Reinsurance Group of America, Incorporated (RGA) Earnings Call Transcript & Summary

Welcome to the Reinsurance Group of America's Reinsurance Transaction Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jeff Hopson, Head of Investor Relations. Please go ahead.

Thank you. Welcome to RGA's conference call. With me on the call is Tony Cheng, RGA's President and CEO; Axel Andre, Chief Financial Officer; Leslie Barbi, Chief Investment Officer; Jonathan Porter, Chief Risk Officer; and Ron Herrmann, Head of RGA Americas. First, a quick reminder regarding forward-looking information and non-GAAP financial measures. Some of our comments and answers may contain forward-looking statements. Please refer to this morning's press release for a list of factors that could cause actual results to differ from expected results. Also, during the course of this call, the information we provide may include non-GAAP financial measures. Please see our press release and presentation both of which are posted on our website for a discussion of these terms and reconciliations to the GAAP measures. Throughout the call, we will be referencing slides from the presentation which is posted on our website. And now I'll turn the call over to Tony for his comments.

Good morning, everyone, and thank you for joining this call. We are very excited by the transaction announced with Equitable today. This deal delights our clients, delivers attractive returns for shareholders and demonstrates our commitment to disciplined risk and capital management. Our capital position remains strong, and we are well positioned for selective and disciplined deployment for the remainder of the year. Firstly, this is a mutually beneficial transaction that enables our clients to execute on its strategy. It broadens our new business partnership beyond traditional mortality reinsurance and into product development, underwriting outsourcing and asset management. This is an example of RGA executing on the Creation Re strategy in the U.S. by providing more holistic solutions that impact different parts of the value chain. Secondly, this transaction delivers strong financial returns for our shareholders. It is priced with attractive returns within our target range over the life of the transaction. In addition, we expect it to meaningfully contribute to meeting EPS and ROE targets in the short and intermediate term. Thirdly, this transaction demonstrates our commitment to disciplined risk management. This is a balanced block of life insurance fully within our risk tolerance and is consistent with our existing risk profile. As you all know, RGA is fundamentally a group of risk managers focused on only one thing, life and health risk. We have a proud track record over 50 years to demonstrate how we excel in this. So all in all, this transaction is strategic for our clients, strategic for RGA and plays to our unique strengths and ability to reinsure both sides of the balance sheet. The transaction is an example of the Creation Re virtuous cycle which generates greater and greater demand for RGA's unique offerings. World-class companies want to work with RGA. This puts us in the enviable position of being selective and disciplined to maximize long-term shareholder value. Any landmark transaction allows me to reflect and pause on the journey of this company. We have built this company brick by brick. And as a result, our foundations are so strong. That first product development we did in Hong Kong in 2002 is why we now have a thriving Asian traditional business. That first discussion with the Japanese regulator in 2003 is why our Asian GFS business is our fastest area of growth. The partnerships, expertise and technology we built in the U.K. 20 years ago is why we are now a global leader in longevity risk. And that first facultative case we underwrote in the U.S. more than 50 years ago laid the groundwork for the transaction we are announcing today. Today's transaction may be larger than average, but it is a natural outgrowth of the strong foundation we have built over decades, our biometric risk expertise, our global liability origination platform, our integrated capabilities on both sides of the balance sheet and our commitment to financial and risk discipline. That's what RGA is all about. That's why I'm so proud to lead this company, and that's why we are so confident about our future. I will now turn it over to Axel for his comments.

