Reinsurance Group Of America Inc Q2 FY2022 Earnings Call

Good day, and welcome to the Reinsurance Group of America Second Quarter 2022 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 Ms. Anna Manning, President and Chief Executive Officer. Please go ahead, Mr. Larson.

Thank you. Good morning, and welcome to RGA's second quarter 2022 conference call. I am joined on the call this morning with Anna Manning, RGA's President and Chief Executive Officer; Leslie Barbi, our Chief Investment Officer; Jonathan Porter, our Chief Risk Officer; and Jeff Hopson, the Head of our Investor Relations. Now a quick reminder about forward-looking information and GAAP financial measures. Some of our comments or answers to your questions may contain forward statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for 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 website for discussions of these terms and recommendations to GAAP measures. And now we'll turn the call over to Anna Manning for her comments.

Good morning, and thank you for joining our call this morning. Last night we reported adjusted operating earnings per share of $5.78. This was a record level of earnings for us. Importantly, it included strong contributions from many of our business segments. In addition, growth in organic new business was good. We had another active quarter for capital deployment into in-force and other transactions. We also saw COVID claims come down substantially, and our underlying non-COVID mortality was favorable in most markets. While uncertainty remained, we expect future COVID impacts to continue to be more limited, given the protection provided by vaccinations and prior infections and by the continued development of new vaccines and treatments. I think this quarter points to many positive signs of the strength of our underlying business, the momentum on new business, and the continuing attractive pipeline of growth opportunities. Turning to some further highlights in the quarter, the US and Latin America Traditional business had an excellent quarter, as individual mortality experience was very favorable, with both claim frequency and severity better than expected, and premium growth reflected solid underlying demand. The Asia Traditional business also had an excellent quarter with favorable underwriting experience across the region. I am very pleased with the range of new business activities, notably product development, and other client partnership initiatives that will allow us to continue to deliver profitable growth into the future. Our global financial solutions business also delivered another strong quarter across all their business segments and geographies. The Asia business saw measurable GFS earnings growth, reflecting our success over the past couple of years in deploying meaningful amounts of capital into in-force block transactions. Further, our capital deployment of $121 million into in-force and other transactions puts us roughly on pace to match last year's record capital deployment levels. Our pipelines remain active and broad-based across risks and geographies, and momentum was good as we stand here halfway through the year. Our reported premium growth was 4.3% and 8.1% on a constant FX basis, and we continue to see favorable dynamics for insurance products in many of our traditional markets, and strong demand from clients for our insurance risk and capital reinsurance solutions. Our investment results were favorable overall, reflecting the benefit of higher new money yields, and its sustained higher yields would become a meaningful benefit going forward. I am also pleased to report that we increased our quarterly dividend by nearly 10%, reflecting our confidence in the strength and sustainability of RGA's underlying earnings. We have a great franchise and are very well positioned around the world. We've demonstrated that we can successfully manage through periods of elevated uncertainty and change, which makes me confident in our ability to continue to create substantial long-term value for our investors. Thank you for your interest in RGA, and I'll hand it over to Todd to review the financial results.

