Reinsurance Group (NYSE:RGA) of America, Incorporated (NYSE: RGA) has reported a strong second quarter for 2024, with adjusted operating earnings of $5.48 per share, surpassing analyst expectations. The company has seen significant growth across all business lines and geographies, with a notable increase in adjusted operating return on equity at 15.3%. RGA's strategic capital deployment and dividend increase reflect a confident outlook, despite a higher-than-expected effective tax rate for the quarter.
Key Takeaways
- RGA exceeded expectations with $5.48 adjusted operating earnings per share.
- All business lines and geographies reported strong growth.
- Adjusted operating return on equity reached 15.3% over the past 12 months.
- Underwriting results were positive for the fifth consecutive quarter.
- Capital deployment of $307 million into in-force transactions.
- Raised quarterly dividend by 4.7% to $0.89 per share.
- Book value per share increased to $149, a 10.4% CAGR since 2021.
Company Outlook
- RGA expects an effective tax rate of 24% to 25% for the full year.
- The company maintains a strong capital and liquidity position, with excess capital of about $1 billion.
- Executives expressed confidence in meeting financial targets and delivering attractive returns to shareholders.
Bearish Highlights
- The effective tax rate for the quarter was 25.5%, higher than the expected range.
- Certain negative impacts were noted from client reporting items and data catch-ups.
Bullish Highlights
- RGA experienced favorable underwriting results and growth in Longevity and PRT business, asset-intensive business in Asia, Asia Traditional business, and US Traditional business.
- The company has seen a $100 million positive impact from in-force management actions.
- There is a strong pipeline for capital deployment in the second half of the year.
Misses
- Despite overall positive results, the company faced some unfavorable impacts that were offset by in-force rate actions.
Q&A Highlights
- RGA is selective in new business pursuits, focusing on areas with favorable risk/reward trade-offs.
- The company has a rigorous approach to pricing and risk management, with regular monitoring of favorable experience.
- Executives discussed the embrace of asset-intensive reinsurance in the Asian market, particularly in Japan.
- There have been no significant changes in US mortality experience, with a downward trend in excess mortality.
- RGA's Australia business remains selective and issue-free with older legacy blocks.
- The company is comfortable with the pricing environment and is positioned well for future opportunities in Asia.
In summary, Reinsurance Group of America's earnings call highlighted a quarter of robust performance and strategic growth. The company's strong results and proactive capital management demonstrate a solid foundation for continued success in the reinsurance industry.
InvestingPro Insights
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InvestingPro Data highlights RGA's market capitalization at $13.34 billion, showcasing its significant presence in the insurance industry. The company's P/E ratio, which stands at 15.54, suggests that the stock might be trading at a reasonable valuation relative to its near-term earnings growth. Moreover, RGA's revenue for the last twelve months as of Q1 2024 has grown by a robust 24.71%, indicating strong top-line performance.
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Full transcript - Reinsurance Group of America Inc (RGA) Q2 2024:
Operator: Good day and welcome to the Reinsurance Group of America, Incorporated second quarter 2024 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Jeff Hopson, Head of Investor Relations. Please go ahead.
Jeffrey Hopson: Thank you. Welcome to RGA's second quarter 2024 conference call. I am joined on the call this morning with Tony Cheng, RGA's Chief Executive Officer; Todd Larson, Chief Financial Officer; Leslie Barbi, Chief Investment Officer; and Jonathan Porter, Chief Risk Officer. A quick reminder before we get started regarding forward-looking information and non-GAAP financial measures. 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, the information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation and quarterly financial supplement, all of which are posted on our website for a discussion of these terms and reconciliations to GAAP measures. Throughout the call, we will be referencing slides from the earnings presentation, which, again, is posted on our website. And now, I'll turn the call over to Tony for his comments.
