Reinsurance Group of America, Incorporated Q2 FY2025 earnings call

Key Points - Tony Cheng:

• Reported operating EPS of $4.72 per share. Adjusted operating return on equity for the trailing 12 months excluding notable items was 14.3%, in line with intermediate-term targets. Operating results below expectations due to large claims volatility in U.S. individual life and unfavorable claims in U.S. group healthcare excess. Forward-looking views unchanged. Achieved significant strategic successes: substantial increase in excess and deployable capital, strong business momentum in financial solutions and traditional businesses, closed Equitable transaction, had success in global asset-intensive business, strong traditional business premium growth in first 6 months on constant currency basis. Discussed new business activities in Asia traditional, Asia Financial Solutions, longevity in PRT market, and U.S. traditional.

Key Points - Axel Andre:

• Pretax adjusted operating income of $421 million for the quarter or $4.72 per share after tax. Trailing 12 months adjusted operating return on equity excluding notable items was 14.3%. Made progress on strategic initiatives, including improved capital position. Excess capital increased to $3.8 billion at end of Q2, $2.3 billion pro forma for Equitable transaction. Deployable capital increased to $3.4 billion. Nonspread portfolio yield excluding variable investment income was 4.98% in Q2. Effective tax rate for the quarter was 25.2% on adjusted operating income before taxes. Announced closing of Equitable transaction with details on effective date, earnings reporting, and future earnings contributions. Discussed quarterly segment results and capital management.

The U.S. and Latin America traditional results reflected unfavorable claims experience. For the year, the economic claims experience in U.S. Individual Life is broadly in line with expectations. The U.S. Financial Solutions results were higher than expected due to higher variable investment income and higher investment yields. Canada traditional results reflected modestly unfavorable group results in individual life claims experience. The Financial Solutions results reflected favorable longevity experience. In the Europe, Middle East and Africa region, the traditional results reflected unfavorable claims experience, partially offset by favorable other experience. EMEA's Financial Solutions results were above expectations, reflecting favorable longevity experience, higher variable investment income and higher investment margins due to ongoing growth. The Asia Pacific region's traditional results were good, reflecting favorable claims experience across the region. Financial Solutions results were favorable, primarily due to higher variable investment income and ongoing growth of the business. The Corporate and Other segment reported an adjusted operating loss before tax of $32 million, favorable compared to the expected quarterly average run rate, primarily due to higher variable investment income. Revenue contribution % details were not explicitly provided in a tabulated manner in the transcript but can be inferred from the overall segment performance descriptions.

- Tax Guidance:

• Still expecting a tax rate of 23% to 24% for the full year.

- Equitable Transaction Guidance:

• The transaction is effective April 1. Will only report 6 months of earnings in 2025 GAAP results. Q2 earnings on the block estimated to be $30 million. Expect pretax operating income contributions of approximately $70 million for the second half of 2025, increasing to $160 million to $170 million in 2026 and approximately $200 million per year by 2027.

- Business Guidance:

• Confident in intermediate-term financial targets. Traditional business premiums continue to have strong momentum with 11% growth on constant currency basis year-to-date.

• Large claims volatility in U.S. individual life could impact results. - Unfavorable claims in U.S. group healthcare excess business, although short-term and most will be repriced by 2026, currently has an impact. - Effective tax rate for the quarter was above the expected range due to establishment of valuation allowances on foreign tax credits.

Q: Can you talk a little bit more about the additional credit you got on the life block? What changes were made? And did you consider incorporating that with the third quarter actuarial assumption review?

A: Tony Cheng responded that they're pleased with the value of in-force credits in the capital model, it's the result of long-term work capturing embedded value in the business with current assumptions and it's too early to talk about third quarter actual assumptions work as it's still ongoing and will be discussed on the next quarter's earnings call.

Q: Can you just unpack the individual life experience in the quarter? Was there some significant lag effect from Q1? And was there any impact from you guys increasing retentions at the beginning of the year?

A: Jonathan William Porter responded that when reviewing claims experience, they focus on longer time periods. Q1 had very positive results in U.S. individual line due to favorable large claims volatility, Q2 saw the opposite but year-to-date results are broadly in line with expectations. The magnitude of large claims volatility in Q1 and Q2 was unusual and not expected to continue at that level regularly.

Q: Can you talk more just about the health experience in the quarter and future performance of the block? And can you give a sense of the magnitude and expected impact of rate increases?

A: Jonathan William Porter responded that the U.S. Group business has 4 major lines, 3 performing as expected, negative experience in Q2 related to healthcare excess line, about 30% of expected U.S. Group earnings and 3% of U.S. traditional earnings. Results driven by higher claims costs from various expensive treatments. Have implemented significant rate increases on renewed blocks and expect to continue.

Q: How should we think about you guys getting incremental credit for future deals in terms of excess capital figure? Is it certain types of deals that would qualify for credit? Do you talk to the rating agencies on a case by case basis?

A: Tony Cheng responded that they have a long-term track record of working with rating agencies to obtain credit for value of in-force. At times in the past, it's been in the context of securitization of a block of business, but also have a process where certain portions of the business receive value of in-force credit as they write new business and address other portions block by block, expecting to constantly look for opportunities to create more value of in-force recognition through the rating agency process.

Q: Do you think any of the higher costs you're seeing in excess health care on more expensive but more effective treatments could eventually be offset by savings on claims and life down the line?