Thanks, Anna. RGA reported pretax adjusted operating income of $505 million for the quarter and adjusted operating earnings per share of $5.78, which includes a negative COVID-19 impact of $0.12 per share and a foreign currency headwind of $0.16 per share. We consider this to be a very strong quarter, a record one as Anna has already mentioned. The effective tax rate for the quarter was 22.5%, just below the expected range of 23% to 24%. Turning to the segment results listed on slides 6 and 7 of our earnings presentation. Reported premiums were up 4.3%. After adjusting for the adverse foreign currency impact of $190 million, premiums were up 8.1%. Because of the significant currency impact in the quarter, I wanted to give you a region-by-region summary. Canada Traditional reported a premium increase of 4.3%, and in constant currency increased 8.2%. EMEA Traditional reported a decrease of 1.4%—however, in constant currency, premiums increased 9%. Asia Pacific Traditional reported a 3.9% increase in premiums and in constant currency were up 10.2%. We are pleased to see the good momentum in our business. Now turning to the segment earnings results. The US and Latin America Traditional segment results were very strong, reflecting both favorable non-COVID and COVID individual mortality experience. Jonathan will provide further details in a few minutes. Variable investment income was in line with expectations although below the recent run rate. The US individual health business had favorable experience overall. Our group business result was slightly below our expectations, reflecting unfavorable morbidity claim experience offset by positive development on the COVID IBNR. The US asset-intensive business results showed favorable overall experience. The US Capital Solutions business reported very strong results due to its 3D recapture fee of approximately $49 million. The Canada Traditional segment results reflected unfavorable individual life mortality experience due to the quarterly volatility from an above-average level of large claims and the impact of COVID-19 claim costs of $1 million. The Canada Financial Solutions segment results were in line with expectations. In Europe, the Middle East and Africa, the traditional business results reflected unfavorable UK mortality experience, partially offset by favorable results in other markets. COVID-19 claim costs were $5 million a quarter. The US financial solutions had a good quarter reflecting favorable longevity experience. Turning to our Asia Pacific Traditional business. Asia results reflected favorable underwriting experience across the region and absorbed COVID-19 claim costs of $3 million. Australia reported a small loss for the quarter due to $4 million of COVID-19 claim costs. The Asia Pacific Financial Solutions business results were very strong, primarily reflecting business growth and favorable investment yields, partially offset by $4 million of COVID-19 claim costs. The corporate and other segment reported a pretax adjusted operating loss of $5 million better than our quarterly average run rate due to higher net investment income, including the positive impact from limited partnership investments. Moving on to investments on slides 8 through 10 in our earnings presentation. The non-spread portfolio yield for the quarter was 4.63%, reflecting variable investment income that was in line with expectations as well as a positive impact from higher rates that we achieved in the first two quarters. We believe the portfolio is well positioned as we move through the uncertain economic environment. As shown on slides 11 and 12 of our earnings presentation, our capital position remains strong, and we ended the quarter with excess capital of approximately $1 billion. We deployed $121 million into in-force and other transactions and $49 million to shareholders through dividends. I will now turn the call over to Jonathan Porter, our Chief Risk Officer to provide some additional comments.

Thanks, Todd. COVID-19 general population deaths were down this quarter in all of our key markets. Compared to the first quarter reported general population deaths were down almost 80% in the US, 40% in Canada, and 10% in the UK. Our claims experience was consistent with these population trends as our estimated COVID-19 claim costs were at their lowest level of the pandemic. As shown on slide 13, US COVID-19 general population deaths were approximately 32,000 in the quarter, the lowest quarterly level since the start of the pandemic. Although CDC reporting isn't yet complete, there was a negligible level of excess non-COVID-19 mortality in the US general population in Q2. Finally, we have now seen three consecutive quarters of a declining proportion of general population deaths at ages below 65, ages where there is more life insurance exposure. Turning to our US individual mortality results, non-COVID-19 experience was favorable due to both a lower frequency of claims and a lower average claim size. COVID-19 mortality experience was a net positive in the quarter due to $40 million of favorable development of prior period IBNR. Excluding the benefit of this IBNR adjustment, COVID-19 claim costs were approximately $9 million per 10,000 general population deaths below the low end of our expected range. We have now seen a decline in our COVID-19 claim cost per 10,000 general population deaths in the US for three consecutive quarters, reflective of the trend in the lower proportion of general population deaths in working ages. To the extent that this trend continues, we would expect to be at the lower end of our range in future quarters. Total COVID-19 claim costs on all other business outside of US individual mortality were modest, and is broken out by reporting segment on slide 6. We are very encouraged by the favorable trends in COVID-19 claim costs that we have seen over the past several quarters. Although there is still uncertainty on how the pandemic will evolve, we believe that future impacts will continue to be manageable. Evidence suggests that COVID-19 has moved into an endemic phase and will continue to impact future mortality, although to a much lesser extent than seen over the past two and a half years. Population immunity is higher due to vaccinations and significant levels of prior infection, and new vaccines and treatments will continue to improve over time. I'll now hand it back to Todd.