Tony Cheng: Good morning, everyone. And thank you for joining our call. Last night, we reported adjusted operating earnings of $5.48 per share, continuing our trend of strong bottom line results. In addition, we continue to have strong momentum across all our business lines and geographies worldwide. The pipeline remains robust, reflecting RGA's unique positioning in the market and the dedication of our teams. Our adjusted operating return on equity for the past 12 months was 15.3%, exceeding the intermediate-term targets we previously shared. Underwriting results on an economic basis were in line with our expectations across the company. This was also generally the case across each of our business segments. It is pleasing to note that we have now had five straight quarters of positive underwriting results. We have a world-class investment platform that is integral to our business and strategy. We continue to put new money to work at returns well above the current portfolio yield, benefiting from our broad asset completion platform. In terms of new business activity, our recent momentum continued this quarter, and our internal measure, new business and better value, strongly exceeded our goals for both the quarter and the year-to-date. This was driven by both the number of transactions and the expected returns on these transactions. At our Investor Day, we shared many recent examples of innovative forms of new business. These transactions do generate a higher expected return for RGA, given the greater value created for all parties. We continue to see the percentage of these transactions well ahead of our internal goals, leading to greater long-term value for RGA. In relation to this, we deployed a material amount of capital into in-force transactions at $307 million, which was a solid follow-up to an especially strong first quarter. We have always shared a preference to redeploy our excess capital back into the business for both financial and strategic reasons. As we know, successful transactions lead to favorable economics and repeat transactions over time. Let's now share some more specifics from our four areas of notable growth, starting with our Longevity and PRT business. In the US PRT market, we completed another transaction this quarter and we remain optimistic about our prospects going forward. In the UK longevity space, where RGA is a market leader, we continue to be highly successful on longevity swaps of all sizes, as well as funded reinsurance transactions. The pipeline remains active in both the US and UK and we expect the rest of the year to be productive. This follows a strong Q1 where we close the first material longevity deal in Japan and our largest US PRT transaction to date. Our second area of notable growth is the asset intensive business in Asia. RGA's multi-faceted client partnership means we have deep relationships with our clients in many ways. With a large Japanese client, we closed their first asset intensive transaction after enjoying a long-standing relationship on the biometric side over many years. The client highlighted the numerous positives from this transaction, including risk reduction and the increase of their long-term value. This further strengthens the view that reinsurance is a key tool for capital management, reinforcing our positive view towards future opportunities. In addition, in Korea, we closed one of the first asset intensive transactions in the market and we are optimistic about further opportunities. This transaction continues RGA's long track record of being a pioneer in asset intensive reinsurance around the world. In our third area of notable growth, which is our Asia Traditional business, we continue to see very positive results. Our focus has long been to package product development with capital and underwriting solutions to fuel our clients' growth and success. This quarter, we have added a technology solution to this package. This is a market-first digital underwriting solution to address the lengthy onboarding process for Mainland Chinese visitors buying insurance in Hong Kong. We have successfully launched this with a key client and it is generating strong interest in the market. Finally, our fourth area of notable growth is the US Traditional business. Here, RGA has worked in partnership with one of our clients, one of the largest distributors in the US and another reinsurer to develop a new proprietary life product. Each partner brought their own strengths to the table, with RGA providing mortality expertise as well as performing all the case underwriting for the business. We expect this will stimulate future growth for RGA in these exclusive transactions. Outside our four areas, we continue to have strong success. In South Africa, we launched a new effort with a large growing bancassurer to offer simplified issue policies to the mass market. This uses RGA's proprietary model and technology to enhance the underwriting journey for customers. This is an important transaction with strategic significance as we can leverage this solution elsewhere around the world. Finally, as I expressed at Investor Day, in addition to new business activities, we also have other levers to help grow ROE and PTAOI. This quarter, we executed an in-force action across multiple regions as well as asset repositioning into higher yielding investments. These actions in aggregate generated positive PTAOI this quarter and also on an ongoing basis. All in all, I am delighted with yet another quarter where we are firing on all cylinders. Strong financial results in terms of PTAOI and ROE, strong success in the four areas of notable growth continues and other areas are also contributing with strategic transactions. We are increasingly using technology to deploy our intellectual property as we saw in South Africa and Hong Kong. Finally, we saw the successful use of the other levers RGA has available to unlock value in our balance sheet and positively impact profit and ROE. We are the only global reinsurer exclusively focused on life and health business, and thus our platform is unique. In my view, our capabilities are second to none. Success breeds success as the virtuous innovation cycle continues. I am fully confident in our ability to continue to deliver growth at attractive returns to our shareholders for many years to come. I will now turn it over to Todd to discuss the financial results in more detail.