A: Jonathan William Porter responded that it's a valid point and part of the potential opportunities in the mortality space, and part of how they think about the mix of risks at the enterprise level. Tony Cheng added that they internally observe this and expect long-term impact from medical advances to outweigh short-term earnings impact.

Q: Is RGA anywhere near its retention on the excess healthcare business? Just trying to assess how confident you are in the remaining weakness there?

A: Jonathan William Porter responded that the reserves established this quarter are their best estimate of claims to come out for earned premium, and the drag effect is additional reserves expected to be established as premium is earned over the balance of the year, but they believe reserves are appropriate. Tony Cheng added that it's a very short-term business, majority will be repriced by January 2026, and they're comfortable with the position.

Q: Did you actually have to do anything in regards to like borrowing against future in-force value or anything like that? Or is this just more about getting the credit from the rating agencies through the process that you have to go through with them?

A: Axel Philippe Alain Andre responded that this is really a recognition of the value of in-force that did not require or was not associated with an actual securitization or borrowing, but they have that available to them should they find value in doing that in the future, strictly from a rating agency process perspective. Tony Cheng added strategically that they talk a lot about the value of in-force business margins, which generates opportunities, and it took external consultants to verify and ratings agencies to agree, and there's further blocks to come.

Q: You had mentioned some higher profile blocks in the market that you chose not to bid on during the quarter. Just curious, were those deals that have already been announced? Are you referring to deals that are in the market that where there haven't been transactions yet?

A: Tony Cheng responded that it refers to transactions that have occurred, and there's no intention to increase the proportion of the company in certain directions like LTC or ULSG type businesses, as shown by their actions of not being involved in material LTC blocks in previous quarters.

Q: Can you just talk to the conservatism that's built into the value in-force credit? Because to me, it sounds like this is another sort of assumption-driven sort of number and if those assumptions end up being too aggressive, then maybe the $2 billion is at $2 billion. And I just want to make sure we don't run into an issue like that down the road as you continue to pursue this source of capital.

A: Axel Philippe Alain Andre responded that it's a very strict review process for reflecting value of in-force in the frameworks, starting with conservative actuarial assumptions backed by long history and data, and only getting partial credit for it, so they feel very confident in the amount recognized through that framework, having been reviewed by third party and rating agency process.

Q: You've raised the ROE target, you've raised the EPS growth target, you're very bullish about the opportunity, but the stock's multiple is lower than when the ROE target was lower and the growth was lower. And we can debate the reasons why. But I think one of them is there is a view in the market that maybe this new strategy is going to add a lot of risk to the story relative to kind of the RGA of old. And so I just wanted to give you an opportunity to comment on that.

A: Tony Cheng responded that the RGA of old, especially in Asia, was an approach of being proactive, innovative, finding things to help clients grow and succeed, and the current more aggressive approach is a more proactive and less risky approach as commoditized business is not conducive to long-term goals, and they'll continue to focus on innovation and solutions in life and health risk, confident in growing EPS and raising ROE.

Q: One on -- just a follow-up on the $2 billion capital benefit from the value of in-force. Is there a practical limitation to how much you could do like the maximum? I assume you can't go to 100% of equity capital or something like that. But when we think about $2 billion, I don't know, would the limit be half of total actual equity from a credit profile -- sorry, from a credit you would get on capital? Can you just give kind of the framework?

A: Axel Philippe Alain Andre responded that there is a limit to the amount of value of in-force credit that can be recognized from a rating agency perspective, but they still have upside opportunities to capture more value of in-force with further in-force blocks, and their capital metrics consider multiple frameworks including economic capital, regulatory, and rating agency, and they've been able to free up capital through retrocession and other tools to redeploy into the business.

Q: I was just hoping you could help us kind of frame this -- the variability in the result this quarter. And I guess just thinking about -- if it may change in the earnings power, right, or even just 2026, the calendar year because we have the equitable accretion, organic and inorganic growth, maybe some buyback and then there's maybe a little bit of a risk from some stop-loss losses in a worst-case scenario, but is there anything else that should be changing how we think about 2026?

A: Axel Philippe Alain Andre responded that they remain confident in their intermediate-term financial targets, pleased with capital deployed into attractive transactions, confident in earnings expectations from the Equitable transaction and other tailwinds like Creation Re strategy, investment portfolio, and balance sheet optimization, and would not be changing expectations based on one or 2 quarters' worth of volatility.

Q: I was just hoping you could help us kind of frame this -- the variability in the result this quarter. And I guess just thinking about -- if it may change in the earnings power, right, or even just 2026, the calendar year because we have the equitable accretion, organic and inorganic growth, maybe some buyback and then there's maybe a little bit of a risk from some stop-loss losses in a worst-case scenario, but is there anything else that should be changing how we think about 2026?

A: Axel Philippe Alain Andre responded that they remain confident in their intermediate-term financial targets, pleased with capital deployed into attractive transactions, confident in earnings expectations from the Equitable transaction and other tailwinds like Creation Re strategy, investment portfolio, and balance sheet optimization, and would not be changing expectations based on one or 2 quarters' worth of volatility.

Q: Curious how you see that today versus financial solutions. And just curious how the regulatory regime changes in Asia maybe are impacting demand?

A: Tony Cheng responded that business is strong throughout, focused on Creation Re and exclusivity. Biometric is a driver of traditional business with strong premium growth and robust margins, and asset intensive business's sweet spot is when there is material biometric risk within it, enabling them to differentiate and build long-term results.