Thanks, Jonathan. I'd like to pivot the discussion of the Long Duration Targeted Improvements or LDTI. As we move closer to the January 1, 2023 effective date, I want to discuss some of the high-level impacts of the new financial reporting standard. Please note that the information we've disclosed are estimates and could differ upon final adoption. LDTI has many positive features relative to current US GAAP. We believe the financial community will come to appreciate the new standard over time. We also believe it will provide further insight into the performance and value of RGA's long-term business. There are five key points that are important to emphasize. First, the economics of RGA's business remain unchanged. Second, reserves will reflect best estimate assumptions, which will be updated on a regular basis. Third, at transition, reserves can only be increased. Four, the transition adjustment to retained earnings will lead to higher future income. And finally, earnings volatility from quarterly claims fluctuations will be reduced. Now moving to some of the specific impacts to the balance sheet, as shown on slide 18 of our earnings presentation, we estimate a decrease to retained earnings at December 31, 2021, of $500 million to $800 million. There are a few elements in this adjustment. First, LDTI requires an assessment of profitability at a lower level of granularity and requires the recognition of loss cohorts or not recognizing the gain position in other cohorts. It is important to note that we have a limited number of loss recognition cohorts and have substantial margins in the rest of our business that we expect will produce material future earnings. A second component to this adjustment is the elimination of negative reserves on cohorts which have had very strong performance. It primarily relates to our longevity business. It is required that these reserves be adjusted to zero at transition. The decrease in retained earnings from eliminating the negative reserves at transition will flow into future earnings. A third, a small portion of the adjustment relates to market risk benefits. Additionally, there are also adjustments to AOCI from unlocking reserve discount rates. Currently, reserve discount rates are generally locked in at issue. Under LDTI, reserve discount rates will be reflective of current interest rates and AOCI will be adjusted accordingly. We estimate that this adjustment will decrease AOCI $3.2 billion to $5.2 billion as of December 31, 2021. The new reserve liability component of AOCI, when combined with the existing unrealized gain or loss investment component, will result in AOCI that is both smaller and less volatile. Moving to earnings emergence, under US GAAP claims are the main driver of our operating income volatility. However, under LDTI, earnings volatility from claims variability will be significantly muted compared to current financial reporting. Thus, we expect our income under LDTI to be less volatile, absent any reserve assumption changes. Additionally, we expect to recognize slightly more earnings in early years on new business due to the removal of the provision for adverse deviation and reserves. To conclude, we feel the new standard will provide better insight into RGA's long-term performance and, along with the new disclosures, provide additional transparency to investors. Thank you for your interest in RGA. We will now open the call for questions.

We'll take our first question from Jimmy Bhullar with JPMorgan.

Hey, good morning. I had a couple of questions. The first one is for Todd on buybacks. So you had bought back stock in the last quarter, but nothing this quarter. I'm wondering if it has to do with just the uncertainty about COVID still lingering in certain parts of the world? Or is there something else in terms of new business opportunities or otherwise? And how are you thinking about buybacks and under what conditions could you not do any buybacks for the rest of the year versus maybe doing a or accelerate versus what you've done in the last few quarters?

Yes. Hi, Jimmy. So as shown on slide 12 in our presentation, and as we've discussed in the past, we view as a very balanced approach to capital management over time, looking at deployment in the business opportunities and transactions that we really like, the shareholder dividend, and also share buybacks. We'll continue that approach in the future, which will include no share repurchases. Anna mentioned we've got an active pipeline of transactions across various geographies. Having some dry powder in today's environment will allow us to take advantage of potential new opportunities out there. But again, we'll continue to view share repurchases as part of our overall balanced approach to capital management.

Okay, and then maybe for Jonathan, or for Anna, there's been a lot of discussion about the whole dynamic of pull forward of claims and whether that benefits your results in the next few years versus maybe lingering effects of COVID and non-COVID. People maybe ignoring screenings and stuff, which could cause worse mortality once the pandemic ends in the next few years. Do you have any strong views on whether there's going to be a tailwind or headwind to your margins over the next few years because of the pandemic?