Todd Larson: Thanks, Tony. RGA reported pre-tax adjusted operating income of $491 million for the quarter and adjusted operating earnings per share of $5.48. For the trailing 12 months, adjusted operating return on equity was 15.3%. We are pleased with these results and with the continued positive momentum in new business activity and in-force transactions. Reported premiums were up 17.5% for the quarter. This increase includes $282 million from a single premium US PRT transaction in our financial solutions business. Our traditional business premium growth was a healthy 7% for the quarter and 7.6% year-to-date on a constant currency basis. We are pleased with the premium growth, reflecting good results across all regions. The effective tax rate for the quarter was 25.5% on pre-tax adjusted operating income, above the expected range, primarily related to income earned in foreign jurisdictions. For the full year, we expect the effective tax rate to be in the range of 24% to 25%. Before turning to the quarterly segment results, I would like to speak to slide 7 in our earnings presentation that displays the total company claims experience and the related financial statement impacts. We have seen positive biometrics experience over the last five quarters. In the current period, underlying biometric experience, which includes mortality, morbidity, and longevity, was in line with overall expectations. However, the financial statement impact recognized in the current quarter was a $14 million loss. The difference between the actual experience and the financial statement impact is a function of LDTI cohorting and the duration of the business. The US and Latin America Traditional segment results reflected favorable in-force management actions primarily related to a client recapture of a block of business. The financial impacts were recognized in the current period due to the business being a capped cohort. Not only did this lead to favorable current period results, we expect this to reduce some claims volatility going forward. Separately, this favorable impact was partially offset by client reporting adjustments. Overall, claims experience was in line with expectations with nothing notable in terms of frequency or severity of claims. The US financial solutions results were below expectations due to the timing of recent new business not yet at a full earnings rate as well as some one-time items. Canada Traditional results reflected modestly unfavorable mortality experience. However, year-to-date underlying mortality experience is favorable. The financial solutions business results were in line with expectations. In the Europe, Middle East, and Africa segment, the traditional business results reflected unfavorable experience, primarily in the U.K. EMEA financial solutions business results were favorable, reflecting the impact of strong new business in recent periods and favorable longevity experience. Turning to our Asia Pacific results, both our Asia traditional and financial solutions businesses performed very well. The traditional business reflected the benefit of in-force management actions as well as the impact of recent new business in Asia, while financial solutions business reflected favorable overall experience. The Corporate and Other segment reported a pre-tax adjusted operating loss of $44 million, slightly worse than the expected quarterly average run rate due to some variable expenses, including higher incentive compensation accruals. For the first half of the year, results were in line with the expected average run rate. Moving on to investments on slides 9 through 12, the non-spread portfolio yield for the quarter was 4.65%, including the impact of lower variable investment income. For non-spread business, our new money rate was 6.22%. This is still well above the portfolio yield and higher than the prior quarter. Credit impairments were minimal and we believe the portfolio remains well positioned. Related to capital management, as shown on slides 13 and 14, our capital and liquidity position remains strong and we ended the quarter with excess capital of approximately $1 billion. This includes the impact from the $650 million senior debt issued in the second quarter. We have an active and balanced approach to capital management over time and we had another solid quarter of $307 million of capital deployed in the in-force transactions across multiple geographies. We also raised our quarterly dividend by 4.7% to $0.89 per share. We remain well capitalized and access to multiple forms of capital. We expect to remain active in deploying capital into attractive growth opportunities while balancing returning excess capital to shareholders over time. During the quarter, we continued our long track record of increasing book value per share. As shown on slide 15, our book value per share excluding AOCI and the impacts of B36 embedded derivatives increased to $149, which represents a compounded annual growth rate of 10.4% since the beginning of 2021. As we've discussed, we've had a great first half of the year. We continue to see very good opportunities across our geographies and business lines and we are well positioned to execute on our strategic plan. Our business continues to demonstrate its resilience and underlying earnings power. We are very excited about the future and expect to deliver attractive returns to our shareholders. With that, I'd like to take a moment to thank everyone for your continued interest in RGA. As many of you know, I have announced my planned retirement for the end of this year and this will be my last earnings call as CFO before turning it over to Axel Andre on August 5. I have enjoyed my nearly 30 years here at RGA and look forward to staying on through the end of the year as special advisor. And I will reiterate what I said at Investor Day. I believe that RGA's future is as bright as ever. This concludes our prepared remarks. We would now like to open it up for questions.