Thank you, Tony. I share Tony's excitement for today's strategic announcement. This transaction will deliver favorable economics and significant expected future value for RGA upon closing. It is expected to meaningfully contribute to our intermediate-term financial targets. It fits squarely within our risk profile and our capital position remains strong. The transaction was underwritten to attractive returns within our target range and is expected to have significant benefits to our future earnings. We expect the earnings to meaningfully increase as the asset portfolio is repositioned. Assuming a midyear close, it is expected to contribute around $70 million of adjusted operating income before taxes in 2025, increasing to approximately $160 million in 2026 and over time to approximately $200 million per annum. Thus, the transaction reinforces our conviction in achieving our intermediate-term financial targets. As outlined on Slide 6 of the presentation, the assumed block of business includes a $32 billion diversified mix of life products, consisting of both general and separate account liabilities, all of which fits very well within RGA's existing business. We view ourselves as the leading biometric risk experts, and we are very familiar with these underlying risks. Including the impacts of the transaction, our biometric risk distribution is relatively unchanged. Our investment risk profile remains in line with our current portfolio and our policyholder behavior risk profile continues to be tilted towards the low and very low risk bucket. Additionally, this block provides a balanced mix of earnings from fee, spread and underwriting margins. We expect to deploy about $1.5 billion of capital in this transaction, which we anticipate to fund through excess capital and a potential debt offering. Including this transaction, our capital position remains strong and we are well positioned for selective and disciplined capital deployment over the remainder of the year. We expect the deployment to remain consistent with our robust organic and transaction pipeline of quality opportunities across the globe. To summarize, we are excited with today's announcement. It meaningfully contributes to our intermediate-term financial targets. We have sufficient capital to deploy for the remainder of the year, and we will remain selective and disciplined to maximize long-term shareholder value. With that, I would like to thank everyone for your continued interest in RGA. We will now open it up for questions.

[Operator Instructions] And the first question will come from Elyse Greenspan with Wells Fargo.

My first question, I just wanted to confirm on some of the financials, right? So the $70 million of earnings this year and $160 million of next year, are those all -- was the earnings from the deal embedded within the run rate guidance as well as the intermediate CAGRs that you outlined with earnings?

Thank you for the question, Elyse. As we mentioned on our prior earnings call, we updated our target run rate. The 2026 CAGR growth relative to 2025 of 8% to 10% represents a growth in pretax income at the middle of the range of about $180 million. This transaction delivers about $160 million of that, representing a significant down payment on our target growth. In addition to that, following the deployment of capital in this transaction, we remained with dry powder for capital of about $800 million. And so we're in a position to continue to be selective and disciplined in that capital deployment for the remainder of the year.

And then my follow-up, right? So at a run rate basis, right, this is $200 million of earnings that's pretax, right? So on an after-tax basis and with the $1.5 billion of capital, the return seems at around 10.5%. I know you said it's in line with targets. Can you just comment on the return here? And I guess, relative to what you're targeting on deals, because I think, right, the overall operating ROE target for the company is a bit higher, right, the 13% to 15% relative to something in the 10% to 11% range?

Yes. Thank you, Elyse, for the question. So the return -- our return targets, return on equity target of 13% to 15% that we put out recently, again, returns on equity, the total capital required for the transaction is $1.5 billion. We are funding this capital through a combination of excess capital we have on balance sheet as well as a potential debt offering. So we believe this transaction is priced within this range of return on equity at attractive returns.

Yes. I mean, Elyse, just to add to it. I mean, the way I view it is that $200 million does not include the investment income on the $1.5 billion capital. So that's incremental accretion, for lack of better words, on the PTAOI, if that helps. So it's not right to compare it, let's say, to an ROE target of sorts because obviously, when we look at that, we earn investment income on that equity.

And our next question will come from Wes Carmichael with Autonomous Research.

I maybe just wanted to follow up on the last question on ROE because if I did the math on the $200 million, and Tony, you mentioned investment income. And then you take out $600 million for the debt that leaves a $900 million equity deployment. So my math is north of 15% ROE. And you guys are saying it's kind of closer to your 13% to 15% target. So just trying to see if we can maybe square that a little bit more.

