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Date
Friday, Aug. 1, 2025 at 2:00 p.m. ET
Call participants
President and Chief Executive Officer — Tony Cheng
Executive Vice President and Chief Financial Officer — Axel Andre
Executive Vice President, Global Chief Risk and Chief Underwriting Officer — Jonathan Porter
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Risks
Claims volatility in US individual life: Adjusted operating results for the quarter were below expectations due to significant claims volatility in US individual life, resulting in a $158 million unfavorable impact.
Unfavorable healthcare excess claims: US Group’s healthcare excess business was unfavorable, consistent with market trends. Margins are only expected to improve as repricing occurs by January 2026.
Higher tax rate: The effective tax rate for the quarter was 25.2% on adjusted operating income before taxes, above the expected range of 23%-24%, primarily due to valuation allowances on foreign tax credits.
Takeaways
Operating EPS— $4.72 per share, with management stating results were below expectations due to claims volatility.
Adjusted operating ROE— Trailing-twelve-month adjusted operating return on equity, excluding notable items, was 14.3%, aligning with intermediate-term targets.
Pretax adjusted operating income— $421 million for the quarter.
Net premiums— Consolidated net premiums increased 14% year over year when adjusted for the impact of US PRT transactions; traditional business premium growth was 11% year to date on a constant currency basis.
Excess capital— Excess capital increased to $3.8 billion at the end of the quarter; pro forma with the Equitable transaction, it was $2.3 billion.
Deployable capital— Deployable capital rose to $3.4 billion due to balance sheet optimization and value of in-force credits.
Dividend increase— The quarterly common stock dividend was raised 4.5% to $0.93 per share.
Investment portfolio earned rate— Non-spread portfolio yield, excluding variable investment income, was 4.98%, up eight basis points sequentially. Total non-spread portfolio yield was 5.31%.
Variable investment income— $105 million, driven by realizations in limited partnerships and real estate joint venture sales.
Book value per share— Book value per share, excluding AOCI and B36 embedded derivatives, increased to $156.63, representing a 9.7% compounded annual growth rate since the beginning of 2021.
Value of in-force business margins— Value of in-force business margins totaled $41 billion at the end of the quarter, up approximately $4 billion year to date, with $2 billion from new business. This does not include the impact of the Equitable transaction.
Equitable transaction— Closed as of April 1; earnings included a $30 million contribution (to be deferred and amortized). Expected to add approximately $70 million in pretax operating income for 2025, $160 million-$170 million in 2026, and about $200 million per year by 2027.
Share repurchase guidance— Management plans to deploy 20%-30% of after-tax operating earnings to shareholders through dividends and share repurchases on average over the long term, confirming intent to recommence buybacks after a six-quarter pause.
Summary
The first mention of the company:Reinsurance Group of America(RGA -7.86%) reported a quarter marked by increased capital flexibility, driven by balance sheet optimization and rating agency recognition of value in-force credits. Management emphasized a diversified global pipeline, highlighting historic success in asset-intensive transactions across five countries and strong growth in Asia and EMEA, particularly in premium expansion and new business activity. Executives directly linked near-term margin and earnings headwinds to claims volatility and healthcare excess losses, but maintained confidence in repricing measures, portfolio quality, and ongoing strategic momentum. They clarified that the quarter's results do not prompt changes in run rate assumptions or intermediate-term financial targets.
Cheng said, "our focus on creation rate. This focus allows us to continue to exceed our targets in terms of the percentage of business coming from exclusive arrangements," indicating enhanced pricing returns from bespoke, exclusive deals.
Andre commented, "value of enforced recognition is the recognition for only a portion of our in-force block, and that there are further opportunities for further recognition down the line," suggesting additional capital optimization potential.
Porter detailed, "the experience we are seeing this quarter is primarily in our healthcare excess line. To size that for you, it represents about 30% of our US group earnings, which is about 3% of our US traditional earnings," sizing the at-risk exposure in the affected segment.
Company leaders confirmed selective discipline, stating they chose not to pursue "several high-profile brokered transactions" in the US, reinforcing RGA's commitment to risk appetite and margin preservation.
Cheng clarified, "our business remains incredibly strong, you know, and the returns we're seeing on the new business are a tailwind to the ROE guidance we've given of the 13% to 15%," emphasizing stable underlying business drivers despite quarterly volatility.
Industry glossary
PRT (Pension Risk Transfer): Insurance or reinsurance transactions in which a company transfers defined benefit pension liabilities to a third party.
AOCI (Accumulated Other Comprehensive Income): An accounting item representing unrealized gains and losses excluded from net income, primarily from investments or hedging activities.
LDTI (Long-Duration Targeted Improvements): US GAAP accounting standard for long-duration insurance contracts, altering reserve determination and profit emergence for affected products.
Value of in-force (VIF): The present value of expected future profits from existing insurance or reinsurance contracts, used in capital and valuation frameworks.
Deployable capital: Management’s estimate of capital available for deployment to transactions or for return to shareholders over the coming twelve months, after accounting for all committed uses.
Healthcare excess: A short-tail reinsurance product covering high-cost healthcare claims, subject to annual repricing and claims volatility.
Full Conference Call Transcript
Tony Cheng: Good morning, everyone, and thank you for joining our call. Last night, we reported operating EPS of $4.72 per share. Our adjusted operating return on equity for the trailing twelve months, excluding notable items, was 14.3%, which is in line with our intermediate-term targets. The operating results were below expectations due to large claims volatility in US individual life and unfavorable claims in our healthcare excess business, which is one of our four business lines within US Group. The US individual experience reflected a higher level of large claims that offset the favorable experience in Q1. For the year, we are in line with expectations and our forward-looking views have not changed.