Operator: [Operator Instructions]. The first question comes from Joel Hurwitz with Dowling & Partners.
Joel Hurwitz: My first question is just on the in-force management actions. What was the earnings benefit in the quarter? And then, has there been an increase in sort of in-force actions or is this sort of a one-off?
Todd Larson: Well, this is Todd. In-force management is an ongoing part of our daily activities. We are constantly managing the in-force. That's part of what we do. But again, as we've talked about in the past, we do it in very much a partnership approach with our clients. If I take a step back, in the quarter we had both positives and negatives across certain areas. I would say if you looked at on a consolidated basis, the impact of the in-force actions, which was positive, offset by some of these client reporting items and data catch-ups, that kind of thing. On a consolidated basis, the impact was a positive of about $100 million.
Joel Hurwitz: Looking at the Asia Pacific financial solutions business, it's off favorable experience again this quarter. It feels like a pretty consistent trend. What's been driving the continued favorable experience in that business? And I guess at what point may you start to think that some of the experience could be sustainable?
Tony Cheng: I'm sorry. Which business did you ask about?
Joel Hurwitz: Asia Traditional.
Todd Larson: No, Asia financial solutions.
Tony Cheng: Asia financial solutions, that business continues to ramp up over the last few years, so we've been very successful bringing on new treaties and new business. So we just continue to see continued strong momentum on that business. Our clients are reacting well with the solutions that we're bringing to them, and those are very much value added type transactions, so we can generally get some nice margins on those.
Operator: Our next question comes from Wes Carmichael with Autonomous Research.
Wes Carmichael: First, I just wanted to clarify on Joel's question. With the in-force action of $100 million, is that a pre-tax number or is that after tax?
Todd Larson: That's pre-tax, and that's the consolidated number, and that's net of some of the other client reporting adjustments and some other things that we did.
Wes Carmichael: Just on US financial solutions, I think you had a retrocession to Ruby Re in the quarter. Is there any help you can give us with how that impacted the income statement in that segment for the quarter?
Todd Larson: This is Todd again. Let me clarify. For Ruby Re, we had the initial C-block retrocession back in December, and we're in the process of doing some additional retrocessions, but we did not have a specific retrocession in the second quarter, but we will have some as we go forward.
Wes Carmichael: I guess the slides also mention, I guess, an earnings impact for timing. Is there something that will change in the third quarter in financial solutions?
Todd Larson: For financial solutions, we had a couple sort of one-time items in the quarter. We had some data catch-up from a client on a treaty that was a negative impact, and then we did have some timing of some fee recognition, which we would expect to be just a timing issue that should come back in the future.
Operator: Our next question comes from Jimmy Bhullar with J.P. Morgan.
Jimmy Bhullar: I just had a question on financial solutions. I think you mentioned that the depressed level of earnings was – or the earnings were affected a little bit by just the timing of new business being put on. Is this something that should correct itself beginning next quarter, or is it more of a longer-term issue where the full earnings power will emerge maybe into next year?