Yes, that's correct. That's the way of looking at it, right? So basically -- so in the absence of -- our capital structure is -- effectively the target capital structure is 70% equity, 30% debt. So if you want to think in generic terms, when we price transactions, we price transactions to a return of equity within our range, 13% to 15%. That's the return on that equity, assuming a capital structure, such as I mentioned. To your point, for this specific transaction and this specific financing, we are financing it to your point with excess capital and debt -- a potential debt offering, resulting in a return that is attractive and to your point, that is towards the upper end of our range.

Got it. That's really helpful. And then, Axel, maybe on -- as you said, you're deploying $1.5 billion with this transaction in mid-2025. If I'm not mistaken, I think that's well above what you would have assumed in your run rate earnings guidance with the fourth quarter. So how much does this really accelerate the pace of capital deployment versus what you guys would have assumed when you provided those figures?

Yes. Thank you for the question. So we -- in our updated run rate, we mentioned that the growth on earnings, so the 8% to 10% growth on earnings represents a capital deployment of about $1.5 billion per year. So in a generic assumption of deploying the capital over the course of the year, that's -- and assuming we price it with return on equity within our range, that will be the earnings delivered by that. This transaction delivers essentially earnings that are extremely consistent with that target growth. To your point, we're assuming the transaction will be effective towards the middle of the year, and as a result, we have conviction in our ability to meet our intermediate-term financial targets.

Yes. I mean -- and just to add, I mean, as Axel mentioned earlier, the net result is essentially we've deployed the $1.5 billion and we've still got $800 million left to selectively deploy in our very robust pipeline. So obviously, anything that we deploy on the $800 million front in terms of deals will be additive to the '26 EPS, meeting those or exceeding those goals.

And our next question will come from Jimmy Bhullar with JPMorgan.

So just to beat a dead horse because I think there was a little bit of confusion about your guidance on the earnings call as well. So in your growth guidance, you had assumed that you'd be doing some deals and this transaction that you announced sort of gets you closer to that point. So some of -- this would have been embedded in your earnings anyway, but if you do more -- a lot more, then obviously, there's upside, and if you don't do anything, then you wouldn't approach the guidance that you had mentioned. But I think the point you're trying to make is that this gets you closer to being at the -- within your range anyway, even with just this one deal, correct?

Yes, Jimmy, that's right. So like -- exactly. So the 2026 EPS or implied EPS from the updated run rates, to your point, assumed about $1.5 billion of capital deployment during this year. Well, this is it. This transaction is $1.5 billion of capital and the earnings that is expected to produce are very consistent with that growth. Further to that, like Tony said, we then remain -- we have dry powder remaining of about $800 million of capital available to deploy this year. And so we're very excited by that. We have a robust pipeline of opportunities across the globe. We'll be able to continue to be very selective and disciplined in how we choose to deploy that capital, providing potential upside to that guidance.

And this is obviously a very large deal, but how do you see the opportunity set other than this throughout this year? And do you think that this increases the odds of you may be potentially doing more than what you had anticipated given how chunky this one transaction is?

Yes. Look, Jimmy, maybe I'll take that first. Firstly, outside of the U.S., the pipeline remains very robust. As we've always communicated. Now what does this transaction do for us in the U.S.? It's a landmark transaction, which proves beyond doubt the strength of our platform in the U.S., and we're very excited, very proud of this transaction. Now to execute on these transactions, a lot of things have to happen. It's got to be the right client. It's got to be the right risk return trade-off. We've got to have the capital for it. And it's got to be within our risk appetite. So does this set us up for future transactions? I wouldn't say tomorrow, put it that way. But absolutely, it's fully enhanced our brand, it's fully enhanced even further our capabilities and it really sets us up for, once again, more of that intermediate growth trajectory that we're so excited about.

And I may add, Jimmy, this is Ron. Great question. But as Tony and Axel have mentioned, the pipelines are robust. And as we always do, we'll continue to evaluate every transaction that comes along and does it meet the risk return comments that Tony just made. But in relationship to that, this transaction brings a significant strategic value to us where we're sort of helping Equitable look forward and serve its clients in a different way by them outsourcing some of the underwriting and some of the things that go along with that and us helping build product and experience for the end client tying into Equitable, which is obviously a very strong brand and a very, very strong distribution organization as well.