On the US Group Healthcare Access business, claims were unfavorable consistent with the trends in the market as seen by the experience of other health companies. This is short-term business, the vast majority of which will be repriced by January 2026. At a more strategic level, RGA has achieved one of our best quarters yet, in terms of delivering tangible successes. Firstly, during the quarter, there was a significant increase in our excess and deployable capital measures. This will give us considerably more flexibility going forward to fund not only our strong growth but also return capital to shareholders in the form of dividends and share repurchases.
Secondly, our business momentum remains very strong in both our financial solutions and traditional businesses. I am delighted with the closing of the Equitable transaction as we announced yesterday. This transaction has an effective date of April 1. This start date was mutually agreed with Equitable as the experience on the block in Q2 was in line with our expectations. It is not just in the US that we continue to be a market leader in the asset-intensive business. We are having tremendous success in this business line across the globe. I believe this quarter was the first time in our history we have won asset-intensive transactions in five different countries across three continents.
This shows the power of RGA's global platform. In the traditional space, for the first six months of the year, our premiums rose by a strong 11% on a constant currency basis while maintaining our robust margins by delivering unique and customized solutions. Whether in the traditional or financial solution space, the nature of our solutions does vary around the world. But what is consistent throughout and what drives this business momentum is our focus on creation rate. This focus allows us to continue to exceed our targets in terms of the percentage of business coming from exclusive arrangements. This increases our pricing returns as we create greater value for RGA and our clients.
As you know, Creation Re is about our ability to create innovative solutions. It is also about our ability to maintain our strong risk discipline. We speak a fair amount about the business we do win but as instructive is information about the blocks we do not pursue. This quarter, there were several high-profile brokered transactions in the US that we chose not to participate in. These transactions did not fit within our sweet spot and risk appetite. Our global platform allows us the flexibility to selectively pursue the business we like around the world.
Thirdly, another area of strategic success is the continued build-out of our comprehensive asset management platform both in terms of the breadth and depth of capabilities. Our investment results were strong this quarter. The earned rate on the portfolio increased due to the strong variable investment income and higher new money rate. Our efforts over the past year to identify and act on repositioning some existing investments also supported these results. Our success is due to our prudent long-term approach to asset management. We build portfolios to weather the entirety of the investment cycle and have delivered strong returns while remaining well matched to our liability profile.
I will now provide more specific details on some of our new business activities in the quarter focused on our four areas of notable growth. In Asia Traditional, we had a robust quarter in terms of new treaties with all markets performing well. Our Hong Kong operations continue to shine in a market that showed a 43% increase in life insurance sales for the first quarter to a record high. In Taiwan, which is one of our strongest markets, we have been active in the senior market. Currently, there are six clients in the market offering 14 senior products all supported by RGA.
Finally, in Korea, we continue to have success in the upgrade cycle relating to the next generation of critical illness products. As you can see, each new product development not only leads to greater business within that market but also adds to our library of solutions that we then redeploy across Asia and across the globe. Moving to Asia financial solutions, our second area of notable growth. We closed several transactions in Japan, Korea, and Hong Kong. We continue to see regulatory changes as a key tailwind in these and other markets. While the large marquee transactions get the headlines, we also value these more frequent, modest-sized flow or block transactions that are often completed without an intense bidding process.
RGA, with its many touchpoints and long-standing relationships, is best positioned to provide these differentiated and more tailored solutions to our clients. Our third area of notable growth is the longevity in the PRT market. In the UK, we had a very active quarter as we closed a number of attractive transactions. We are on pace to meet our targets for new business and believe we are the clear market leader. The highlight of the quarter in the UK was an asset-intensive transaction with a new client. We partnered to develop a tailored solution made possible because of RGA's strong ratings reputation, and execution certainty.
In the US PRT market, we are encouraged by the increase in activity at the jumbo end of the market. Given our business pipeline, we expect a pickup in activity in the second half of the year. In the US traditional area, our fourth area of notable growth, we had strong new business, most of which was related to our underwriting initiatives. It was a record quarter for individual underwriting cases and we made inroads towards full underwriting outsourcing with a few important clients. Additionally, our broad array of underwriting services was the primary driver of us winning a leading share in many transactions.
This included one in-force transaction where the client increased our share due to the services we provide. When you combine our underwriting and product development with our partners that provide distribution technology and other services, further coupled with our ability to reinsure both sides of the balance sheet, you can see why we continue to bring holistic solutions generating exclusive business for RGA. Putting it all together, I am very pleased with our continued success in providing significant value to RGA and our clients through our creation re efforts.
When combined with our balance sheet optimization on the capital side, in-force actions, investment portfolio repositioning, and other management levers, we expect to be successful in driving improved returns for shareholders and therefore a tailwind to our current ROE. We remain confident about the future of our business prospects as RGA is well positioned in its markets, and we have a proven successful strategy that has stood the test of time. I will now turn it over to our CFO, Axel Andre, to discuss the financial results in more detail.
Axel Andre: Thanks, Tony. RGA reported pretax adjusted operating income of $421 million for the quarter, or $4.72 per share after tax. For the trailing twelve months, adjusted operating return on equity, excluding notable items, was 14.3%. After a strong first quarter, this quarter's results were below expectations driven primarily by claims volatility in US Individual Life and unfavorable claims in one of the businesses within US Group, I'll expand on shortly. Aside from the financial results, we have made good progress on several strategic initiatives in the quarter. Including materially improving our capital position.
