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

I think we're ready to get started. So first, I'd like to thank Laura Cockrill for being with us, CFO RGA; and Ron Hermann, Chief Commercial Officer. So thank you all for being here.

Maybe we'll start with a broad one to kick it off. And I wanted to ask about what do you see as the biggest priorities over the next 12 months? And what are the things we should look for to judge whether you're executing on those priorities.

Sure. I'll start. Feel free to jump in. So I think as I come into this world, there's a few priorities that I think about over the next year. First is really just continuing to deliver on our strategy. I think we've been doing extremely well in hitting our financial targets of the 8% to 10% EPS growth and the 13% to 15% ROE. So as I think about going forward and leveraging our competitive advantages and how we want to continue to benefit from our local presence, our ability to reinsure both sides of the balance sheet, our biometric expertise, continuing to use those to ensure we're going after that balanced disciplined growth. Second would be investor communications. I think one of the things that I really want to focus on is just how we tell our story externally. I think there's a little bit of a gap between just the understanding of how RGA creates value, really our biometric focus and expertise, the mix of earnings of our business. So really want to enhance how we do the investor communications, whether through things like this or our disclosures or different metrics. And then lastly, I would probably say third-party capital. That's a focus for us right now. A great tool for us as we think about our broader capital management and just different things we can benefit from that. So that's something as we finish deploying Ruby this year, we'll look to kind of what makes sense going forward.

So next, one of the questions I get frequently is on the competitive environment. And I was interested if you could talk about it and just how is the price discipline, the competition different when you're looking at bigger in-force box versus, I think, some of the recurring flow reinsurance through relationships that you've talked about.

Sure. You want to start this?

Yes, I can start this one. So one of the benefits we have is a global footprint. So when you think about the local support we have across the globe, the way we interact with the regions, it enables us really to think about competition in a different light. In Asia, for example, we do an awful lot of flow business, and a lot of that is origination with the clients and then work with the regulators as we build the products. And what we have found in our exclusive approach to many of those situations is we don't have competition per se in those. Take the U.S., we do the same thing across the Americas, including Canada, where we focus on an underwriting approach and a lot of those transactions end up also being exclusive. And then on the larger blocks, which happen more in the U.S., we've become highly selective of the types of business that we want and where we think our biometric expertise can play a role. And as Laura mentioned, having the ability to do both sides of the balance sheet really do help us in terms of focus on transactions that we're capable of doing just about anything across the board. And then in EMEA, primarily in the U.K., we're very big in the longevity space. We're well represented there. We've got a long-standing history there. And although that marketplace has been a little bit slow in 2026, the pipelines are picking up significantly. There just haven't been as many large transactions. And we're capable of handling the small transactions. We're capable of handling the larger transactions. And we have seen an increase, as I just mentioned. And so we're very selective where we compete, and I think that helps us in terms of the competitive environment overall.

Got it. Next topic, mortality. So it's been running pretty favorable recently. And I was interested if you all could comment on how transitory do you think it is? Is it more viewed as there was some pull forward around COVID-19 and so forth, and we're getting the benefit of being on the other side of that now. Does any of it have to do with some of the medications that are out there or potentially longer term, some of the tech improvements that could benefit medical care?

Yes, I'll take that. So I think from a mortality experience perspective, it's been favorable to date in the last few years, actually, and we're quite pleased with that. I think it really does show our expertise in the risk selection as we think about just broader mortality. The mortality trends have been really positive across a lot of our key markets in the U.K., the U.S. and Canada. So that certainly provides some potential tailwinds. If it's pull forward from COVID, I mean, I think that's a possibility. It's hard to say exactly if that's the case. It's certainly something that we monitor and we look at as we see the trends, but it's hard to tell. The medical advancements for sure. I mean, GLP-1 is the one that absolutely comes up the most as we're talking and looking at a lot of our research. There's been a lot this year as far as advancements, specifically in that as far as kind of the oral GLP-1 the Medicare is going to start covering it. So that should allow broader access and hopefully make it cheaper. And then just the generic versions of it. So I think all of that will be beneficial. When we think about that and we think about our assumptions, we generally bake in some sort of medical advancements into our assumptions. So what's happening with GLP-1 and some of the other drugs certainly helps give us confidence in those assumptions. We'll continue to monitor and see what happens. But between just the advancements and some of the technology, it certainly suggests potential tailwinds.

I guess mortality improvement assumptions over time because this isn't something that's a new assumption for you all. I mean, has it changed your approach to that? Or is it sort of things that are happening just give you more confidence in what you are already assuming?

Yes, I would say more of the latter. I mean, again, over, I guess, 50-plus years of us, there's been medical advancement. So we assume that in our general assumptions. And so this does give you confidence. Whether with things like AI and technology, there's going to be more, we'll have to see. But that's something as part of just our -- we have a huge global research and development team that's constantly doing research on all the different things that are going on. And then there's a lot of discussions back and forth across the different markets and regions and different products on what makes sense.