Tony Cheng: As we've talked about in the past, it depends on the underlying transaction and structure, but generally, it's worked out a little bit below our ultimate run rate, if you will. We still price the transactions to hit our overall returns, but generally, as we go through and reposition the investments and that type of thing, it generally takes, say, a year to 18 months to ramp up.
Jimmy Bhullar: If I go by the sort of unusual benefit you mentioned from the client transaction recaptures, offset by some of the other one-time, you get about $1.20 per share. Is that the – or $1.20 per share is a lower number from what you reported. Is that a good number to use in terms of looking at your earnings going forward, or were there other things that might have depressed your earnings in the second quarter that you didn't include in that?
Todd Larson: The way I would look at it, if I take a step back at a high level, we talked about – and these are pre-tax numbers. We talked about the in-force actions, primarily in US Trad and Asia Trad, and then offset by some of the financial reporting type items. From a financial reporting perspective, we had some negative claims of about $15 million or so, but the underlying claims experience was still fine. That was just the LDTI reporting impact. Then we had some additional expense accruals that I mentioned, primarily related to incentive comp. That was probably another $20 million or so and then some small miscellaneous items. So to me, those items add up to say $65 million or $70 million pre-tax, but I would advocate that things like the in-force actions that we took really created a lot of value to the enterprise, not only in the current period, but go forward as well.
Tony Cheng: Just to reiterate that point, look, during Investor Day, we shared in-force actions is just one of our other levers for growth in PTAOI and ROE. We always do it on a holistic basis. We feel that's stood us in good stead over the medium and long term. And these are lumpy transactions. So at times, we could be working on them for one or two years, but we are very active in sort of making sure we execute on our rights in the treaty, but also very much in a partnership fashion to continue to partner with these clients on new business and in-force.
Operator: Our next question comes from Elyse Greenspan with Wells Fargo (NYSE:WFC).
Elyse Greenspan: My first question is on Ruby Re. You guys obviously seeded business when the entity was set up, but you haven't been seeding ongoing business yet. When would you expect that to change? And I guess, what are you waiting on just for you guys to be able to seed current business into the platform?
Todd Larson: This is Todd. No, we're actually working on putting together the – going through the process, I guess, is the best way to do it, to retro-seed some business to – we've identified some blocks and we're just going through the process of doing the modeling and getting the appropriate approvals and that type of thing. So, I would expect that you'll see some retrocessions or sessions out for Ruby the remainder of this year.
Elyse Greenspan: My second question, you guys did issue some debt in the quarter. How do we think about target debt to capital, including hybrids, just when we think about the capacity away from Ruby for additional transactions?
Todd Larson: Generally, we target around 20% or so senior debt to equity. And then, all in, combined with the hybrids, say 35%, but there's some flexibility around that. And in addition, again, to the traditional debt markets, we all do spend quite a bit of time looking at what we call alternative forms of capital, of which Ruby Re and third-party capital is part of that. Historically, we've also done some embedded values securitization as well as did some strategic retrocessions as well where it makes sense.
Operator: Our next question comes from Ryan Krueger with KBW.
Ryan Krueger: I'm sorry to harp on this, but I'm going to come back one more time on the underlying earnings power, make it for an interesting call for Todd on his last one. So, I think you mentioned the $100 million positive, so just the $15 million gap claims, $20 million higher expenses. I think beyond that, I believe BII was also weaker and the tax rate was higher. Are those the other two things you would consider when trying to kind of come up with more of a run rate earnings power? And if so, how would you quantify those two other items?
Todd Larson: I think variable income, by our best estimate, is about a $15 million pre-tax negative impact in the quarter. The tax rate was – our previous range was 23% to 24%, so the impact of another, say, 1.5 to 2 points on the tax rate on the pre-tax income of $491 million. But we're still, reiterate, comfortable with the run rates that we provided earlier in the year and continue to plan to grow off – deliver the intermediate growth targets that we provided.