As a result of further balance sheet optimization, and the recognition of the additional value of in-force business, in certain capital models, our excess capital increased to $3.8 billion at the end of Q2. Pro forma for the Equitable transaction, which I'll discuss in more detail, excess capital was $2.3 billion. Similarly, our deployable capital increased to $3.4 billion at the end of the quarter. During the period, we deployed $276 million into in-force transactions. Our non-spread portfolio yield excluding variable investment income, was 4.98% in Q2. Up eight basis points from the first quarter. Total variable investment income was strong at $105 million significantly higher than last quarter and now favorable for the year.
The results were primarily due to realizations in our limited partnerships and real estate joint venture sales. The effective tax rate for the quarter was 25.2% on adjusted operating income before taxes. Above the expected range of 23% to 24%, primarily due to the establishment of valuation allowances on foreign tax credits. We are still expecting a tax rate of 23% to 24% for the full year. Yesterday, we announced the closing of the previously discussed transaction with Equitable. I would like to provide additional details regarding certain closing terms. The transaction is effective April 1, which was mutually agreed versus an alternative of July 1.
When reviewing the Q2 claims experience and overall results on the assumed block, we found it to be in line with our expectations and thus, beneficial to accept an earlier effective date. Our review of the experience also helped affirm the reasonableness of our actuarial and pricing assumptions. Although it's effective April 1, we would only report six months of earnings in our 2025 GAAP results. The Q2 earnings on the block are estimated to be $30 million in line with our expectations and these will be deferred and amortized into earnings over the life of the transaction.
For 2025, we still expect pretax operating income contributions of approximately $70 million increasing to $160 million to $170 million in 2026, and approximately $200 million per year by 2027. Turning to biometric claims experience. As outlined on slide eight of our earnings presentation. This displays the total company claims experience and the related financial statement impacts on a quarterly basis. As mentioned earlier, claims experience was unfavorable in the quarter, primarily driven by the US traditional segment. For the company, economic claims experience was lower than expected by $256 million with a corresponding $158 million unfavorable current period financial impact.
Claims experience was unfavorable in US individual life primarily due to higher large claims, offsetting the favorable experience from Q1. For the year, the economic claims experience for US individual life is broadly in line with expectations. The current period financial impact was significant due to the proportion of claims in capped cohorts. Claims in US group were also higher than expected. Driven by our healthcare access business. Consistent with recent industry trends. Other lines within US group performed in line with expectations. We think that the current challenge within the healthcare access block can be remediated in a reasonable time frame given its short tail, and our ability to reprice quickly and modify underwriting.
We have already begun taking pricing action and expect that the majority of the block will be repriced by January 2026. Looking at the second half of the year, our assumption is that the group business overall will be approximately breakeven, versus an expectation of $20 million to $30 million for the remainder of the year. We expect to see improvement in the results as we move through 2026. Claims in Canada and EMEA were modestly unfavorable, while APAC experience was favorable. As we've seen in the first two quarters, volatility on a quarterly basis, both positive and negative, is normal and does not necessarily include a material trend.
As shown on page eight of our presentation, on a longer-term basis, economic claims experience for the total company has been favorable by $272 million since 2023, when we fully emerged more fully emerge from COVID. US individual life represents approximately $75 million of this favorable experience. As a reminder, the favorable economic experience that has not been recognized through the accounting results will be recognized over the remaining life of the business. As a result of our substantial new business activity year to date, the value of in-force business margins totaled $41 billion at the end of the quarter. An increase of approximately $4 billion year to date. With approximately $2 billion coming from new business.
This excludes the impact of the Equitable transaction. Which will be included in our Q3 results. We will provide a more detailed update on the value of In Force margins with our Q3 results. For the year, consolidated net premiums were up 14% year over year when adjusted for the impacts from US PRT transactions which can cause premiums to fluctuate. Our traditional business premium growth was 11% year to date. On a constant currency basis. Which has benefited from strong growth in the US, EMEA, and Asia. Premiums are a good indicator of the ongoing strength of our traditional business. And we continue to have strong momentum across our regions. Turning now to capital.
Our excess capital increased to an estimated $3.8 billion at the end of Q2, or $2.3 billion pro forma for the Equitable transaction. The increase is primarily due to the recognition within certain capital frameworks of additional value of in-force credits related to business already on our books. We recently satisfied the strict external requirements needed to include these balances in our capital metrics. Note that excess capital considers our three main capital lenses. Corresponding to RGA's internal economic capital model, local regulatory capital across our main legal entities, and rating agency capital methodologies. Our deployable capital at Q2 increased to an estimated $3.4 billion due to similar reasons I just highlighted.
As a quick reminder, this measure represents management's estimates of the capital available to be deployed into transactions or returned to shareholders over the next twelve months. Taking into account estimated capital sources and committed uses over that forward-looking twelve-month period. Including the impact of the Equitable transaction. Our strong balance sheet capital management toolkit, and current levels of excess and deployable capital position us well to continue to support an attractive new business pipeline with existing capital. We will balance the deployment into the business with returning capital to shareholders. Through quarterly dividends which we just increased 4.5% to $0.93 per share, and share repurchases.
Regarding share repurchases, our intention in the short to intermediate term is to be active but opportunistic quarter by quarter, depending on our capital position, a forward view of our transaction pipeline, as well as valuation metrics. Over the longer term, we would expect total shareholder return of capital through dividends and share repurchases to range between 20% to 30% of after-tax operating earnings on average. Consistent with our long-term history. Moving to the quarterly segment results on slide six. The US and Latin America Traditional results reflected unfavorable claims experience as previously discussed. For the year, the economic claims experience US individual life is broadly in line with expectations.