Yes, thanks for the question. Jimmy, this is Jonathan. I'll talk specifically about the couple of items that you mentioned. As far as pull forward goes, we've talked about this in prior quarters, and we do expect to see some. It is difficult to directly identify, though, and hard to draw conclusions based on one quarter of results, like we've seen favorable results this quarter. One thing I will say is that we did see that our experience in the US was notably favorable in the older ages, which is consistent with where we've seen higher pandemic deaths in the past. With respect to screening, and that potential impact and delayed diagnosis, we're monitoring that. Nothing material in our cause of death or in CDC data yet indicates that that's going to change materially. As we get further away from the period of the delay, which is really back in the first year of the pandemic in 2020, I think it's also logical to assume that the screening process will be catching up. The further you are from that time period, the less likely that there will be a material impact as well. So on balance, I think it's going to be pluses and minuses, like you say, but specifically the items that you noted, we're not seeing anything material at this point. Okay, and maybe just for Todd on the buyback point. I understand your comments on the pipeline. But is the pipeline stronger now than it was maybe two, three quarters ago because you did buyback a little bit of stock earlier this year?

And again, share buybacks will continue to be part of our overall capital management. But we are seeing some potential opportunities, as I mentioned earlier across various geographies.

We'll take our next question from Erik Bass with Autonomous Research.

Hi, thank you. In your LDTI disclosure, you show a decline in the retained earnings from the transition date to year-end 20. Can you just talk about what's driving this? Is it restating 2021 earnings higher, movements in interest rates in capital markets, or something else? Should we expect the retained earnings impact to be smaller by the time of adoption at the end of 2022?

Yes, part of the reason for the decrease in the transition adjustment, if you look at January 1, 2021, compared to the end of the year, in 2021. That decrease in the retained earnings adjustment is due to higher earnings under LDTI than under current GAAP. That's the way the LDTI works; it smooths out some of the elevated claims related to COVID.

Got it. So just two quick follow-ups there. If that were to be the case again, then I guess it would go down and by the end of 2022. But then also, I think based on your LDTI comments, you're saying DAC amortizations, not changing materially. The earnings for blocks with negative reserves should go up prospectively. Should we conclude that overall, your earnings are likely to be higher under the new framework?

Yes, we'll see how the year plays out and how the calculations work. We'll also be looking at the year in 2022 balance sheet and looking at the various assumptions that go into the reserve calculations.

We'll take our next question from John Barnidge with Piper Sandler.

Thank you very much. If we think back maybe last quarter, a quarter ago, you talked about as you got more comfortable with the health landscape possibly bringing in excess capital below $1 billion, given the results are meaningfully better and health landscape remains improved. How should we think about access capital coming down further? And maybe within the framework, how you view annual internal excess capital generation? Thank you.

Yes, so we would be comfortable going down below the current level of excess capital. As we've talked about in the past, we also continue to look at alternative forms of capital to make sure we can remain as flexible as possible as well. We did the retro session in the middle part of last year, we did a surplus note towards the end of the year. We continue to look at other forms of efficient alternative capital. So yes, we would be willing to go down below the $1 billion level given our comfort that we are able to generate capital ongoing through our global platform ex the impacts of COVID.

Thank you. Then my follow up on the investment income. Can you maybe size the width from floaters in the quarter where you maybe see that projecting? And do you have an early look maybe into how you think variable investment income may perform in the third quarter? Thank you for the opportunity to ask a question.

Leslie, would you like to take that one?

Sure. Let me jump in on that. So on the first part of your question. The floating rate additional impact in the quarter on the non-spread portion was roughly $3.5 million. On a consolidated basis, it was more in the ballpark of $7.5 million with risk factors here. Variable investment income is looking good going forward. This quarter was closer to our expectations. We just came out of a very robust real estate environment. We expect some less activity in that going forward. There's also been downward pressure on the equity markets year-to-date, although some bounce back, particularly in things like Russell 2000 this quarter. Nonetheless, I would expect some downward pressure on unrealized gains. The platform long-term should continue to deliver at the current level, but I do expect some downward pressure in the second half of the year from the factors that I mentioned.