Yes. No. And thanks, Ron, for adding that very much. I mean that's why we keep talking about this Creation Re virtuous cycle. We're able to do -- help a client on capital and help a client on how they manage their new business. It's a rare trait for a reinsurer to be able to do that in one country, let alone around the world. So that just keeps building up the strength of our platform. So we now are in the enviable position where the pipelines are full with true quality business. And we're very selective on how we do transactions. We've done that over 51 years, whether it's from a risk, from a capital, from a strategic perspective and don't expect any change on our strategy and philosophy in doing these.

And our next question will come from Suneet Kamath with Jefferies.

My first question on the $1.5 billion, it sounds like, to your point, Axel, you've done the deployment for 2026, I guess. But as we think about what you're going to need to do to keep the 8% to 10% going, I mean it sounds like you're going to need to continue to come up with $1.5 billion of capital to deploy. It sounds like you're using your leverage capacity with this deal. So simple question is where does that capital come from? Because if I look at Slide 9 of your deck, it looks like your free cash flow is -- implied free cash flow is a lot less than that.

Yes. Thanks for the question. Yes, if you look on Slide 9, where we look at organic capital generation. So the way I think about it, the organic capital generation, we're going to be adding some earnings from this transaction, which adds in 2026 to the level of organic capital generation in 2026. Now as that occurs, we then create debt capacity. So you add that debt capacity. And so we -- when you do that and you net out the dividend, the shareholder dividend, we feel pretty comfortable about the ability to generate $1.5 billion or so of capital to deploy. And then in addition to that, we've mentioned that third-party capital is something that's going to be core to our strategy. And so as we look to execute on the next phase of that, that could provide for additional capital to deploy and generate a fee stream from that.

Okay. So your -- just to be clear, your capital plans and deployment plans and growth plans don't anticipate or contemplate any need to raise equity capital. It's all debt and third-party capital that you talked about.

Correct. The base case organic capital generation is consistent with that level of capital deployment.

And our next question will come from John Barnidge with Piper Sandler.

My question is on the asset repositioning. How long do you anticipate that will take for the asset repositioning to be completed and to see that net investment income?

I'm happy to get started...

Sorry, this is Leslie. The repositioning of the portfolio is expected to happen within the normal time frame of about 12 months. The income contribution does take a little longer. The repositioning of public investments obviously can happen quite quickly. It's the private assets we originate over a couple of quarters, several quarters. And once we're fully repositioned, the second full year has more income than the first 12 months of transactions.

My follow-up question is around the additional sources of capital. You talk about strategic retrocessions and additional third-party capital vehicles. Can you talk about visibility and appetite for that?

Yes. Thanks, John. So as you know, we've executed on Ruby Re. I mentioned that we have over half of the capital left over to deploy. We're very pleased with how that's going. We expect that capital to be fully deployed in the second half of this year. And really, we look to build upon that success and look to raise -- to create more vehicles in the future. So that's on the sidecar side. On the retro side, it's really -- we've got a massive book of business. We have ability to retrocede business in certain places, either to free up capital and recycle that into opportunities or at times benefit from different pricing that's out there in the market and the ability to generate profits from ceding a block of business, given where the market is pricing it.

The next question will come from Alex Scott with Barclays.

I just wanted to go back to the, I guess, the remaining capital capacity you have kind of following this deal, I think, an $800 million number was mentioned. I just wanted to understand that a little bit better. Could you kind of break that apart in terms of is that just equity? Is that assuming debt capacity at some level? Does that include anything from assumed Ruby Re deployment?