The US financial solutions results were higher than expected due to higher variable investment income and higher investment yields. As a reminder, the Equitable transaction will be recorded within this segment. Canada traditional results reflected modestly unfavorable group results and individual life claims experience. Financial solutions results reflected favorable longevity experience. In the Europe, Middle East, and Africa region, traditional results reflected unfavorable claims experience, partially offset by favorable other experience. EMEA's financial solutions results were above expectations, reflecting favorable longevity experience, higher variable investment income, and higher investment margins due to ongoing growth. Turning to our Asia Pacific region. The traditional results were good, reflecting favorable claims experience across the region.
Financial solutions results were favorable primarily due to higher variable investment income and ongoing growth of the business. Finally, the corporate and other segments reported an adjusted operating loss before tax of $32 million. Favorable compared to the expected quarterly average run rate. This was primarily due to higher variable investment income. Moving to investments on slides nine through 12. The non-spread book yield, excluding variable investment income, rose to 4.98%, primarily due to higher new money rates, which increased to 6.53% and remain well above the portfolio yield. The total non-spread portfolio yield for the quarter was 5.31% up from last quarter, reflecting higher variable investment income, and higher new money rates.
Variable investment income was strong for the period. Driven by increased realizations in limited partnerships, and real estate joint venture sales. I'll note that we still hold an above-average level of cash. That we look to deploy opportunistically over the coming quarters. Importantly, portfolio quality remains high and credit impairments are in line with expectations, for the year. And we believe the portfolio remains well positioned. During the quarter, we continued our long track record of increasing book value per share. As shown on Slide 16, our book value per share, excluding AOCI and impacts from B36 embedded derivatives increased to $156.63 which represents a compounded annual growth rate of 9.7% since the beginning of 2021.
To summarize, following a strong first quarter, this quarter's results were impacted by claims experience in our US Traditional segment. Importantly, we continue to advance many strategic objectives. Our long-term strategy remains well on track, and we are confident in our ability to deliver on our intermediate-term financial targets. We continue to see good opportunities across our geographies and business lines and remain well capitalized to execute on our strategic plan. We also believe we are in a position to return excess capital to shareholders, through dividends and share repurchases. With that, I would like to thank everyone for your continued interest in RGA. This concludes our prepared remarks. We would now like to open it up for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star. If you are using a speakerphone, please pick up your handset before the keys. To withdraw your question, please press star then 2. Please limit yourselves to one question and one follow-up. If you have additional questions, you may reenter the queue. Our first question today comes from John Barnidge with Piper Sandler. Please go ahead.
John Barnidge: Good morning. Thank you for the opportunity. Can you talk a little bit more about the additional credit you got on the LifeBlock? I know it was a bit probably a very thorough analysis across markets and products. What changes were made, and did you are you making an assumption for an improvement in obesity epidemic because of GLP one drug? Thank you.
Axel Andre: Hi, John. Thank you for the question. We're very pleased, obviously, with the value of in-force credits that we received in our capital model. As you correctly pointed out, this was the result of a lot of work over a long period of time. And this really represents capturing within available capital models some portion of the large embedded value in our business. Given the long-term nature of our cash flows and the long-term embedded underwriting margins in our business. This is really a reflection of the current book of business with current assumptions. And does not reflect any change in our actuarial assumptions at this point.
John Barnidge: Are you considering incorporating that with the third quarter actuarial assumption review as my follow-up? Thank you.
Axel Andre: So it is too early to be talking about the third quarter assumptions work. This work is still ongoing. And we will be discussing that on the next quarter's earnings call.
Operator: The next question is from Joel Hurwitz with Dowling Partners. Please go ahead.
Joel Hurwitz: Hey, good morning. Can you just unpack the individual life experience in the quarter? Was there some significant lag effect from Q1? And or was there any from you guys increasing retentions at the beginning of the year?
Jonathan Porter: Yeah. Hi, Joel. Thanks for the question. This is Jonathan. You know, when we review claims experience, we focus on longer time periods. Before drawing conclusions on trends, positive or negative, because underlying results can be more variable when you look at any one quarter, any one market. So in that context, very pleased with our overall biometric experience, as Axel talked about in his remarks. Q1 of this year, we had very positive results in our US individual line of business due to large claims volatility being favorable. Q2, we saw the same thing, but in the opposite direction. So on a year-to-date basis, results for US individual are broadly in line with our expectations.
The total number of large claims we get in any one quarter is less than 200, so a small change in count or average size can create fluctuations in experience, and that's really what we saw in Q2. We had slightly elevated frequency of large claims, so more or less in line with expectations, a little bit higher. But it was really the materiality or the severity of the claims or the average claim size. That was higher. I'd characterize the magnitude of the large claims volatility that we seen in Q1 and Q2 as unusual. I wouldn't expect it to continue at that level on a regular basis.
And again, given things are broadly in line on a year-to-date basis, there's nothing from a trend perspective. That we're concerned about at this point.
Joel Hurwitz: Okay. Got it. And then, Axel, going back to the $2 billion value of in-force credit, can you just unpack that process a little more for me and sort of you know, what rating agency and regulators were involved and, I guess, just in your deck, you're right. You talk about the binding capital framework can change. Was there a change in just what would cause that to change?
Axel Andre: Yeah. Thank you for the question. So you're correct to point out that our capital metrics, whether it's excess capital or deployable capital, consider the three main capital lenses. That we evaluate capital on, and that's of course, RGA's internal economic capital model. It's the local regulatory capital across legal entities and, rating agency capital models. You're correct to point out that at times, we've talked about how the binding constraint between these three frameworks is what determines for us the excess or the deployable capital. In this case, value of in-force is a process that we pursued with rating agencies. So it says that the rating agency capital framework was all binding constraints.