Yes. I was just going to add, I mean, if you think about, we have over 50 years of biometric experience in pricing. And so although, as Laura mentioned, we've got a lot of people looking at the improvements over time, we react slower, right? We don't build those things into pricing immediately. So we look to see some of those improvements which support some of the assumptions that we built in. And so I think part of what you're seeing is just that experience.

Got it. So the next one, I'm going to apologize ahead of time. It has an accounting kind of angle to it, but I do I think it's important, and I think it's important for people to like hear the explanation of what it is and why it's important. But you have these capped cohorts as they're called, and you reduced that meaningfully by 25%. And I think you suggested you could take it down further. What are these capped cohorts? Maybe you can kind of give us that in plain English. And why is it impactful for volatility of earnings and improvement of earnings to take these actions?

I guess that was mine. Sure. So I'll try to keep it plain English and feel free to tell me if it's not. But so the capped cohorts, it's a concept that just came out of the new long-duration targeted improvement accounting. But really, what it is, is when we think about -- sometimes we refer to an NPR or a net premium ratio and when that -- which is basically an indicator of profitability. So when we have an NPR or when a cohort is capped, it's because that net premium ratio is over 100%. And all that means is that all future premiums are needed to pay future benefits. So there's no profitability going forward that we can smooth it over when we talk about smoothing. So that's basically what the capped cohort is. It's just that it's over 100%, and there's no more to smooth it over. And so when that happens, any experience in earnings, whether good or bad, just goes straight to the bottom line. And that can cause some volatility. And so a lot of the in-force management actions that we've talked about have been to address those capped cohorts so that we can try to limit or minimize that volatility. And when we do those in-force actions, we can do things like rate increases. So if we do get rate increases, that then improves the profitability and can change that a cohort can go from capped to uncapped or we might recapture the business or the client may recapture the business. We'll negotiate a recapture and then the business just comes off our books. So we have been intentional about trying to go after some of those capped cohorts just to help limit that volatility, and it can be underperforming business.

Got it. Very helpful. Pivoting to Asia Pacific, it's been an important source of growth recently. Sometimes on the outside, it's a little hard to see exactly where and how you're growing. So I wanted to see if you could give a little more detail on what kind of transactions those are, what kind of geographies, the products that you're engaged in? And are these bigger in-force blocks? Are they more asset heavy? Or are they more of these relationship deals that you talked about?

Yes, I can take that one. So primarily, most of our business in Asia is coming from Japan and Hong Kong. We've had a local presence there for a long time. In fact, our CEO, Tony, is who really established our footprint there and built that out over a number of years. And so that team has been with RGA for a long time. They're very connected with clients. They're also very connected with regulators. And a lot of what we're doing is flow transactions that there -- the ability to do exclusives because we're helping design them and helping them get through the regulatory environment has been a very big part of what we do. It's a lot of single premium whole life and products along those lines. There have been some recent announcement about competition within those markets. That's primarily your asset plays, companies that are looking more for the asset transactions only, and that's not where we play. We play primarily where there are biometric and asset mixes coming together.

Yes. And maybe I'll just add to that. One of the big successes we've had in Asia, too, is just product development. And so we are working with the clients to actually create the products that we think can make sense in the market, and then we can get reinsurance from that. So that's been a huge part of our success there as well.

Got it. This where we were on Asia Pacific, I wanted to ask about the potential increased scrutiny from China on some of the brokerage accounts in Hong Kong. And if there's any update that you can provide on how you're seeing that impact, if at all, the sales, particularly to Mainland China visitors in Hong Kong.

Yes. I'll start with that one. Yes. So I think the bottom line is we expect it to have pretty limited impact on our business. What has come out in the news, but the tax law is actually not new. It's just more discussions on if they're going to enforce it and how. But as we look across the business and we talk to the clients, taxes are not the main motivation for why some of the Mainland Chinese visitors are coming over and buying the different products. It's access to USD or to a broader global investment strategy, some of the protection benefits that come with it. So it's not taxes. So still relatively new, but we expect it to be pretty limited.

Got it. So Ruby Re has become pretty fully deployed. Can you provide an update on that? What are you looking at in terms of potential next vehicles? And could that find a larger part of the set of liabilities that you all look at?

Yes, sure. So maybe just taking a step back from a sidecar perspective in general, like I mentioned, it is one of our priorities. I think it's a pretty advantageous tool to have in our toolkit as far as a few things really. It does obviously provide additional capital as we see some of these opportunities that we've been seeing. The fee income, just the reoccurring stream of capital-light fee income is always a benefit. We also like it because it helps us think about public versus private company balance sheets. So as we think about some of the different risks that we want to reinsure when we have the sidecars in place, we can see where they might make the most sense. And then lastly, I would say it gives an opportunity for third-party investors to really benefit from some of our biometric expertise and our understanding of the liabilities and then really does help validate the price as other investors are happy to take the business. Ruby Re will be fully deployed this year. So we're very excited about that. And then we're looking to see what makes sense next. It is part of our broader strategy. Right now, nothing to specifically say, but look forward to talking about it when we have it.