We will move on to our next question from Ryan Krueger with KBW.

Hi, thanks. Good morning. First follow-up on the last question on, can you talk about interest rates in general? Maybe give us a sense of how much of a drag the low interest rate environment had been on the annual earnings and maybe how to think about the potential upside in total in the current environment?

It’s Leslie. If you'd like, I'll take the go forward. If you look at what we might have expected from net investment income coming into this year, the kinds of levels that we had at year-end, broadly, short rates, investment grade yields, all of that are about 200 basis points higher. If you think about that kind of magnitude over the next 12 months, I would expect something on the order of $70 million additional net investment income versus what we might have expected coming into the year.

That's helpful. Is there any—would that all drop to the bottom line? Or is there any offset in other areas?

On that, that was a net, so if there's floating rate liabilities and other things, that was factored into that estimate.

Yes, so at the end of 2021, these are in rough order of magnitude, the market risk benefit is fairly small, I'd say maybe around 10% of the total of the negative reserves, or in the roughly neighborhood of maybe 40-ish percent, and then the remainder would be the underperforming cohorts.

And we move on to our next question from Tracy with Barclays.

Good morning, I want to go back to the discussion of the dampening effect from claims on your LDTI reserve methodology. So I understand and I believe you alluded to it for the dampening effect to work, there'll need to be some margin falling retrospective unlocking. Without getting too specific on margin adequacy by line or cohort by cohort, if you could share any high-level thoughts on where you're seeing a margin with respect to your assumptions versus your more recent emerging experience?

One way to start by answering that, maybe clarifying the question is that the way that new financial reporting and reserving works, if your net premium ratio is above 100%, we can refer to those as the underperforming blocks. The claim volatility will flow through to the bottom line; it's the cohorts with less than 100% where the elevated claims or claims volatility will get muted and spread over the longer period of the life of the underlying policy and treaties.

Okay, that's helpful. You've also mentioned that COVID losses should become more limited, so I am wondering if you're considering a new threshold to call out unfavorable or favorable mortality in any given quarter as the $0.12 EPS impact from COVID held in comparison of your favorable mortality experience. I guess my question for this quarter would be when you think your mortality would have been in the quarter backing out that favorable experience?

Are you talking specifically about our US business? Just to clarify?

I mean, US is the big one that would be helpful.

Okay. Yes. For our US individual business, our estimate is that excluding the impacts of COVID, the favorable experience in the quarter would have been about $70 million favorable. This split was roughly 50:50 between large claims and non-large claims experience. Basically, we saw across-the-board improvement, whether you look by attained age or you see from the prior quarter, so it's all quite favorable.

We'll take our next question from Tom Gallagher with Evercore ISI.

Good morning, I just assume you don't have very much SUL exposure. Just invited a prudential charge the other day, but just want to confirm that. How should we think about whether you do have any exposure to that type of product structure?

Hi, this is Todd. We historically have not reinsured the lapse guarantee component of those products. It's just something that we've never gotten comfortable with from a risk perspective. We do reinsure the mortality component on some of those products, but it's just the mortality component only. A change in lapses really doesn't have a material impact on that performance of that risk. So no, we don't have exposure.

Okay, thank you. Along with that change in lapsation, Pru mentioned they also changed their ultimate mortality assumptions, as part of the charge. Just curious how you're thinking about ultimate mortality? Is that something you're considering changing? Or overall thoughts on that?

Yes, as far as long-term mortality goes, we're quite bullish on long-term mortality improvement for a number of reasons related to medical advancements, genomics, and other technology changes. At this point, we haven't made a change to our long-term expectation just like all our business we regularly review mortality and look at assumptions and emergence, but nothing right now.

We'll take our next question from Alex Scott with Goldman Sachs Group.

Hey, yes, the first one I had was just on the PFO growth. On a local currency basis, it looked pretty good. Can you just help us think through the different dynamics that are driving the top line and what you foresee for the next year or two on top line growth across the geographies?