And that through this work, which is thorough, which requires third-party review and, in a thorough process from the rating agency perspective, we now see this value of in-force reflected in our model. We are now in a position where rating agency and regulatory capital are relatively comparable. And then lastly, I just want to point out that this value of enforced recognition is the recognition for only a portion of our in-force block, and that there are further opportunities for further recognition down the line.
Operator: The next question is from Elyse Greenspan with Wells Fargo. Please go ahead.
Elyse Greenspan: Hi, thanks. Good morning. I was hoping you guys could talk more just about health experience in the quarter and just thinking about, you know, future performance of the block and then know you guys touched on rate increases in the prepared remarks. Can you just give us a sense of just the magnitude and the expected impact there as well?
Jonathan Porter: Hi, Elyse. This is Jonathan. I'll take that question. So this is a line of business that we've been in for a significant period of time, and we have quite a bit of expertise. It has also performed well over time and has been profitable even including the results that we're seeing in this quarter. Our US group business is comprised of four major lines. Three of those are performing as expected. The negative experience we're seeing this quarter and seeing this is, like, it's our healthcare access line. And just to size that for you, it's about 30% of our US group earnings, which is about 3% of our US traditional earnings.
The results this quarter are really driven by higher claims costs stemming from a variety of more expensive treatments. So things like specialty drugs, transplants, premature births, and some cancer therapies. As Axel mentioned, you know, the business is short-term and annually repricable. Which means we're able to quickly address the experience variances, in the business. And we do expect margins to improve going into 2026. The rate increases we have as you mentioned in your question, we have already implemented rate increases so far this year on blocks that have already been renewed. Those amount of increases are significant don't have an exact figure to give you, but they are material.
In what we've seen so far and expect that to continue.
Elyse Greenspan: Thanks. And then my second question, I guess, is also just on the excess capital figure. You were talking about, right, getting credit for part of the value in force. As we think about future deals that get done in the future, how should we think about you guys getting incremental credit there? Is it certain types of deals that would qualify for credit? Do you talk to the rating agencies on a case-by-case basis? Could you just give us a sense for, you know, just future transactions and deployable capital credit that you could get?
Axel Andre: Yeah. Thank you for the question, Elyse. Yeah. So we have a long-term track record of working with the rating agencies. To obtain credit for value of in-force. At times, in the past, it's been in the context of the securitization of a block of business. But also, at times, it doesn't necessarily require that securitization. We have a process where there are certain portions of our business where we are receiving value of in-force credit as we write new business. Because we have a well-established process and understanding of the nature of the business. And then for other portions of our in-force business, we address it block by block, if you will.
So we do expect that over time, we will be looking at our balance sheet and looking for opportunities to create more value of in-force recognition through the rating agency process.
Operator: The next question is from Jimmy Bhullar with JPMorgan. Please go ahead.
Jimmy Bhullar: Hey, good morning. I had a couple of questions. One is, on the health insurance business. Can you talk about the lag in your results versus what your clients are seeing and the point of the question is that given that health insurance results have generally gotten worse in 2Q, should we assume that flows through your results in the third quarter or the fourth quarter. So even though you'll reprice part of the block, that things might actually get worse? And then secondly, on capital, I think you're based on what you're saying in terms of your excess or deployable capital, that number close to 20, 30% of your market cap.
Yet if we look at most of the traditional metrics like debt to cap or RBC, they really don't imply that much excess capital. And similarly, if we look at your actions, despite a fairly low multiple, you guys haven't really been buying back stock. Obviously, you have deployed capital into deals. So just to and excess capital, in my view, more is more of an opinion than a fact anyway. But what are your priorities in terms of using that excess capital over the next year, two years or so? And are you more open to buying back stock? Than you've been in the past year, two years? Thanks.
Jonathan Porter: Thanks, Jimmy. This is Jonathan. I'll take the first question. So with respect to the healthcare excess and the claims lag, I mean, as a reinsurer, it's possible we might see a little bit longer of a lag in reporting, but, you know, the couple things on that. So we work very closely with our clients, obviously. In fact, we provide services to our clients that help them better manage their claims, expectations, and we have a successful track record of demonstrating that value, historically as well. Also, these claims, because of the nature of them and them being large, tend to be very known very quickly. So that also helps in addressing any potential lag situation.
And then from the perspective of our actual liabilities, obviously, we've established reserves from a case perspective. As well as IBNR. To using our best estimate of what we believe the experience has been. So you know, from that perspective, we feel we're appropriately reserved at the end of the quarter.
Tony Cheng: Okay. Thanks. And, Jimmy, let me start off, on question around the capital. Look, as I shared in my remarks, our business remains incredibly strong, you know, and the returns we're seeing on the new business are a tailwind to the ROE guidance we've given of the 13% to 15%. Actually, it ticked up, this quarter, just from an internal management report. So the business is as strong as ever. But, you know, I'm make no mistake. Our job from an investor perspective is to raise the ROE, you know, keep pushing towards raising ROE and keep pushing towards EPS growth. So, yeah.
And we all, obviously, know that share repurchases is a very, very effective tool that can obviously, you know, cement essentially EPS growth and know, the right price ROE. Accretion. So we're really trying to balance you know, those two strong forces, you know, absolutely as RGA, you know, traditionally and will continue to do is have a very balanced approach. You know? And we are saying at this point in time, you know, that balance is 20 to 30%, of our earnings as they're returning to shareholders. As I'm sure you're fully aware, we have not bought back stock for the past six quarters.