Okay. Great. Next on the Equitable transaction. It's been a little while now. I'd be interested in just an update on how has that performed doing a larger deal. Is that something that you view as repeatable? Is that a unique transaction that could offer more opportunities with other large primaries?

Sure. I'll take that. So Number one, I think some know, but not all. I ran the life insurance business and the group employee benefits business at Equitable for years before joining RGA. It's a very unique transaction. The one that everybody looks at is the block, which we'll certainly talk about. But it was more of a partnering arrangement where we've ultimately gained exclusivity because of the different areas to which we were able to partner with them. They contributed to Ruby Re. We've talked to AllianceBernstein. We actually have taken over a significant part of their underwriting where we are actually doing the underwriting through our own organization, which we obviously always like doing and have built out over quite a bit over the last few years. We've also built them product and that relationship continues. In terms of the deal itself, it has certainly met all of our expectations, and it is well within where we expected it to be, both from a mortality claims standpoint as well as earnings standpoint. So the numbers that we've disclosed, it's still tracking pretty much right in line with what we would expect it to be. I think that's -- there's really 4 reasons for that. One is we have 50 years plus of underwriting mortality, but we were able to look at that block and the experience that they had over that time and apply both our knowledge and experience with their knowledge and experience. And I think the net-net of that is what you saw in the ceding commissions and what that was published. The other side of it is we were able to reposition the assets. And that enabled us to get better returns than they had traditionally been able to get. And that was all a big part of how we evolved and how we looked at that entire process going through it. And then in terms of capital, we're able to do it at a lower cost of capital. And that's just really due to our expertise and the teams that Laura have overall. We have done other transactions like Equitable, but they have been much smaller. So Equitable, there's not a lot of $32 billion statutory business out there, but it showed the capabilities that we had as an organization to be able to deliver it. We have repeated that type of business. And it's actually part of what we're looking for as we go forward where I mentioned earlier about driving to exclusives. It's hard to tell somebody, "hey, you have a block, we want to look at it, give us exclusivity." It's much easier when we say, well, we can help you with this, this and this, and we can think about this as a holistic partnership and how do we move forward. And so we have repeated it, smaller transactions that aren't as public. And in terms of the underwriting capabilities, we've actually taken over 3 organizations now, either in total or a large sum of it, and those have led to additional blocks as we move forward.

Yes, that's a big piece for us when we can help play across different pieces of the value chain, whether it's the product development in Asia or the underwriting in the U.S., like all of that just contributes then as we kind of work with the clients and work towards that exclusive business.

Got it. Okay. Next on capital. Could you talk about the capital position of the company, how you're thinking about it and how much capacity that gives you for growth opportunities as well as maybe how you balance that with other forms of capital deployment like buybacks?

Sure, sure. So when I think about capital, we have numerous sources of capital. We obviously have organic growth that can help fund our capital, the third-party capital that I talked about. There's runoff of our existing block of business. we leverage capacity to the extent that, that's available and then our excess capital. So we do have about $2 billion of excess capital that we disclosed at the end of Q2. And so we really think about looking at our pipeline, which right now is very attractive across all the different regions and looking at both the mix of transaction and flow business and see what we see coming over the next, say, 12 to 18 months. Some of these deals, especially larger transactions can take quite some time to play out with the clients. So we have to balance kind of that timing when we look at the capital. We also are very committed to the 20% to 30% payout ratio that we put out there as far as a shareholder return perspective. And we'll look at that, and we'll look at the pipeline and think about where we can be opportunistic if it makes sense from a buyback perspective or if there's just a large amount of transactions. I think when we think about kind of funding the business overall and the total capacity, it is a mix of flow and transactions. And so that's where it's nice. When we think about hitting the 8% to 10% EPS, we have multiple different levers other than just deployment into the transaction. So that is the flow business, that is as we think about balance sheet optimization efforts across our asset portfolio, the in-force management that I talked about and the buyback. So it's all a balance, and we look across all those different pieces as we think about our broader kind of capital and capacity.

Maybe one quick thing to add to. I mean, under Laura and I've worked together now for quite a few years, but one of the things that we're really trying to focus on is the planning process to think about the transactions we want to be involved in. So we've become very highly selective in the types of transactions that we want to be in, more planning around the whole capital framework that Laura was just talking about because of the length of some of the processes that we have. And so -- it's helped because in my role, we're shifting across regions. We're doing and looking at different things, some move quicker than others, and that balance is really tied into sort of the selection, the governance and the oversight of the deals that we really want to partake in.