Yes, so maybe. Go ahead, Todd. I’ll provide additional comments once you comment on the growth.

Okay, Anna, thanks. We're still very comfortable with what we've been talking about, that mid to high single-digit growth on the premium side. We think it continues to be achievable. We're really seeing good opportunities in all of our different regions on new business opportunities and product development, and Asia, some higher production in the US. So really, it's across the board that we're very pleased with the opportunities that we're seeing.

Yes. If I could add some comments to that, and thank you for the question. When it started, and I think we've had this conversation in prior quarters, but there are large life insurance or maybe more broadly protection gaps in all our markets and they're sizable. Our life insurance clients want to offer protection to not only their existing consumers but new customers, and they want to offer good, simple, affordable products. Many of our clients are also leaning towards these capital-light models, so we can play and are playing a big role because, as Todd already mentioned, our product development, our risk transfer, and capital-efficient solutions. We're already doing that. We have many of the tools and capabilities that the clients need. I see that continuing. For example, I've spoken about our underwriting expertise about the depth of it in our facultative businesses, a big differentiator. Few reinsurers can and do provide that service. It also has high barriers to entry. When I look at that, and then layer on our global footprint, where we have very strong local teams with extensive market knowledge, they have strong local client relationships. This enables us to quickly leverage good ideas between markets, and I've shared in the past, it's the new ideas or being early to new market opportunities that generally come with stronger margins, or exclusive arrangements where you're not competing against others. Further, I would add the very large longevity and pension risk opportunities around the globe, as well as other in-force block opportunities, again, good growth opportunities. Because we're talking about some framework changes, there's a lot happening in capital models around the world and financial reporting models as well; just about every country is in the midst of revising their frameworks. We think that will drive further interest in reinsurance both as risk and efficient capital management tools. Perhaps not immediately, as would be expected, the focus right now is on implementation. People are busy reworking all these changes. Once that's completed, we would expect clients to turn to look for opportunities to optimize portfolios and rebalance. That’s clearly what we saw through Solvency I and Solvency II, and RGA, we have a long history of creating new solutions that respond to the new environment. You can expect us to continue to do that. All of that to say, we see attractive growth opportunities in all parts of our business. I am confident that we'll continue to deliver on growth in this organization.

So I had this sort of high-level question on margins. If I look at just PFO growth and where it's come in through the pandemic, how much higher PFOs are today, and I look back at the kind of PFO margins you were generating before the pandemic, is that the right way to think about the potential earnings power here? Can we get back to a sort of full PFO margin the way that you were earning before? I mean, is there anything structurally different about the business? Certainly, we don't know what's going to happen with COVID. We'll have to have our estimates around that. But if we set COVID aside for a minute, can you return to those levels? If so, is the good amount of this earnings be here sustainable?

Yes, I apologize. Todd, just want to start again.

I was just going to comment that if you look back to pre-pandemic levels, I think our pretax operating income was about $1.2 billion or so. Throughout the last couple of years amid the pandemic, we've continued to layer on profitable new business and deployed record levels of capital into the business. We feel it, and as you mentioned, excluding any potential impacts of COVID. We still have that earnings power, and more going forward. Given the increasing rate environment, that should also be a tailwind as well.

We'll take our next question from Andrew Kligerman with Crédit Suisse.

Hey, good morning. We'd like to follow up on a few earlier questions. With the LDTI, $1 billion to $1.3 billion impact at transition on retained earnings, could you possibly give a little color on what types of cohorts were impacted there by product and vintage?

As you know, it is the loss cohorts where the net premium ratio is above 100%. We're not giving a lot of detail at this point; we'll provide more over time, but there are a few select pockets around the globe. Real clearly in the US, the 99 to 04 block that we've talked about and been pretty transparent about over the last several years as a component of that adjustment.

