Reinsurance Group Of America Inc Q1 FY2021 Earnings Call

Good day, and welcome to the Reinsurance Group of America First Quarter 2021 Results Conference Call. Today's call is being recorded. At this time, I would like to introduce Mr. Todd Larson, Senior Executive Vice President and Chief Financial Officer; and Anna Manning, President and Chief Executive Officer. Please go ahead, Mr. Larson.

Thank you. Good morning, and welcome to RGA's First Quarter 2021 Conference Call. With me this morning on the call is Anna Manning, RGA's President and Chief Executive Officer; Alain Néemeh, Chief Operating Officer; Leslie Barbi, our Chief Investment Officer; Jonathan Porter, Chief Risk Officer; and Jeff Hopson, Head of Investor Relations. We will discuss the first quarter results after a quick reminder about forward-looking information and non-GAAP financial measures. Following our prepared remarks, we will be happy to take your questions. 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, information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation, quarterly financial supplement, and our website for a discussion of these terms and reconciliations to GAAP measures. And now I'll turn the call over to Anna for her comments.

Thank you, Todd. Good morning, everyone, and thank you for joining our call today. Last night, we reported a loss of $1.24 in adjusted operating EPS, which included $474 million in COVID-19 impacts or $5.31 per share. In the context of the quarter that saw pandemic-related deaths reach their highest peak in some of our markets, this was obviously a challenging quarter for us. But if I take a step back, our core business performed well overall and we consider this another solid quarter, further demonstrating the resilience of our global business platform and franchise. Both our Asia traditional and Financial Solutions businesses had excellent results. US Group and individual health performed well, and Australia was breakeven. During the quarter, we completed a number of in-force transactions deploying $100 million in capital, which will further add value to our underlying earnings. The transaction pipeline remains very good with opportunities in all our regions. Our approach to capital deployment during this crisis remains balanced and disciplined as we seek opportunities to deliver long-term value. I'm also proud to announce that for the 10th consecutive year, RGA has been ranked number one for business capabilities on a global basis by NMG in their 2020 global reinsurance report. Leveraging our capabilities and being a trusted partner as well as a thought leader has allowed us to deliver value to our clients throughout the past year. A point of personal pride in this organization and a tribute to all our employees and our culture of client-centricity.

Thanks, Anna. RGA reported a loss for the quarter of $115 million on a pretax adjusted operating basis. Adjusted operating EPS was a loss of $1.24 per share, which includes COVID-19 impacts of $5.31 per share. Our trailing 12-month adjusted operating ROE was 3.7%, which was reduced by COVID-19 impacts of 8.8%. Reported premiums increased 3% in the quarter. Growth was 5%, excluding the premium decline in Australia, reflecting our continued caution in that market. The effective tax rate on the pretax adjusted operating loss was 26.9% for the quarter, above the expected range of 23% to 24% due to the geographical mix of the earnings. Turning to the segment results that are represented on Slides 7 and 8 of our earnings presentation. Beginning with the US, the US and Latin America traditional segment reported a pretax, adjusted operating loss of $344 million in the quarter, including COVID-19 claim cost of $358 million.

Thanks, Todd. As Anna mentioned, Q1 COVID-19 general population deaths were at their highest levels in many countries, notably the US and the UK. Our models continue to track well to actual results and our overall COVID-19 mortality claim costs, which only include claims that we believe will ultimately be reported with the COVID-19 cause of death, were within our expected range based on the level of general population deaths. The US continues to be the driver of our mortality claim costs, accounting for 74% of our global total. This was approximately $17 million per 10,000 US general population deaths at the lower end of our model estimates and very consistent with the prior quarter. Both the UK and Canada had Q1 COVID-19 mortality claim costs in excess of our ranges, which we are attributing primarily to short-term volatility. The UK and Canada had a greater number of larger COVID-19 claims in the quarter relative to what we saw in 2020. After considering this quarterly volatility, we are reiterating our previous rules of thumb for claim cost estimates in these markets as shown on Slide 12. All other markets combined accounted for approximately 10% of our COVID-19 mortality claim costs in line with our expectations, with the majority of this coming from South Africa, consistent with the high level of general population death they experienced this quarter. India accounted for less than 1% of our COVID-19 claim costs in the quarter. Both countries have experienced a significant level of excess mortality beyond what is being reported in general population COVID-19 figures, much of which we believe is likely COVID-19. Since the beginning of the pandemic, over the last 12 months, South Africa has accounted for approximately 5% of COVID-19 mortality claim costs and India approximately 2%.