So it is important communication that, we will, commence you know, considering, yeah, buying back stock, from this point forward. Axel, I don't know if there's anything further to add, but I'll pass it on to you if there is.
Axel Andre: Yeah. No. I mean, so I think first, I think with that point, so, you know, we're very pleased to be in the capital position that we're in. We have the flexibility with the capital that we have to deploy into the business to return capital to shareholders. As I mentioned, we expect to be, with share buyback to be opportunistic quarter by quarter, but over the long term, think of a 20 to 30% payout ratio in terms of the total return, through dividends and buyback. To shareholders. Again, varying quarter by quarter, but over the long term, consistent with that, which is consistent with our long-term history.
On the capital point, you know, I would remind you that we have multiple balance sheet, multiple legal entities across both US RBC framework, but also Bermuda, framework in particular. So all of our capital metrics consider are really on the consolidated basis, looking at the totality of our balance sheet. They consider all of the frameworks and so they and they capture the binding constraint. So whatever is gonna be most binding, including regulatory is gonna determine that number.
Operator: The next question is from Wilma Burdis with Raymond James. Please go ahead.
Wilma Burdis: Hey, good morning. Do you think any of the higher costs you're seeing in excess healthcare on more expensive but more effective treatments could eventually be offset by savings on claims and life down the line? Thanks.
Jonathan Porter: Yeah. Thanks, Wilma. This is Jonathan. I think that's a very valid point. You know, and that's one of the things that, you know, excites us about potential opportunities in the mortality space. Right? And that's also another reason why you know, we want we've pursued a diversification from a risk perspective position at from the enterprise. So when we see potentially some stress or volatility going in a negative direction in one line of business, that can support positivity, either in the current period or down the road in another line of business. And that's part of how we think about our mix of risks at the enterprise level.
Tony Cheng: Yeah. Well, let me just add. No. Thank you for asking that question. We internally observe that. And you know, we obviously, as an investment community, get focused on short-term earnings, but the long-term impact from the medical advances, as Jonathan mentioned, whether it's GLP one or other, medical advances, we expect to see in the future weigh our way you know, the short-term earnings impact quite tremendously. So thank you for the question.
Wilma Burdis: Second question, is RGA anywhere near its retention on the excess healthcare business? Just trying to assess you know, I know a lot of those claims come in towards your end, so just trying to assess how confident you are in the remaining weakness there. Thanks.
Jonathan Porter: Yeah. Hi, Wilma. This is Jonathan again. You know, as I mentioned before, I think the reserves we've established this quarter, which is driving a negative result is our best estimate of where we expect the claims to come out for business that we or for premium we've already recognized and earned through the income statement. The drag effect that Axel mentioned in his remarks is really additional reserves that we expect to establish as the premium is earned over the balance of the year. But at this point, we believe our reserves are appropriate for the business.
Tony Cheng: Yeah. I mean and just it's Tony here. Look. As we said, this is very short-term business. In our comments, we've said the majority of which will be repriced by January. I think all of it gets repriced by the quarter after. So it's just that January is the main renewal period. So it is a very self-contained you know, we've got actions in place, which Axel has already shared. We've commenced for the July renewals, and we're comfortable with the position.
Operator: The next question is from Ryan Krueger with KBW. Please go ahead.
Ryan Krueger: Hey, thanks. Good morning. Just one more follow-up on the value force credit. Did you actually have to do anything in regards to bar you know, like, borrowing against future in-force value or anything like that, or is this just more about getting the credit from the rating agencies through the process that you have to go through with them. I wanted to make sure I understood that.
Axel Andre: Yeah. Hi, Ryan. Thank you for the question. It's Axel. Yeah. No. In this case, this is really recognition of the value of in-force that did not require or was not associated with, an actual securitization or borrowing. Now we have that, of course, which means we have that still available to us should we find value in doing that. In the future. But this was strictly from a rating agency process perspective.
Tony Cheng: Yep. Ryan, maybe if you don't mind me adding strategically. I mean, we talk a lot about our long-term value or what do we call it, value of in-force margins, which is now at $41 billion. That generates these opportunities. Right? If you don't have the embedded value in the you can't do these things. So it's like as Axel says, the question of us, doing the work focusing on doing work, getting the satisfactory resources or resources. In the past, that has not been a constraint to our business growth. It became a constraint, which we spent a lot of energy to rectify. And you know, yes, it takes external consultants to verify. Yes.
It takes the ratings agency also to agree, you know, and tick it off. And it's not uncommon. I mean, other regulatory environments, believe IFRS already, you know, allow for this fifth credit in capital. So we're really excited by what we've achieved and we believe there's further blocks to come.
Ryan Krueger: Thank you. And then Tony, you had mentioned some higher profile blocks in the market that you chose not to bid on during the quarter. Just curious, were those are you referring to deals that have already been announced? Or are you referring to deals that are in the market that where there haven't been transactions yet?
Tony Cheng: Yeah. Thanks, Ryan. Look. That does refer to transactions that have occurred. You know, I know there's been some questions around our you know, the businesses that we've taken, whether LTC or ULSG, type businesses. You know, I just want to assure everyone there's no intention whatsoever to increase the proportion, you know, of the company, in that direction. So you know? And the only way besides me continually saying that is you know, look at the actions we take. So, in the first quarter, there was a very material LTC block that came to market. We were not involved whatsoever. It just did not fit into our criteria of what we set for LTC, which is very and tight.