Thank you for that, Todd. And then Jonathan, there was some discussion earlier about non-COVID-19 mortality, and certainly this quarter, it looked like the frequency and severity was quite favorable. COVID-19, I think has been influencing non-COVID-19 mortality. The question is, assuming COVID-19 dissipates, and hopefully it does, what might be the lag period in which we could still see this sort of COVID-19 influenced indirect mortality? How long do you think, a year from now, you'll be in the clear, and we won't expect any more claims, given the lack of medical checkups, and so forth?

Yes, thanks for the question, Andrew. Putting a precise timeline is very challenging, as I'm sure you can appreciate. One thing that was encouraging is when we saw negative excess mortality in the US this quarter. The CDC data isn't complete yet, but it looks like after backing out the impact of COVID, that mortality is actually slightly more favorable than what has been sort of a historic run rate based on the CDC reporting. That helps support our belief that most of the general population excess mortality we've been seeing over the course of the pandemic is directly or indirectly related to COVID-19. Therefore, we expect a significant normalization as COVID-19 deaths come down. We did talk earlier about the potential for impacts of delayed diagnoses and things. I said before, the further we get away from that delayed period, the less of an impact there will be. Of course, there are other pluses and minuses in the mix that are not directly COVID related. On balance, again, we haven't seen anything materially emerging yet on the delayed diagnosis item.

And then, Andrew, if I could circle back to your question on the LDTI. I commented in my opening remarks that on day one reserves can only be increased. I just want to emphasize that the majority of our businesses do have very significant positive margins that are significantly in excess of any of the retained earnings reserve adjustments we made at the transition date. We've got a very long-term business, a very large block, and we have substantial margins on the balance sheet that will be realized going forward.

We'll take our next question from Michael Ward with Citi.

Hey, guys. Thanks for the question. Just thinking about the potential for COVID to morph into an endemic idea. I'm just wondering if you guys have a set number of years of experience or an idea of how long it might take you to form the view that you should adjust mortality assumptions and incorporate those into new business or existing business.

Yes, thanks for the question. This is Jonathan again. Let me just start by reiterating that we're encouraged by the favorable trends we've seen over the last few quarters. Consistent with expert views, we expect to see future variants and waves of infections and hospitalizations, but we also expect that mortality impacts will be much lower than what we've seen in the past. For the reasons I mentioned in my prepared remarks, we look at a range of scenarios into the future. We have been and will continue to reflect the uncertainty and the expectation in our pricing. We've definitely made adjustments to prices for new business. We've made adjustments to our approach to underwriting to ensure that we're avoiding anti-selection risk relative to COVID and updating based on the newest medical information. We have been managing the business proactively over the last few years and will continue to do so as new data emerges that we need to take into account.

Okay, maybe just following up on the existing business. Have you been adjusting any pricing? Or is there a certain level of mortality or number of years that you might need to see before you do that?

Yes, I mean, I think of just broadly changes in mortality, any change that causes an impact to mortality, I mean, to the extent that we see that it is material and longer lasting, we’ll review those impacts on a client-by-client basis and take action using options we have available in our in-force treaties. This is a regular process we go through quarterly, or at least probably take an assessment of that. We have taken some actions in the past for various reasons, and we will continue to use that as an option in the future.

We'll now move on to our next question from Dan Bergman with Jefferies.

Hi, thanks. Good morning. I guess with the block deal activity pretty elevated for a few quarters now. I wanted to see if there's any more color you can provide on the types of blocks you're acquiring, whether by size, types of risks, or geography, and also any update or change in the competitive environment among acquirers. Any differences there between what you're seeing on the asset-intensive side versus more kind of core mortality blocks?