Ryan Krueger: Just given the challenges of one of your main competitors, I guess I just wanted to give you guys a chance to kind of comment on your confidence in your own reserve assumptions at this point.
Jonathan Porter: This is Jonathan. Let me take that one. Obviously, we're not in a position to comment directly on other companies' actions, but just a few points from our perspective. The first one, I think we need to keep in mind that there are differences in the business that each company has, right? So the underlying business, the premiums that are being charged, the assumptions that are being used from an expectation perspective. So it's not really possible to read through things in that way. Second, I would say we feel that risk management is one of our core strengths at RGA. We've got a very rigorous approach to pricing, and I think we've demonstrated our discipline across multiple markets and product lines. And where we don't see the risk/reward trade-off making sense to us, we don't pursue the business. The last point I'll mention is we do regular monitoring and reporting of our experience. Things can move up and down quarter to quarter, but we have been pleased that our underlying biometric experience has been favorable, as Todd and Tony both pointed out, for the last five quarters.
Tony Cheng: Tony here. Let me just add, these actions or these activities happen from time to time. As Jonathan said, our discipline, our risk management, our focus on life and health is critical for us. And at times, this can create opportunities for us. So we remain incredibly disciplined, focused on life and health, and the risk management principles we have will obviously continue well into the future.
Operator: Our next question comes from Suneet Kamath with Jefferies.
Suneet Kamath: I guess on capital deployment, it looks like you deployed about a billion year-to-date, a very healthy number. Should we sort of think about the second half as maybe you guys needing some time to sort of digest what you've deployed, or is it sort of still doors wide open to do more deployment?
Tony Cheng: Maybe I'll take that one, Suneet. I'd answer it by saying our pipelines are absolutely full. So, obviously, Q1 was unique or unusually strong, but there's no reason we're slowing down in Q3, Q4. So, hopefully, that gives you a good sense. Very excited by the pipelines, very excited by how we're positioned strategically. We've got plenty of capital to use to execute on transactions, and that momentum is only growing stronger.
Suneet Kamath: Just maybe shifting gears to the PRT market. Obviously, we've been seeing some headlines related to some of the deals that were done with the private equity-backed players. Just wondering if that's having an impact on either competition for PRT business or pricing in that business.
Tony Cheng: I don't really want to comment on the issues relating to some of our competitors or indirectly. But for us, once again, same thing. Pipeline strong, particularly in the jumbo side where we do spend a lot of our focus. Pricing, in my mind, is fair. So key part of our strategy is the longevity risk broadly, the PRT market in the US. Excited by the rest of the year and no reason to think that that's not the case going forward.
Operator: Our next question comes from Tom Gallagher with Evercore.
Thomas Gallagher: Todd, just back on the $100 million of in-force rate actions benefit. Is it all one-time benefit or would you expect any go-forward earnings impact as well?
Todd Larson: Again, that's on a consolidated basis. And it's net of some of those client reporting adjustments. So I would maybe break it up into two, Tom. The US in-force action had a current year benefit. As I mentioned in my comments, that was on a what we call a capped cohort under LDTI, net premium ratio above 100%. So the impact of that came through the current period. And there really won't be much income statement plus or minus going forward, but we do believe it will help decrease some of the claims volatility with that treaty no longer on our books. And then switching over to Asia, that was a great adjustment. The way it works, that treaty had a net premium ratio less than 100%, so it was an uncapped cohort. So the way you look at that, whatever the change in cash flows based on the new rate structure, you recalculate the net premium ratio and actually apply it back to the inception of the adoption of LDTI. So you get a little bit of a catch up or you can catch up in the current period and then some positive impacts going forward.
Thomas Gallagher: Just to put a bow on this run rate of earnings. So $100 million of favorable. and if I added up all the unfavorables, I think it's $60 million to $70 million, so a net of $30 million to $40 million pre-tax. Does that sound about right?
