Reinsurance Group of America, Incorporated (NYSE:RGA) Q1 2024 Earnings Call Transcript May 3, 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: Good day and welcome to the Reinsurance Group of America Q1 Conference Call. [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 2024 conference call. I am 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 of $6.02 per share, which is our highest ever quarterly result. Our adjusted operating return on equity for the past 12 months was 14.8%, exceeding the intermediate targets we previously shared. The record earnings and attractive ROE is not solely from one or two areas of the company. All four geographic regions and both the Traditional and GFS businesses met or exceeded our run rates. In particular, our Traditional results stood out driven by strong underlying experience notably in the U.S. It was a quarter where many things came together and follows an excellent 2023 for RGA. I am very pleased that we just learned that RGA was rated number one for the 13th consecutive year on NMG Consulting’s Global all respondents Business Capability Index.
This is based on 2023 feedback from the life and health insurance companies around the world. In addition to the outstanding earnings and external recognition, our new business activity was very strong. We deployed a record amount of capital into in-force transactions of $737 million. We have always shared a preference to redeploy our excess capital back into the business for both financial and strategic reasons. Successful transactions lead to favorable economics over the long run and can create repeat opportunities from these clients. In addition to the record quantity of new business, we are delighted with the quality of the new business as we continue to see a high percentage of transactions centered around exclusive arrangements with some of the leading life insurers in the world.
These transactions are more innovative in nature and create greater value for RGA and its partners. When we see excellent earnings, ROE, new business performance across many parts of the enterprise and external recognition of our capabilities, we know our strategy is working. We know our brand and capabilities are strong, and I know our people and culture are second to none. Combining this incredibly strong foundation with macro tailwinds, we are highly confident in delivering long-term attractive results and shareholder returns. I have previously outlined four areas of notable growth in the company. Let me discuss some of the activities and successes in each of these areas, starting with our longevity and PRT business. Longevity not only diversifies our mortality exposure, but also provides favorable opportunities given the increased funding levels of pension funds around the world.
In the U.S. PRT market, we announced deals with both of our partners, including our largest PRT transaction to date, and we remain optimistic about our prospects going forward. In the UK longevity space, where RGA is a market leader, we built on a very successful 2023 with additional transactions this quarter. The pipeline remains active in both the U.S. and the UK, and we expect 2024 to be another exciting year. Our second area of notable growth is the asset-intensive business in Asia. During the quarter, we executed a number of reported transactions in the region. As announced, we closed an approximately $4.7 billion deal in Japan. Our success shows the powerful position RGA has in many of our markets around the world. This is a client that we have shared a strong business relationship with for over a decade.
This is an innovative solution being the first sizable longevity transaction in Japan, leveraging our strengths in the UK and the U.S. This transaction demonstrates our integrated approach with our investment and business teams working hand-in-hand to arrive at the right asset solution tailored for these liabilities, strong local relationships, coupled with worldwide expertise further enhanced by the collaboration amongst our teams is how we win at RGA. In our third area of notable growth, which is our Asia Traditional segment, we continue to see very positive results. Our focus is to package product development with capital and underwriting solutions to fuel our clients’ growth and success. In January, we adopted a product from Japan and launched with a major insurer in Korea.
Given the success of this product launch, we expect multiple clients to launch with RGA in 2024. In China, we closed an in-force transaction, and we expect this success to lead to further opportunities in this space in the near future. Finally, in Hong Kong, which is our largest Asian market, we continue to be excited by the increased volume of Mainland Chinese visitors buying life insurance. Throughout the past few years, we have increased our share of key products and therefore, well positioned to benefit. And finally, in our U.S. Traditional segment, which is our home market and the largest reinsurance market in the world, we continue to strategically build our offerings in the underwriting space to act as our key differentiator. In the quarter, we launched a partnership to extend our digital underwriting offerings.
This complements our full-service facultative and supplemental underwriting programs. It is this ability to offer the full breadth of the underwriting spectrum that positions RGA so well in this market. In addition, we see strong momentum and in-force activity as clients continue derisking their balance sheets which we believe is a leading indicator for future new business for RGA. Beyond these four areas of growth, we also continue to have tremendous success in other markets. You will have seen our announcements on the USD 4.4 billion transaction in Canada as well as our EUR 900 million asset transaction in Belgium. Both of these transactions create long-term value for the organization and is due to the tremendous work and effort of our local and global teams.
