ve discussed, 2023 was very strong for RGA and results were ahead of the intermediate term financial targets and run rates provided at our Investor Day. The primary drivers of the outperformance were favorable impacts of higher interest rates, strong new business, and favorable experience. Considering these dynamics and the continued strength of our underlying business, we have updated our current run rates and reiterated our intermediate growth targets, as shown on slide 18. We have also increased our intermediate return on equity target range to 12% to 14%. These updated run rates now represent the base from which we expect to achieve our intermediate growth targets. We believe these updates appropriately reflect our strong momentum and earnings power as we look to the future.

We continue to see good opportunities across our geographies and business lines, and we are well positioned to execute on these opportunities and our strategic plan. We are very excited about the future and expect to deliver attractive returns to our shareholders. This concludes our prepared remarks, and we would now like to open it up for questions.

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Q&A Session

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

Jimmy Bhullar: Good morning. I had a couple of questions first on just the difference between net and operating income. I think you had a decent amount of derivative losses and losses on sales of investments. So if you could just give us some color on what really drove each of those items?

Todd Larson: One — Jimmy, it’s Todd. One item is, I think what we refer to as B36 of the embedded derivatives, that’s on the funds withheld type reinsurance treaties that we’ve had over the years. So that had part of the impact. And then some of the derivatives that we use in some of our currency investment strategies had a negative impact. And then we had some capital losses as well.

Jimmy Bhullar: Okay. And the losses on sales, are those related to repositioning of the portfolio on deals and stuff? Or is it just normal sales because of credit deterioration?

Leslie Barbi: Hi, it’s Leslie. Yes, on the unrealized losses, it was things like extension trade, normal trading cash management and relative value. There was a few specific credit exposures you managed, but it’s predominantly just normal course decisions and portfolio repositioning. And as you know, the portfolio market values are still somewhat below book value for people generally just because interest rates had risen so much in 2022 and into 2023.

Jimmy Bhullar: And then just on the portfolio as well. If I look at your new money yield, it was already pretty good. It went up even more in 3Q. And I think you’re almost 300 basis points above their 10-year treasury yield is. So you mentioned private that you’re doing a lot more privates, but the yield seems very high. So just talk about what it is that you’re investing in and your comfort with the credit quality? And what’s really driving the increase in human yields?

Leslie Barbi: So there, we, in this quarter, not every quarter is exactly our target asset allocations over time, but there were some great opportunities in private. So disproportionately, we had more of this quarter that explained really the full change quarter-over-quarter. But if you look at underlying still investment grade corporates were the largest allocation. And we had covered a bit in Investor Day. I know we normally don’t spend a lot of time talking about investments, but we have a very broad platform. So we do have an excellent mix of opportunities across both public and private. And so there’s a lot of premium we can add over just straight publics when we’re investing. And on top of that, so there are some areas like TMLs where there’s still very good opportunities because there’s probably more interested borrowers than lenders given banks backing out of there, and we had really good opportunities there in rate-locks. So that’s some of it.

Jimmy Bhullar: Thank you.

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

John Barnidge: Good morning. Thank you for the opportunity. As we think about new business generation, and I’m just trying to think about how much of that is now coming from boutique one-to-one solutions than just winning on price? Maybe leveraging the data and solutions you have to really grow that volume in the flywheel. Thank you.

Tony Cheng: Let me take that, John. Really, I just want to firstly just reiterate our strategy, which hasn’t changed, which is, we, as I mentioned in my comments, we’ve got this incredible risk management and pricing capability. And when you combine it with the entrepreneurial spirit, the collaboration between our great people, this leads to innovation leads to growing market share. And as I said during Investor Day, it’s very important for our growth to continue to grow reinsurance markets and grow underlying insurance markets. So to answer your question, I’m really delighted with the proportion of our new business that came from what we call Creation Re. Broadly, it’s really pursuing exclusive transactions where we’re able to provide the idea, provide the innovative solution, hopefully give the partner that we partner with an edge to create greater value for that company and we share in that value.

So what I’d say, I’m not going to give you a specific number. We set a target, we well exceeded that target during the year. We’ll obviously up our targets internally for 2024. But really, delighted with how that’s going. And it really shows the strength of our strategy, the strength of our people and really the excitement within the organization.

John Barnidge: That’s very helpful. Thank you. My follow-up question, Variable investment income has been rather relatively strong. Can you maybe talk about your near-term outlook for transaction volume within that? Thank you.

Leslie Barbi: Hi, this is Leslie. Yes, so we had a very good solid quarter there on variable investment income. It was modestly above what we expected. I think if you think about the composition of our portfolio that drives that, which we have been strategically building over the last 10 years, we get sort of balanced sourcing from private equity and real estate. I would say that generally in the market, obviously, with 2023, not an amazing year for M&A and things that tends to drive less activity of realizations in the private equity portfolio. And on the real estate front, we have an in-house team and we’re the ones picking those investments were the ones that are thinking about when is the best time to sell them. So I’d say part of 2023, certainly, there was probably in the marketplace in general, still a separation between buyers and sellers.

I think there’s some more activity picking up there. But for us, it’s really about the specific holdings that we have and what makes the best sense about when to sell those. So I think we’ll continue to have a probably similar year in 2024 in terms of total VII possibly a touch lighter but we had a couple of years of really, really robust. This environment is a little less robust, but we’re still moving around that long-term average return that we communicated in Investor Day of 10% to 12%.

John Barnidge: Thank you. Appreciate it.

Operator: The next question comes from Joel Hurwitz with Dowling Partners. Please go ahead.

Joel Hurwitz: Hey, good morning. So I appreciate the updated disclosure on the unrealized under margins. Can you just take me through the moving pieces of the $3 billion growth? I think you mentioned $2 billion is new business. I guess what is the other $1 billion? Is there net favorable experience that flows through that?

Todd Larson: This is Todd. I’ll start and others can chime in. But yes, so a big portion of that $3 billion, as you referred to — the about $2 billion, is due to the value add from the strong new business growth throughout 2023. Then the additional $1 billion is really a combination of sort of experience assumption adjustments and how they impact the future margins offset a little bit by just natural runoff of the in-force business.

Joel Hurwitz: Okay helpful. And then just in terms of current quarter experience in U.S. individual mortality, can you just give a breakout of what you saw in the impact between capped and uncapped cohorts?

Todd Larson: Yes. So I’ll start out. This is Todd again. The individual life portion of U.S. trend. We saw adverse claims of about $20 million, I would say, mainly related to elevated large claims. And as we mentioned, a lot of the unfavorable experience was in the capped cohorts as there was some offsetting favorable claims experience in some of the uncapped cohorts. So the net financial reporting statement impact — for the income statement impact was about $40 million negative for the individual life in the quarter.

Joel Hurwitz: Okay, thank you.

Jonathan Porter: Sorry, this is Jonathan, too. Just to add in, if you take a step back and look at the year-to-date results for U.S. Individual Life, our overall — our underlying claims experience was favorable for the year, as we mentioned in the prepared remarks, about $40 million favorable for individual life on its own. And again, we had some cohort distribution impacts, which resulted in that being a headwind over the course of the year, but our underlying experience was favorable.