Todd Larson: I guess when I look at the positives and negatives, I get about, let's call it, $65 million to $70 million pre-tax of positive impact in the quarter, but I would reiterate again, a lot of that related to the in-force actions that we took that created quite a bit of value to the enterprise. So I would do that as part of our business, if you will.
Thomas Gallagher: So $65 million to $70 million would be the net benefit in the quarter and then your tax effect that, that would be the way you would adjust?
Todd Larson: Yeah, if we're looking at also some of the, whatever you want to call them, one-time items or a little bit of those types of items. But again, in every quarter, we're going to have some of these positives and negatives, right? And again, a lot of the positives this quarter was related to some good things that we did from an in-force management perspective.
Operator: Our next question comes from John Barnidge with Piper Sandler.
John Barnidge: Another quarter above the ROE guided range. I know there's some one-timers that have been discussed. Are we trending from the high end towards above it sustainably in your opinion?
Todd Larson: We're happy with our strong performance over the last period of time. We did recently set the intermediate financial targets and those are meant to be sort of intermediate, which is say over a three-year period. At this point, we're not updating the targets, but we do feel good about coming in at the higher end of the targeted range and we'll monitor and consider updating as appropriate going forward.
Tony Cheng: John, maybe just to add, as we said during Investor Day, we've got all these tailwinds, whether that's the returns on the new business as we focus more and more on innovative, exclusive transactions. Another tailwind, obviously, is new money rates still higher than portfolio yields. So, over time, you'd hope we'd drift up, but at this point, we're happy with where we've signaled our ROE and we look forward to continually beating and really working hard and creating value for ourselves and our clients.
John Barnidge: My follow-up question, interestingly enough, it looks like your office portfolio LTV actually improved 2 basis points in the quarter. As you think of – what does that stability in the commercial real estate portfolio portend for your outlook for gain harvesting and maybe the balance of the year on portions where you have an equity position for VII?
Leslie Barbi: This is Leslie Barbi. The portfolio overall, the credit quality has been quite stable. We have a very experienced team that is managing that. Related specifically to your comment on the office LTV, it came down about 2 points. That is primarily due to some new loans closed in the quarter with quite low LTVs and stability on the rest of the portfolio there. And we did have a small amount, $13 million in office that we took into REO that helped contribute a little, but more so the new very low LTV loans. While there's a lot of things going on in the market, certainly there's also been less lending available to the market in general, so we can pick and choose. We're very disciplined. As we're doing this transition, we can both work through any individual issues, but also look for market opportunities.
Operator: Our next question comes from Mike Ward with Citi.
Michael Ward: I was just wondering, all this talk about – or all the dynamics from the in-force actions and whatnot, is there any change in sort of the run rate dollar earnings for the segments like US Trad or Asia? Or it sounds like not, but just wanted to make sure.
Todd Larson: It's Todd. I'd say no. Nothing material.
Michael Ward: Most of my other questions were asked, but I'm just curious if there's been any sort of underlying changes in US mortality experience that you've been observing over the last five quarters, call it, post pandemic, any sort of themes that you've seen?
Jonathan Porter: This is Jonathan. So I'd say nothing really new to report relative to what our expectations have been. We continue to be pleased with our underlying economic performance within the business, which has been positive over the last five quarters. No real significant trends to note in Q1 or Q2 of this year at a sub level when you start to drill into the block of business. We do have an expectation, as I've mentioned before, built into our go forward mortality expectations for excess mortality. And we continue to see that in the population. It is reducing. So it still is trending down. I think we're about 3% to 4% excess relative to pre-pandemic levels for the first half of this year. So that's nice to see that trend continue. But we have built that into our expectation. And as I mentioned, our results have been favorable versus that.
Operator: There's a follow-up question from Jimmy Bhullar.
Jimmy Bhullar: I just wanted to see if you could just give us an update on what's going on with your Australia business. And I think results have fluctuated over the past several quarters and just trying to get an idea on the legacy block that's had recurring losses, how big of a part of the business that is and how do you expect it to run off over time?