Yes, thanks for the question, Dan. Let me start with the deals in the second quarter. We won deals in Asia on some savings products. Those deals were in part driven by statutory relief needs of our clients. We also completed a US asset-intensive deal on a deferred annuity block. What's noteworthy is that some of these deals were done on an exclusive basis right from the start. We're working on follow-on transactions with some of the clients and potentially other clients, so we're working on similar deals. No guarantees. We are active. I believe we're in good shape to continue to win deals. As mentioned, in my prepared remarks, we've gotten off to a good start so far this year, pretty much on pace with last year, which was a record year for us. In terms of competition, specifically on deals, it remains very competitive, particularly on the US asset-intensive deals—competition, our experience. Competition varies depending on the size of the deal and the underlying risks. We typically have less competition on the larger and more complex risks, and less competition where there are insurance and biometric risks in a deal relative to market risks. Demand remains overall very good. We feel we're a good competitor, we're in good shape, and we have a strong competitive position. You've seen us continue to win deals, and I would say we win deals for several factors I've spoken about in the past. It's not just price. It's that expertise at all levels, local, regional, global, relationships, and deal certainty. I think if you ask our clients why they choose to partner with RGA, I'm confident that what you'll hear are the same things I just mentioned: great partner, deep risk experts, creative and innovative, solution-oriented. We deliver on our promises and execute as we say we will. The pipelines are strong right across. We're very active, and we continue to win deals.

Got it? That's really helpful. Thank you. I guess maybe then switching gears a little bit, just to follow up on your commentary regarding Alex's question on premium growth. Now that we're further into the pandemic, are you seeing any increased demand from primary life insurance companies raising their reinsurance coverage? Given all the recent volatility and pressure on mortality results due to COVID? I guess, in other words, are you seeing or would you expect any uptick in session rates relative to recent historical levels? Any commentary on that would be helpful.

Yes, specifically with respect to session rates, we haven't seen a lot of movements in session rates. They've been relatively flat, maybe a little up. But remember, session rates are not the only levers of growth for us. In addition to reinsurance, session rates, the underlying market growth is a growth lever for us. If you hold session rates flat, the third lever for us is market share—our ability to gain more of the reinsurance that's taken to market. I'll tie this back to earlier comments around exclusives and bringing ideas to clients; our history and success about being early in leveraging new ideas translates into exclusive arrangements where all the reinsurance comes to us. So we're not competing for that business on a pooled basis. My caution really is around session rates being something to pay attention to, but they're not the only thing that drives our growth.

We'll now take a follow-up from Ryan Krueger with KBW.

Hi, thanks. I just want to clarify one thing. So I guess on earnings post LDTI. The removal of PAD combined with not much of a change in the pattern for DAC amortization, and the adjustments you made to retained earnings seems like they virtually have to make future GAAP earnings higher for some period of time post-LDTI. I just wanted to confirm that I was thinking about that right.

Yes, I think certainly in the early durations here, I think that's right, because we know some of the existing PADs will start being released. Because I mentioned on new business, we won't be setting up provision for adverse deviation. So the margins should be a little bit higher early on.

And we'll take another follow-up from Mike Ward with Citi.

Thanks for the follow-up, guys. Just quickly, Prudential had a slide, and don't worry, this isn't going to be about their mortality charge. They have a slide that they like to point to showing the longevity offset they have that balances off mortality earnings. I was just wondering if you've thought about or discussed making some sort of shift to improve that hedge aspect in the future.

Hi, it's Jonathan. Maybe I'll start, Mike. If you go back to our Investor Day presentation in December, one of the areas we see quite a bit of growth opportunity—and sorry, first of all, we see growth opportunities everywhere—but particularly strong growth opportunities in the US PRT space, which will be longevity risk. We included a slide that showed our distribution of core biometric risks to mortality and morbidity and longevity. We expect over our five-year strategy to grow that portion of longevity. The reason for this growth is that there are good margins and strong growth opportunities, but as an added benefit, like you pointed out, we'll see better diversification from both an earnings perspective and also a capital perspective.

Okay, so it's sort of gradual over five years.

Yes, I think so. I guess I can't off the top of my head remember the exact number. It's in the slide. I think our longevity's portion of those biometric risks is roughly doubling give or take over the next five years as it grows faster than our other businesses.

Thank you. That does conclude today's question and answer session. I'd like to turn the conference back over to Mr. Larson for any additional closing remarks.

Well, everyone, thank you for your continued interest and support in RGA. That concludes our second-quarter call. Thank you very much.

Thank you. That does conclude today's conference. We thank you all for your participation. You may now disconnect.