Q2 2024 Earnings Summary
- Solid Core Earnings Growth and Confidence in Capital Reduction: The company has transitioned from unique, one-time transactions to solid, core earnings growth in core businesses, and management is confident that they will make a real dent on the excess capital over the next few years.
- Expansion into High-Return International Sectors: By expanding into international structured finance and infrastructure, the company is targeting ROEs that are mid-teens or even higher, which will significantly enhance returns over time.
- Strong Protections in Healthcare Portfolio with Improving Results: Despite pressures from COVID-19 and inflation, the company maintains strong covenants and protections in its healthcare portfolio, and results are improving, presenting opportunities to increase overall production and returns.
- Persistent Excess Capital Indicates Limited Growth Opportunities: Despite returning significant capital to shareholders through share buybacks (over $5.2 billion ), the company still has excess capital at the same level as in 2013. Management acknowledges that they are "sprinting to stay still" due to limited growth opportunities, suggesting challenges in reducing excess capital and potentially limited avenues for reinvestment.
- Exposure to Pressures in the Healthcare Sector: The company is facing increased pressures on its healthcare exposures due to rising labor and supply costs caused by COVID-19 and inflation. Management notes that "labor costs went through the roof" and it has "been a while for both the third-party reimbursement to adjust as well as the hospitals themselves to adjust," indicating potential for increased losses or reserves in this sector.
- Uncertainty Surrounding PREPA Debt Restructuring: Despite a favorable court ruling regarding the Puerto Rico Electric Power Authority (PREPA) , management states that "there's still a lot of road to hoe relative to appeals" and they need to "wait for further information and further activity" before adjusting loss reserves. This ongoing uncertainty could prolong the resolution and impact future financial results.
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Capital Return Strategy
Q: Plans for excess liquidity beyond $500M buyback?
A: Management has received nearly $900 million in dividends and capital releases this year. After covering annual cash expenses of $200 million, they have about $700 million in excess liquidity. They plan to maintain the $500 million annual share repurchase target, ensuring 2025 looks pretty good as well, and keep additional cash for potential accretive opportunities. -
Underlying Operating ROE
Q: What's the underlying ROE if running efficiently?
A: The company aims for double-digit ROEs in all business lines. Excess capital dilutes ROE, with levels similar to 2013, despite $5.2 billion in stock buybacks. Plans are in place to reduce excess capital over the next few years to improve ROE. -
Health Care Sector Exposure
Q: Pressures on health care deals and protections?
A: COVID-19 caused increased labor and supply costs in health care, stressing some deals. The company holds strong covenants and protections, including mortgages and coverage covenants, and remains optimistic as hospital results improve. -
Excess Capital Management
Q: How to address persistent excess capital?
A: Despite returning $5.2 billion via buybacks, excess capital remains at 2013 levels due to unique opportunities and accelerated earnings. Management plans to reduce excess capital meaningfully over the next few years as earnings stabilize. -
New Business Opportunities
Q: Opportunities in structured finance and international markets?
A: The company is expanding in structured finance and international infrastructure, closing deals in sectors like subscription finance and direct lending across the U.K., Europe, North America, and Australia. Early successes in Australia are promising. -
PREPA Loss Reserves
Q: Impact of court ruling on PREPA loss reserves?
A: The favorable court ruling on PREPA supports the company's position, but uncertainties remain due to potential appeals. Management adjusted scenarios but remained prudent in reserving until more information is available.
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