Thank you, Jonathan. That concludes our prepared remarks. We'd now like to open it up for your questions.

And our first question is Jimmy Bhullar with JPMorgan.

I have a question regarding your margins, particularly in the European market. In the US and some other regions, the claims were mostly within the previously outlined ranges, although worse than in 2020, which wasn't unexpected. However, in Europe, the claims appeared significantly higher than in the past year, even after adjusting for the increased level of deaths. Could you elaborate on what you observed both in the UK and outside of it? Additionally, what are your expectations for that market, and why are you not increasing your sensitivity range for COVID deaths in that region?

So for the UK, as I mentioned, I think we believe that the primary increase this quarter is caused by larger face amount claims for COVID-related deaths. So we definitely saw an increase in that in Q1 versus prior quarters. If we kind of normalize for that difference and you look sort of in aggregate across four quarters, because there can just be volatility quarter to quarter. We are at the high end of our range or maybe slightly over, but still not materially. The other thing to keep in mind is that when we set those ranges, FX rates have moved and the US dollar has weakened somewhat. So by about 10%, I guess, versus the British pound. So that's probably causing a little bit more of the increase, too.

And you mentioned this a little bit, but is it pretty much a given that the higher deaths in Europe would help longevity results in the second quarter, or are there some other potential factors that will sort of go in the other direction?

We expect to benefit from longevity. As I mentioned, reporting has a lag. Our longevity business has seen reporting extend a little this quarter, averaging four to five months in reporting lengths. As a result, what’s reflected in our financials is primarily based on data from around November of last year, which is when we observed significant spikes in UK mortality that continued into Q1. Therefore, we do anticipate seeing a benefit, but it will materialize over the next few quarters. Additionally, in the UK, aside from COVID-related mortality, excess mortality in the general population has been positive, which may be reducing overall mortality beyond the COVID figures.

And our next question is from Ryan Krueger with KBW.

Could you give us any more perspective on the magnitude of non-COVID mortality that you saw in the quarter? And then, I guess, as a second part to that, I know this is a difficult question to answer, but as you study some of the underlying data on what you think might be driving non-COVID mortality? How you think that may play out as we emerge out of COVID?

Let me start, I think, just a little on our quarter, and then maybe Jonathan can fill in some points on COVID-specific mortality. I think if you back out COVID mortality from our quarter, we think, generally speaking, our quarter was in line with our expectations. Now I will say, as I think was talked about in the script, we have seen normalization of large claims in the quarter in the US. So we had very good, large claims volatility the last couple of quarters that's normalized this quarter. We've also seen some level of excess claims, which isn't inconsistent with what we've seen throughout the pandemic. So we've got COVID-specific claims and then you've got an excess amount that likely is directly or indirectly related to that, so we've seen some of that. And then given the spiking claims towards the end of last year, I think we also saw some claims come into this quarter. So I think when you back all that out, though, we're feeling pretty good about the underlying business. And I would say, certainly, over the last year and even this quarter, our results are very much in line with what we would have expected.

And then maybe I'll just add Alain just more specific to COVID itself, so we talked about South Africa already. But again, that's a similar phenomenon. We're seeing significantly lower general population deaths quarter-over-quarter in the US and the UK as well. The UK has had fewer than 1,000 COVID-marked deaths in Q2, compared to 53,000 in Q1. So we are seeing reductions in some of our larger markets, which is good news.

I mean, as a follow-up. I think generally, the prevailing thought was that after a pandemic, general population mortality would improve for some period of time given the pull forward of deaths. It seems like there’s more uncertainty this time around given some of the other effects that maybe COVID and putting off doctor visits and things like that could have. What are your latest thoughts on that topic?