You can see that we have won a lot of meaningful transactions this quarter. But what you have not seen are the transactions we have looked at and have chosen not to pursue. We remain disciplined and execute only when the risk return trade-off meets our requirements. This risk management focus is as important as any other part of our culture in delivering long-term sustainable performance. As proud as I am about all these accomplishments, I am even more excited about the future. My job as CEO is to make sure that we continue to execute today, but also make sure we are in an even better position tomorrow. It’s a true privilege to lead this organization and I am clearly confident in our ability to continue to deliver growth at attractive returns to our shareholders for many years to come.
I will now turn it over to Todd to discuss the financial results in more detail.
Todd Larson: Thanks, Tony. RGA reported pretax adjusted operating income of $516 million for the quarter and adjusted operating earnings per share of $6.02. For the trailing 12 months, adjusted operating return on equity was 14.8%. We are very pleased with the strong results as well as momentum in new business activity and in-force transactions. Reported premiums were up 58.8% for the quarter. This increase includes $1.9 million – or $1.9 billion from a single premium U.S. PRT transaction in our Financial Solutions business. Our Traditional business premium growth was a healthy 8.2% for the quarter on a constant currency basis. We are pleased with the premium growth that there are good results across all regions. The effective tax rate for the quarter was 22.4% on pretax adjusted operating income, slightly below the expected range, primarily due to tax benefits received in foreign jurisdictions.
Before turning to the quarterly segment results, I would like to point out the addition of Slide 7 in our earnings presentation that displays the current period claims experience and the related financial statement impacts. For the period, underlying biometric experience, which includes experience on our mortality, morbidity and longevity risks was favorable by $138 million, of which $58 million was recognized in current quarter income. The remaining favorable claims experience will be recognized in income over the life of the underlying business. As we’ve discussed, under LDTI, the financial impacts from experience can vary based on the product, duration of the business and whether experience occurs in capped, uncapped or forward contracts.
The U.S. and Latin America Traditional segment results reflected favorable individual life experience as well as favorable health and group results. The individual life favorable experience was broad-based and reflected a lower frequency of large claims. The U.S. Financial Solutions results were slightly below expectations due to lower variable investment income. As you’ll notice, starting this quarter, we have combined the U.S. Asset Intensive and U.S. Capital Solutions results into a single segment. This is consistent with our management of these businesses and the presentation for other regions. Canada Traditional results reflected favorable experience in both group and individual life businesses. The Financial Solutions business reflects longevity experience that was in line with expectations.
In the Europe, Middle East and Africa segment, the Traditional business results reflected favorable timing impacts due to the earnings recognition on an annual premium treaty and positive contributions from new business. EMEA’s Financial Solutions business results were in line with expectations. Turning to our Asia-Pacific Traditional business, results reflected favorable experience across the region. The Asia Pacific Financial Solutions business results reflected favorable overall experience. The Corporate and Other segment reported a pretax adjusted operating loss of $38 million, in line with the expected quarterly average run rate. Moving on to investments on Slides 9 through 12. The non-spread portfolio yield for the quarter was 4.7%, including the impact of lower variable investment income.
For non-spread business, our new money rate was 6.12%, still well above the portfolio yield, but lower than the prior quarter, primarily reflecting lower average yields available in the market. Credit impairments were modest, and we believe the portfolio is well positioned for the current environment. Related to capital management, as shown on Slides 13 and 14, our capital and liquidity positions remained strong, and we ended the quarter with excess capital of approximately $600 million. We have an active and balanced approach to capital management over time, and as we have communicated in the past, we are comfortable bringing down excess capital given the right opportunities. This was the case in the first quarter as we deployed a record $737 million of capital into in-force transactions.
I will note that we do expect to retrocede a share of this to Ruby Re, which is expected to increase available capital by approximately $150 million. We remain well capitalized with access to multiple forms of capital, including debt capacity, retrocessions to Ruby Re and other forms of alternative capital. We expect to remain active in deploying capital into attractive growth opportunities while balancing returning excess capital to shareholders through dividends and share repurchases over time. During the quarter, we continued on track record of increasing book value per share. As shown on Slide 15, our book value per share, excluding AOCI and impacts from B36 embedded derivatives, increased to $146.96, which represents a compounded annual growth rate of 10.6% since the beginning of 2021.
As we’ve discussed, the first quarter was a very strong start to the year for RGA. The primary drivers of the results were favorable experience across the globe, strong premium growth, emerging earnings power from active capital deployment in prior periods and the impact of higher interest rates. Overall, we continue to see very good opportunities across our geographies and business lines and are well positioned to execute on our strategic plan. Our business continues to demonstrate its resilience and underlying earnings power. We are very excited about the future and expect to deliver attractive returns to our shareholders. This concludes our prepared remarks. We would now like to open it up for questions.
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