And second quarter, there was a multitude of, I think, some variable annuities, some ULSG once again. Not interested. You know, we've got our global platform. Right? We've got all these businesses around the world you know, that we can do on exclusive basis, and that's where we obviously want to allocate the capital. That's why we're able to have a tailwind to our ROE through the pricing process, through the business we win. So you know, some balance of business, but, absolutely, our eyes are focused on just creating long-term value. And then as I said earlier, you know, growth in EPS and ROE.
Operator: The next question is from Suneet Kamath with Jefferies. Please go ahead.
Suneet Kamath: Great. Thanks. I did want to come back to the $2 billion of value enforced credit. Can you just talk to the conservatism that's built into that? Because to me, it sounds like this is another sort of assumption-driven sort of number. And if those assumptions end up being too aggressive, then maybe the $2 billion isn't $2 billion. And I just want to make sure we don't run into an issue like that down the road. As you continue to pursue this source of capital.
Axel Andre: Yeah. Thank you, Suneet, for the question. Well, as I mentioned, there's a very strict review process for reflecting value of in-force in the frameworks. So first of all, of course, it starts with our actual assumptions that are, you know, that are conservative and that are backed by long history and long term of data and the short throw of information. But also, you know, there's you only get partial credits for the value of in-force. You only get a frankly, less than 50% credit for it. So we feel very confident in the amounts that are recognized. Through that framework.
As I mentioned, you know, again, it is reviewed by third party as well as the rating agency process.
Suneet Kamath: Okay. And then I guess for Tony, if we just take a step back, you know, you've raised the ROE target you've raised the EPS growth target, you're very bullish about the opportunity, but the stock's multiple is lower. Than when the ROE target was lower and the growth was lower. And we can debate the reasons why, but I think one of them is yeah, there's a view in the market that maybe this new strategy is gonna add a lot of risk. To the story relative to kind of the RGA of old.
I just wanted to give you an opportunity to comment on that because I think that's perhaps a change in the way that people are thinking about your company and about your stock.
Tony Cheng: Yeah. No. Thanks, Suneet, for the question. You know, the RGA of old, you know, all I could really point to is Asia. You know, that's where I was instrumental in running that business for twenty years. And this is exactly the approach we took. Right? And what is that approach? It is an approach of being proactive, innovative, finding things that can help our clients grow. And succeed. And, therefore, you create greater value and you get to share it. So are we more aggressive? We're absolutely more aggressive in that approach, which I think is a more proactive approach.
I could argue a less risky approach in a sense because, you know, commoditized business is really long run, not conducive or probably will not allow us to meet our long-term goals. So and that's not just Asia. I mean, you know, look. We've had tremendous leadership throughout the organization, and this is a culture that essentially has been established from day one where we were all around innovation, all around proactivity and solutions, providing our solutions and a place to our absolute sweet spot because we only do life and health risk.
So it's sort of shame on us if we can't be the best in doing that because we only focus on one thing, which is life and health risk. And we've made the investments around the world to have the talent out there. We're obviously very proud of our team, and this continues. So you know, the market's gonna do what the market's gonna do. Our job is to continue to grow the EPS and continue to raise the ROE, and we have faith that the market will be right in the medium to long term.
Operator: The next question is from Tom Gallagher with Evercore ISI. Please go ahead.
Tom Gallagher: Good morning. One on just a follow-up on the $2 billion capital benefit from the value of in-force. Is there a practical limitation on how much you could do, like, the maximum? Is assume you can't go to 100% of equity capital or something like that, but when we think about two, I don't know. Would the limit be term from a credit half of total actual equity profile? Sorry. From a credit you would get on capital, you just give kind of the framework in terms of maybe the max you could go to theoretically? That's the first question.
Axel Andre: Yeah. Thank you for the question, Tom. So right. So first, let's start with, you know, as we discussed, we have a substantial, embedded value of in-force. In our business. You know, one of the lenses through which look at that is the value of in-force business margin. As I said, what is that? It's the reflection of the long-term embedded underwriting margins that are embedded in business. No. You're correct. From a rating agency perspective, there is a limit to the amount of another important thing to remember so first of all, even relative to that limit, we think still have upside opportunities to capture more value of in-force with further, in-force blocks that we have today's balance sheet.
But also, as I reminded you earlier, we have all three capital frameworks, economic capital, regulatory and rating agency. We're now at a point where rating agency and regulatory are roughly equivalent. So further work from here would benefit from both, getting further value of in-force recognition, but also, you know, in improving on the regulatory side. Which, you know, we have been able to do in the past through retrocession of business, for example, and other capital management tools. That enable us to free up capital to redeploy into the business.
Tom Gallagher: Thank you for that. And then my follow-up is you know, Tony, really, it's a question about you think something needs to change here? And the reason I ask you is because you had very favorable experience in Q1. The market didn't reward you for the favorability. Then you fully reverse it in February, and your stock gets pounded. So you seem to be getting only the downside of volatility, not the upside. Unfortunately. The reason I sorta set it up that way, is there anything you can do structurally here? To improve the situation from a shareholder standpoint by limiting volatility somewhat. You know, I'll throw out one idea.
You know, would you entertain something like doing a retro cover with Ruby Ray which could limit the level of volatility for RGA shareholders, but still give you skin in the game for the economics of that business because of your stake in Ruby Ray. I'm just trying to understand you know, I'm getting a lot of frustrated shareholders saying to me, what can be done here? Because they like your story. They really don't like the level of volatility.
Tony Cheng: Yeah. No. Thanks, Tom, for the clarity of the question. You know, there are things we can do. So, you know, where the volatility usually happens is around the capped cohorts under LDTI. Right? Obviously, the other cohorts, get smoothed out over the life. So, yeah, we could, in theory, retrocede those blocks of business, give up economic value as you suggest, you know, whether it's Ruby or some third party on an arm's length. So we balance all of those considerations, but we've got finite resources. So, you know, the alternative to that could be you know, price and create more business or other balance sheet optimization opportunities and so on.