I mean, I think you're exactly right. There's some pluses and minuses, and it's really not clear at this point yet what that effect will be. So as you mentioned, one of the potential negatives is people delaying diagnosis by not going to the doctor and being diagnosed with conditions at a later stage, which could be more severe. On the other hand, you also mentioned the acceleration effect, which we do think will have some beneficial impact, potentially modest but it will be positive. Then you also think about things like vaccine technology, developments, people’s behavior, social distancing, we saw that in the flu season this year. So those could also be positive, but I think it will take some time for the data to play out.

And our next question is Hung-Fai Lee, Dowling & Partners.

My first question is just to follow up on the non-COVID US mortality piece. You talked about this reporting lag and then I assume there may be some adverse developments. Can you size that impact for this quarter?

I mean, in terms of the question sort of reporting like an adverse impact, so I think it's more just a little bit of reporting lag and that's largely related to the big flux of claims or big influx of claims that we saw towards the end of last year. In terms of sizing it, tens of millions, thereabouts…

Yes, because you did put up IBNR reserve of $100 million at the end of the quarter, I mean, last quarter, so clearly, blew pass that. So that's the driver. And I guess maybe exiting first quarter, where do you stand in terms of IBNR reserves?

Yes, we did set up the IBNR at the end of the year. We took the best information that we had and made the best estimate that we had, and it was reasonable, we thought at the time. As Alain mentioned, there was a pretty significant acceleration of deaths towards the end of the year as we all saw. So we missed it by a little but that's not unusual. The quarterly IBNR, either are below or above where you need to be, and that's just an ongoing fact. And again, given the volume of deaths that were out there towards the end of the year, we just understated it a little bit. And then again, for first quarter, we again, looked at the information that we had available to us and reset what we thought the appropriate IBNR balance is for the end of the first quarter. Now it would have come down a little bit given that the number of deaths, if you will, has come down as you got towards the end of the quarter.

I want to step back for a minute. And I want to make sure that when we talk about our performance over the last 12 months, adjusted for COVID, and it's been in line that we appreciate what that includes. So in the last 12 months in the US there have been approximately 550,000 deaths reported, COVID deaths reported. But in addition to those deaths, there's been roughly 150,000 excess deaths, not specifically identified as COVID. Now, we believe those excess are likely COVID related directly or indirectly and likely temporary in nature as we come out of the pandemic. When we say we adjust our business we're only adjusting for the impact of the 550,000 specific deaths, that means our business is wearing the other 150,000 deaths. I just want to make sure that that's clear. So to me that's a signal of good performance over the course of the last 12 months.

My follow up question is you talked about, in the prepared remarks, you talked about the exposure to India, and it has only been 2% of your claim cost to date. But given the spike in deaths over there, and I recall, you had a $20 million impact in the fourth quarter. Like how should we think about that going into the second quarter given the much worse numbers that's coming through right now?

So first, let me just caveat with coming up with the claims cost sort of estimate for India, just given the situation with sort of the availability of data as well as just the very kind of current nature of what's happening in that country with respect to the situation, it's difficult. Since that information is still developing and considering what's happened to us in the past, I think if we had to put a number or a range on it, we're thinking of it sort of in the $50 million to $100 million pretax range. But again, there's a very wide range of a funnel of doubt or account of doubt around those numbers, just given the situation and how it's developing.

And our next question is from Erik Bass, Autonomous Research.

So I think you ended the quarter with $1.2 billion of excess capital, and you sound pretty optimistic of return to profitability and good or improving performance going forward. So just wanted to get a sense of how you're thinking about the level of excess capital and your comfort level in drawing that down? And going forward, whether it's for block M&A or at some point, potentially returning to shareholders?