Todd Larson: Jimmy's, it's Todd. Year-to-date, Australia's seen a slight pre-tax profit. That's a little bit under where we would like them to be. But for year-to-date, that's where they are. We continuously keep a close eye on the in-force there and have not been pushing the team to grow to any great extent. And so, for that older legacy block, we see some claims here and there, but nothing material at this point.
Jimmy Bhullar: And is the new business environment in the market still tough or is it just the older business that's actually had issues?
Tony Cheng: I'll take that one. Jimmy, look, as Todd mentioned, we're very selective on the new business we chose. And it wouldn't surprise you that – the new business areas we play in, and it wouldn't surprise you that we're comfortable with the environment in those areas. And once again, our discipline of choosing the right areas to play and be part of. And sometimes you see others leave the market, which create a better pricing environment for those areas. We patiently wait for those situations and we're comfortable with the new business pricing in the areas we focus on.
Operator: There's a follow-up question from Wes Carmichael.
Wes Carmichael: I had a higher level question maybe, Tony. In Asia, in asset intensive, I'm just hoping you could give us some perspective, especially in the Japanese market, how that market's embracing asset intensive reinsurance. Maybe how's that changed over the past couple of years and how you're thinking about that dynamic going forward?
Tony Cheng: It's fully embracing it. Asia, we did our first transaction, top of my head, in Japan probably seven or eight years ago on these sort of blocks asset. Once one reputable company does it, others are studying it. We get phone calls often. I'm trying to understand it. I think a few quarters ago, we said we did a first transaction with a more domestic type life insurer, and that once again will set off a trend amongst that group of clients. We did a transaction, as I mentioned earlier, with a client that had never done it before. One would think that could stimulate further transactions with them. And once again, they're a very strong, reputable company which others will look upon and follow. I would say our strength there is the fact that we've been there since 1998 and we've worked with the regulator, gosh, since the early 2000s on some of these rules. And as I mentioned during Investor Day and earlier today, just our multifaceted relationships. The transaction we did this quarter was a client we've been with, I think, on the cancer risk or the mortality risk for 15 years. So, obviously, that trust is built. Those relationships are built when they're looking at improving their capital efficiency. It's not surprising that they turn towards us.
Operator: There's a follow-up question from Tom Gallagher.
Thomas Gallagher: Just had a question about the process of these in-force management actions. Is it something that you react to as experience emerges the wrong way and then you evaluate each treaty, and then if it creates enough pressure, you then go into action? Or do you have a pretty good sense of for what treaties you've been seeing pressure on for several years, and so you kind of have a pipeline and you have visibility into it. Like, how does that really work? Do you have a big pipeline, or is it something you're really just reacting and responding to more real time?
Tony Cheng: Maybe I'll take that. And Jonathan, add if I miss out on anything. You've got to look at the treaty. Is there actions that can be taken is one. Obviously, you can always try and negotiate extra out-of-the-treaty type arrangements. But firstly, that would be one. But like you said, there's a pipeline in which we focus on, and these transactions are lumpy, can be material and take time. If you think about what we do, right, we're obviously a very technical company in nature. So in great detail, we've got phenomenal relationships with our clients, even during these types of discussions. So we can be very creative in coming up with win-wins with the client to best manage these situations. So, yeah, that's broadly the process. Obviously, if experience is not as strong as we like, that's another area that you'd look. But, hopefully, it gives you a sense that a lot of energy has to be put into it. It's very hard to predict, it's very lumpy, but it absolutely can allow us to exercise all our strengths of relationship, technical ability, partnership mentality.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tony Cheng for any closing remarks.
Tony Cheng: Thank you all for your questions and your continued interest in RGA. This was a good quarter following a very strong first quarter, further demonstrating our continued momentum and substantial earning power. Before I go – before we go, I want to congratulate Todd on his retirement and thank him for his nearly 30 years at RGA. There is no doubt his contributions over that time has helped shape RGA into the world class organization it is today, and we will miss him both professionally and personally. Thank you. And this concludes our second quarter call.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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