Thanks for the question. It was a little muffled, but I think I got the gist of it. Look, we show on Page 10 of the presentation. So we've got a deployable capital of $1.7 billion. This transaction consumes $1.5 billion of capital with a potential debt offering of about $600 million that gets us back to $800 million. So that's how we think about that -- the $800 million that's left over and deployable for 2025.

Got it. That's very helpful. And then can you maybe just give us some broad color on the pipeline for larger deals like this? I mean it seems like there's some possibility of large deals like this occurring in Japan around the regulatory changes. But should we take this -- is there any kind of indication that maybe larger deals are coming to the market at a bit faster pace at the moment, and there's more of that kind of potential? Or is this more of a one-off?

Yes. Thanks, Alex. I mean, look, for us in Japan, once again, we're incredibly selective on the blocks, right? So if it's sort of pure asset risk, it's not going to allow our biometric differentiator to make a difference. So I'm not sure what you're exactly referring to in Japan, i.e., the blocks we're seeing, we're delighted with, they're quite modest in size and they're absolutely nowhere near the size of this transaction from a capital deployment. But we're very excited, obviously, with our Asian asset-intensive business, which is our fastest-growing area. But so some of the bigger transactions perhaps in Japan may be more the flow annuity deals, which are a more pure asset-intensive risk. Once again, it's just not in our sweet spot, and we don't particularly participate in those transactions. As I said in the U.S., the exciting thing about the U.S. has been a move in the reinsurance market away from those pure asset transactions, which, once again, we really have not been a player in the past 5 years, those just brute force asset deals. We're now starting to see the transactions connect the biometric risk with the asset risk like this transaction. So once again, we don't -- we feel this is an intermediate trend, right? This is very exciting for our strategy. And kind of validates to us, it feels like we're really on the right path here, but these transactions don't come by every day. These transactions have to fit our filter of, once again, strategic partner within our risk return trade-off, our risk profiles and obviously have the capital available. So a lot of words there, Alex, but hopefully, that gives you a flavor of how we're thinking.

Our last question today comes from again, Wes Carmichael with Autonomous Research.

As part of the transaction, you mentioned Creation Re and expanding the strategic partnership with Equitable. Can you maybe just give us a little bit of color on what you expect going forward on product development? Are you going to be thinking about new products with Equitable and reinsuring them and providing capital solutions, et cetera? Just any thoughts there would be helpful.

Yes. Let me open up with some broader comments and then Ron, I'll ask you to talk a bit more about that. And well, thank you for the question. This is very much -- we've got such a strong skill set across such broad part of the value chain and literally across the globe. So as you know, product development has been an excellent way in which we have grown our business in Asia. We've been doing that in the U.S. We obviously make sure those capabilities are spread around the globe. And the more parts of the value chain, the broader the strategic partnership with any client, obviously, is very exciting once again, to create value for us and our partner and share in that value. But I'll ask Ron to talk a bit more about this partnership with Equitable.

Sure. Thanks, Tony, and thanks for the question, Wes. And so I would say, obviously, the in-force block is the big announcement of today and all the metrics that you're seeing are part of that transaction. But the arrangement that we have entered into with Equitable begins with term insurance. There is product build in there as well using the capabilities that RGA has had and the experience we bring. It's also really about the end experience that their clients would receive in starting with those products. And so if you think about the underwriting process from automated all the way through to fully underwritten, we are working with Equitable in terms of creating swim lanes for their clients and ease of business. We do have opportunities to continue to expand that as we move forward. And it is a flow transaction. So it will be meaningful over time as we continue to capitalize on the distribution and the approach they've taken to supporting the retirement planning with their clients.

This concludes our question-and-answer session. I would like to turn the conference back over to Tony Cheng for any closing remarks.

Thank you for your questions and your continued interest in RGA. We are very excited by this transaction and the strategic partnership with Equitable. It checks all the boxes necessary for a very successful transaction, and we look forward to closing it later this year. Thank you.

The conference has now concluded. Thank you for attending today's call. You may now disconnect.