We continue to prudently manage the capital throughout the pandemic. I think as you've seen historically, we have balanced deployment into the transactions where we kind of obtain good returns and we like the underlying risk profile, the dividend level, and then also done some share repurchases over time. I think we still need some more time to pass here and more certainty to come into view, but we'll continue to follow a prudent and balanced capital management approach. We did deploy $100 million of capital in the first quarter, as Anna mentioned in her comments and we were comfortable with that. It was a very nice underlying profile of liabilities, very stable long-term cash flows. It was follow-on transactions with an important client in Asia and had some other benefits as well. So I think we'll continue to be prudent as we continue to work through this pandemic period, but we'll continue to evaluate what the best alternatives and opportunities are for the capital deployment.

And then we've seen a surge in demand for term life, particularly in the middle market in recent quarters. I'm just wondering, are you capturing much of this business and maybe how are you seeing the growth outlook in US traditional kind of for this year and as we move past the pandemic?

No, you're quite right. I think we are seeing some very good production. In fact, interestingly, MIB, I think, just came out with some statistics that show a record level of application activity in the month of March and very strong Q1 results, and that's not just over last year but over pre-pandemic type quarters. So I think that's wonderful to see. We've talked about in the past an expectation, maybe a hope, to some extent, but an expectation that we would see a resurgence in desire or thinking about life insurance from people in the general population. So we're certainly seeing that now. I'd say as we look ahead, it's difficult to say whether this is, call it, a new sustained level of business or whether it's maybe a little bit of catch-up, a little bit of return to normalcy. So clearly, we'll follow that along. But as we've talked about as well previously, direct companies have invested significantly accelerated their investments in digital efforts and distribution efforts to try and get to that middle market. So it seems to be paying dividends, and we're certainly quite excited by what we're seeing.

And our next question is Andrew Kligerman please go ahead with Crédit Suisse.

I apologize for going off on a tangent regarding non-COVID-19 matters, but I could use some clarification on the figures. Excluding COVID effects in the US and Latin America, we would have been in the negative. If everything were normal, which it isn't, I estimate earnings would be around $170 million, or possibly between $110 million and $120 million. This suggests that what you might consider non-COVID but indirectly related is at half the level of the COVID claims. Additionally, the comparison of excess deaths to the total demonstrates that it's significantly smaller. Could you assist in clarifying whether this quarter faced frequency or severity issues? Ultimately, what should the expected earnings run rate be if we assume there are no ongoing complications from the COVID-19 situation?

I'll take a stab at this first, a couple of comments to make. I think all, backing out COVID claims and then looking at the rest, I think I'd start by saying there's certainly some impact from non-COVID labels but likely related type claims. That would be number one. We have had some slippage, as I mentioned, from last quarter into this quarter. And then maybe the only other thing I'd say, it's very difficult to talk about a run rate on any one quarter. Certainly, when we look back over the last number of years, we see a certain level of seasonality in our business. Just because we have a lower flu season doesn't necessarily mean that all of that seasonality goes away because seasonality has to do with weather time of year, as well as some input from the flu. So look, I would say, I think we're probably around, call it, $300 million annually on traditional. But as we look at this quarter, it's difficult to talk about a run rate for the first quarter. But certainly, I would say when we look at the underlying business, we're pretty happy with what's transpired this quarter.

I think Todd mentioned that Australia is breakeven, but he also mentioned some uncertainty. I want to clarify what that potential uncertainty could be.

I think if I look back over the last few years, we certainly talked about some issues in the underlying market with respect to terms and conditions and the level of competitiveness in new business. And so I think you wouldn't be surprised that we've seen our business volumes come down. And in fact, when we look at this quarter over first quarter last year, we're seeing a significant reduction in premiums. That has to do with two super fund reinsurance treaties that we had that are no longer on our books, one of which, just as a matter of interest, the underlying client would have lost. But the other one, we couldn't come to terms on the reinsurance business as it came for renewal. So we're continuing to be cautious. I think when we talk about a certain level of uncertainty, it has a lot to do with the fact that we're looking at products and terms and conditions in new products, and we're looking to see them get back to a level of normalcy that we'd like to see. I think I talked last quarter about individual DI standards coming into play as regulated by the regulator in October. So I think that will be good news. But I think some of it also has to do, when we look back over the last year, we've been more or less right around breakeven every quarter, which I think is certainly an improvement over prior couple of years. There's still some maybe caution around disability claims and potential mental illness. Now Australia has had better results with respect to the pandemic. But they've also had more shutdowns. So I think the type of thing, we're simply just being cautious about in all of our markets, but I would say we're feeling better about our Australia business for sure. The next step, though, is to see new products get to a point where we get excited about them and then potentially start to put new business back on. But for now, still that cautious approach Todd was alluding to. I hope that answers your question.