So, you know, like I said, you know, all we can share is the facts. Right? We're running the business for the medium, long term, you know, year to date. Experience has been pretty spot on, for the US individual life over the last six quarters, I believe, or ten quarters. I can't recall exactly. Since 2023, the experience has been strong, and the market is gonna do what the market's gonna do as you know as well as I. So we'll keep running it, for the right economics, for the right, EPS and ROE growth, but very mindful of your comments. Thank you.
Operator: The next question is from Wes Carmichael with Autonomous Research. Please go ahead.
Wes Carmichael: Hey, thank you. Good morning. Tony, in your prepared remarks, you mentioned an expected pickup in jumbo PRT. Activity in the second half of the year in the US. I guess my question is when I look at the carriers that transact with plan sponsors where there's a class action lawsuit that's been filed, those have effectively not written any new business over the past few quarters at least. So are those lawsuits not a hurdle that needs to be you know, overcome before you see a meaningful increase in volume to those carriers?
Tony Cheng: Yeah. No. Thank you for the question. You know, just to reiterate, look, obviously, long term the PRT market, fits well in our suite with the biometric the size of the business, its US, and you know, the market dynamics. And as I shared, so we're very excited medium, long term about the business. You know, and you know, there has been, as you've pointed out, a lull in the market, let's say, you know, and for various reasons. But I was encouraged and optimistic to at least start hearing there were green shoots. You know, at least in our pipeline. You know, whether that continues, you know, I'm encouraged and optimistic. It is lumpy business.
We are in the jumbo end of the market. So but, you know, it's a positive sign that I didn't necessarily expect. But let's see if those green shoots continue into going forward.
Wes Carmichael: Gotcha. And then I guess a similar question to some that had been asked, but maybe slightly different. But on the recognition of the value of in-force, just theoretically, like, should a large transaction down the road and you want to deploy a big amount of capital and more than what you have, that I'd call, you know, liquid or hard capital that you could buy back stock with. Are there steps that you need to take to be able to deploy that into a big deal, like securitizations or any other measures?
Axel Andre: Thanks for the question. So yes. So, look, this deployable capital is deployable. Right? So it is real capital available to be put to work in transactions. The capital sits frankly, most of it sits in the legal entities as excess capital relative to the respective regulatory frameworks in each entity. And so it's there and available to be put to work. In addition, of course, we manage holding company cash flows, and that's what feeds the ability to then pay holding company expenses, interest debt expense, as well as share repurchases.
Operator: The next question is from Michael Ward with UBS. Please go ahead.
Michael Ward: Thanks. Good morning. Was just hoping you could help us kind of frame this the variability in the result this quarter. And I guess, you know, I'm just thinking about if there's a change in the earnings power, right, or even just 2026, the calendar year. Because we have you know, the equitable accretion organic and inorganic growth, maybe some buyback. And then there's maybe a little bit of risk from some stop-loss losses in a worst-case scenario, but is there anything else that should be changing, you know, how we think about 2026?
Axel Andre: Hi, Mike. It's Axel. Thanks for the question. I mean, first, let me start off by saying, you know, we remain confident, you know, intermediate-term financial targets that we laid out. We're very pleased with the capital that we've deployed into attractive transactions. So last year, 2024, we deployed $1.7 billion. This year, year to date, if I take into account the Equitable transaction, we've deployed $2.2 billion. So that adds significantly to the earnings power over time. We did communicate previously the earnings expectation for the equitable transaction into 2026. I mentioned earlier today, $160 million to $170 million a year of pretax income, which is a significant down payment on our target EPS growth.
In addition to that, like Tony said, you know, we have a lot of tailwinds. The creation re strategy is producing really well. It's enabling us to attract deals that produce returns that are above our targets. Investment portfolio as we invest new money at significantly higher yield than current book yield, we're picking up investment income. And lastly, balance sheet optimization, an example of which is the significant value of enforced credit that we receive, enables us to do more things with the resources that we have. So in short, we're very confident about our targets, and we would not be changing our run rates or expectations based on one or two quarters worth of volatility.
Michael Ward: Okay. That's helpful. Thank you, Axel. And then just on the kind of the biometric or deal pipeline, curious how you see that today versus financial solutions. And just curious how the regulatory regime changes in Asia maybe are impacting demand.
Tony Cheng: Yeah. Let me take that one, Mike. Look, on the business front, it's strong throughout. I mean, it really is whether it's across the globe, whether it's with strategic clients, repeat business. And, obviously, the nature of deals within the pipeline is really focused on the creationary and the exclusivities. You know, you mentioned our favorite word in the company, which is biometric. For two reasons. One is, you know, it is obviously the driver of our traditional business, which as we shared is incredibly robust at this point. With 11% premium growth rate, as and still very strong robust margins.
But two the second reason is even our asset-intensive, which is our main second line of business, is really the sweet spot is when there is material biometric risk within that and, hence, we can go ahead and try and win the exclusive along with the creationary philosophy. So there's growth all over the place, but I want to make sure the audience is clear. When we look at the asset transactions, it is the first question is how much biometric risk is in that block of business? Because we know that's our way to differentiate. That's our way to get creation rate.
That's our way to build a long-term, not only sustainable financial results, but obviously, further strengthen our strategic platform.
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: Well, thank you all for the questions and your continued interest in RGA. It was a great quarter in terms of our strategic successes, which we believe will continue to fuel our future growth and return. So, with this, I want to end today's call. Thank you very much.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.