And our next question is Dan Bergman with Citi.

I guess to start, maybe just following up on excess capital. It looked like your excess capital only declined by around $100 million in the first quarter versus the year end 2020 level despite absorbing, I think, almost $500 million of COVID claims and deploying $100 million into block deals. So I was hoping you could give some more color on the offsets that allowed for that strong result? And if there's any benefit in your capital model from that accounting change on the LP investments? And maybe just finally on that going forward with COVID claims seemingly likely to decline materially post the first quarter. Should we be expecting an inflection on the capital side with excess capital likely starting to build from here before factoring in capital deployment, block deals, repurchases, et cetera?

We had a positive net income for the quarter, approximately $139 million, which means we actually added capital from that perspective. There were no capital gains included from repositioning the investment portfolio. Additionally, we experienced a positive impact from the accounting adjustments for the limited partnerships. Despite deploying some capital, the overall capital declined by about $100 million for the quarter. As we move beyond COVID, we are assessing what the appropriate level of excess capital should be. We are committed to finding an effective and balanced approach to managing our capital base over time. We don't adjust it on a quarterly basis but evaluate it over a longer period, considering the nature of our long-term business.

And then I know you reiterated your prior COVID claims sensitivity guidance, but I wanted to see if there are any additional thoughts you can provide around how the vaccination program might impact COVID claims or sensitivities going forward. For example, should we be expecting a material difference in vaccination rates between the general and insured populations? And then also just with the timing of older higher-risk populations generally getting the vaccine earlier. Could that impact near term claims trends or sensitivities, could get some of the mortality over the next several quarters be skewed towards younger individuals versus what we've seen early in the pandemic? Maybe a little bit of a broad question, but any thoughts on that would be great.

So I’ll just try to sort of give a couple of points on this. So I think generally speaking, we would expect our rules of thumb to still be applicable as vaccinations programs are rolled out. So as general population mortality declines, our insurance population will decline. And that's not going to be a perfect match but at a macro level, I think it will sort of track reasonably well. And as we see data emerge, obviously, we'll update those rules of thumbs as required. I think to your point about kind of will it be more mortality in different age groups? I kind of think of it as we're essentially eliminating mortality in some age groups. So sort of by definition, that means it will be more proportionate in the groups that have not had the full vaccination. So it's not really a shift in my mind. It's more just we're getting rid of some excess mortality for those age groups and people that have been vaccinated, and the residual mortality will still be there for the other age groups. So yes, we might see something that looks a little different by population components. But again, overall, I think it's because aggregate mortality is going down and our rules of thumb would suggest that we'll see the same results on our books.

And our next question is from John Barnidge with Piper Sandler.

Can you talk about the directionality of session rates broadly that you've seen maybe across geographies? I asked that because the traditional business got some top line growth in the quarter.

I would say, generally speaking, we haven't seen any movement on session rates per se. So our business volumes have very much been driven by the level of new business at the direct company level, and we've seen our share of reinsurance commitment. Now I say that recognizing that with every market and every client in each of those markets, there are reinsurance pools and we participate on some, not all, and with varying degrees of percentages per pool. Those typically will fluctuate year-to-year as new products come out. But generally speaking, I would say, if I understand your question correctly, the level of section rates has generally stayed the same in all of the markets and our positioning has remained quite consistent.

And then a follow up. On the excess mortality, just briefly, is it one of these things where it was a COVID claim they didn't make it of a hospital or is it similar to the flu in that the flu was the first step that started the decay process into death sadly? Just trying to dimension between those two.

I would say, very tough to tell this early on. I think, I mean, Jonathan may have a little bit more information than I. But these are, in many cases, hot off the press already for COVID-type deaths, we're needing to, I'll say, average up from the perspective that our cause of death reporting isn't yet complete this early after a quarter end. So when we talk about excess deaths, we're really relating it to what we're seeing in the general population, relating it to what we've seen in the last few quarters. But it's difficult, I think, from my perspective to get that granular, but I don't know if any one of my colleagues, anything to add to that.

When we look back sort of over time, where the data is more complete. I mean, clearly, we saw excess mortality beyond what was explained by COVID in the US, specifically I'm talking about now in 2020. So it's not unreasonable to expect that it would continue. Clearly, flu deaths have been minimal or almost zero. So that would be an offset to that, but the net of the two still seems to be a drag.

Our next question is Mike Ward with UBS.

I'm just trying to think about high-level earnings power. As you touched on the average Q1 earnings for US and LATAM, I think, is really breakeven over the last several years because of that Q1 seasonality. So if we're thinking post COVID 2022, I'm not asking for guidance. But at a high level, if you think about your kind of earnings power for '22 and beyond today versus before COVID, has anything really changed at all?

No, that's sort of the way I was going to sort of frame it. If you go back to pre-COVID, we had a very diversified, both globally and product-wise earnings profile, where it's called half came from our traditional business as far as bottom line and half from the Global Financial Solutions. And throughout COVID, the Global Financial Solutions business has continued to perform very well. So as we emerge post-COVID and things get back to, I'll call it, more normal we're very confident our underlying business, if you will, and our relationships with our clients and so on, it's still very much intact. So we would be optimistic that we could get back to those pre-COVID earnings levels and then continue on as we were pre-COVID.

And then just to expand on the capital discussion. I guess, if there's going to be a fraction of global COVID deaths this quarter in 2Q, and COVID really is close to being fully in the rearview mirror and you did an equity raise last year for COVID. Your stock is, of course, pretty attractive. So I guess what would be stopping you from really ramping up back capital return in a bigger way?

Just go back to my comments earlier, we're going to prudently manage the capital so that we don't have to raise capital in the future as well. So we're going to keep a close eye on it and look at what opportunities are out there from the business perspective and what type of attractive returns and underlying transaction types that potentially are. And as we did pre-COVID, we'll lay that against the various alternatives as we look at how we want to deploy capital going forward. I don't think we want to get too far out ahead of ourselves.

And our next question is from Tom Gallagher with Evercore.

I appreciated the information on the situation in India. My question is whether there are any other countries you are monitoring more closely where mortality rates are increasing, such as Brazil, where I believe your exposure is limited. I'm just trying to understand if there are other regions we should be aware of.

So obviously, as you say, it's a pretty dynamic situation. We're monitoring all of our business, clearly. Given the current circumstances, though there's nothing significant from what we already talked about. So outside of India, the pandemic is in Asia, the pandemic is still being very well controlled, I think, in those markets in Australia. Latin America, I think the way you characterize it is correct. There are some global hotspot issues in Latin America. But based on the size of our business, which is quite modest and the nature of it, so it's almost entirely annually renewable business. It also is a very large health component and the relatively limited impacts we've seen there to date. So Latin America, in total, has represented about 1% of our inception to date mortality and morbidity impacts. We don't have a specific concern about those markets right now.

And then just a follow up question on IBNR. How much IBNR did you book as a percentage of your total claims for COVID in Q1, if you could quantify that?

So you kind of have to think IBNR, it's really a balance, correct. So there is movement in the quarter. So as Todd mentioned earlier, because the mortality rates came down in Q1 from what we saw in Q4, our IBNR balance actually decreased over the course of the quarter. If you look at our COVID-specific IBNR that we still have on our books, it's probably in the order of magnitude for both mortality and morbidity of about $120 million, give or take, that's in addition to all of our regular IBNR we would hold for our normal course business.

It appears that there are no further questions at this time. Mr. Todd Larson, I'd like to turn the conference back to you for any additional closing remarks.

Thank you. And thank you, everyone, for participating in our first quarter earnings call. We appreciate that and we also appreciate your continued interest in RGA. So thank you very much.

And this concludes today's call. Thank you for your participation. You may now disconnect.