Reinsurance Group of America - Earnings Call - Q1 2020

Transcript

Speaker 0

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

Speaker 1

Thank you. Good morning, everyone, and welcome to RGA's first quarter twenty twenty conference call and our first working from home conference call. With me this morning on the call is Anna Manning, RGA's President and Chief Executive Officer Alan Neeney, Chief Operating Officer Leslie Barbie, Chief Investment Officer Jonathan Porter, our Chief Risk Officer and Jeff Hopson, the Head of our Investor Relations. Considering the unprecedented environment, we have included additional members of our management team on the call and made available an earnings presentation supplement this quarter, which we will be referring to during the call to provide more information on our investment portfolio and our global mortality exposures, amongst other things. We will discuss the first quarter results after a quick reminder about forward looking information and non GAAP financial measures.

Following our prepared remarks, we'll be happy to take your questions. Some of our comments or answers to your questions may contain forward looking information and statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of the important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, information we provide may include non GAAP financial measures.

Please see our earnings release, earnings presentation, quarterly financial supplement and website for discussion of these terms and reconciliations to GAAP measures. And now I'll turn the call over to Anna for her comments.

Speaker 2

Thank you, Todd. Good morning, everyone. These are extremely challenging times for all of us, and particularly for those who have lost loved ones during this pandemic. Our thoughts are with them and with all of those on the front lines of this crisis who are bearing a disproportionate share of the burden. At RGA, we're focused on supporting our employees, our clients, and our communities.

Millions of families around the world rely on the financial support that insurance companies provide in times like these. And RGA remains committed to helping our clients meet our shared responsibilities to those families. RGA is also supporting COVID nineteen global response efforts through grants from the RGA Foundation. Like others, we have been operating with most of our employees working from home. I am pleased to report that our operations are functioning normally.

The RGA teams have risen to the challenge of working remotely, and we are very proud of what they have accomplished. Although there remain many unknowns, RGA entered the pandemic in a position of strength. We have a strong balance sheet. Our investment portfolio is defensively positioned. We have ample liquidity and an excess capital position of approximately 700,000,000.

We have a resilient global operating platform, a business that is well diversified by geography, product and risk, a leading brand and a strong track record of success. In short, I believe we have the best life and health team in the global reinsurance industry, and I'm confident that this team will manage through the challenges ahead and come out strong. Moving to our first quarter, our operating results were below expectations as we reported adjusted operating EPS of $1.41 for the quarter compared to $2.61 a year ago. We also reported a net GAAP loss of $1.41 per share, which in part reflects the accounting treatment for a number of items that are directly attributable to the turmoil in the financial markets. Todd will provide a more comprehensive commentary on these elements, But I would note that as financial markets stabilize, we would expect to see a reversal of some of those items over time.

In the quarter, the two biggest sources of negative variance in our operating results were elevated U. S. Individual mortality claims and very low levels of variable investment income. Elevated claims in our U. S.

Individual mortality business were largely the result of a higher than expected frequency of smaller claims even after adjusting for normal seasonality and the impact of the leap day this year. As discussed at our recent Investor Day, the impact of seasonality has increased in recent years as our blockages, which impacts the pattern of earnings emergence throughout the year. The excess claim impact was highly concentrated at ages 70 and above. And as briefly outlined in our earnings release and earnings presentation, while cause of death and definitive COVID-nineteen impacts are difficult to establish, especially in the early days of the pandemic, we believe that some of these additional claims might have been directly or indirectly related to COVID-nineteen. On the positive side, most of our other segments and businesses performed well in the quarter, including the traditional segments in Canada and EMEA, Asia Financial Solutions business, our U.

S. Group business and our Australia business performed better than expected and produced a modest profit. Throughout the quarter, we continued to support our clients and executed on several in force transactions deploying $55,000,000 in capital. The pipeline remains very good across all our major regions and product lines. Going forward, you can expect that we will continue to execute on attractive transactions following our disciplined approach of pursuing those that best align with our capabilities and advantages.

Let me comment on COVID nineteen more broadly. As we work through our way through this pandemic, we do expect to see additional COVID nineteen claims as well as claims from other causes of death that are accelerated or exacerbated by the pandemic. While the ultimate level and timing of claims is difficult to predict, we believe that our financial strength positions us well through a wide range of potential stress scenarios. Our Chief Risk Officer, Jonathan Porter, will provide more in-depth comments later in this call. We recognize that we are in unprecedented times and that there are a range of uncertainties that will play out over time, economic effects and societal changes.

Through this, we will likely see some ongoing financial impacts, but believe that the effects are manageable given our strong financial position and the demonstrated ongoing earnings power of our global business. RGA's talented teams give me confidence that we will manage through the challenges ahead of us and that we can deliver on our promises of creating long term value for all our stakeholders. Thank you for your interest in RGA, and I hope you all remain safe and well. And with that, I'll hand it back to Todd to provide more detail on our results.

Speaker 1

Thanks, Anna. I'll review the financial results and discuss RGA's capital and liquidity. Reported premium growth was 3% for the quarter, but our organic growth on a constant currency basis was 5%. While that is down from the 6% to 8% that we had been producing more recently, we view the 5% as attractive given the current slowdown in growth in Asia Pacific. As Anna mentioned, we deployed approximately $55,000,000 of capital into transactions this quarter.

The transactions we completed were diverse, both by product and by region. Earlier in the quarter, we repurchased $153,000,000 of common stock. We have since suspended share buybacks. We ended the period with an excess capital position of approximately $700,000,000 Our adjusted operating return on equity for the trailing twelve months was 9.5%. The effective tax rate on pretax adjusted operating income was 24.7% this quarter, slightly above the expected range of 23% to 24%, primarily due to the geographical mix of earnings.

Now I'll comment on the results by segment, which you can see on Slide seven of the earnings presentation. The U. S. And Latin America traditional business reported a pretax adjusted operating loss of 55,000,000 reflecting unfavorable individual mortality experience, primarily due to higher than expected frequency of non large claims and very low levels of variable investment income. We have provided some further commentary in the earnings presentation materials.

We saw a particularly large concentration in claims from those over 70 years of age as well as from older issue year vintages. There's also a grow there's also growing ant incidental evidence anecdotal evidence, sorry about that, that all cause mortality in the general population was higher beginning in March and possibly earlier. While it is difficult to provide definitive attribution at this time, the characteristics of the excess claims lead us to believe it is possible that some of these might be directly or indirectly related to COVID nineteen. Over time, we do expect to get more information and data to better assess the sources of adverse experience to refine our assumptions going forward. Our asset intensive business reported pretax adjusted operating income of $43,000,000 this quarter, lower than expected run rate, reflecting the impact of weak capital markets and some related deferred acquisition cost effects.

Weak capital markets resulted in lower fee income on annuities from lower account balances. Moving to Canada, the traditional segment had another good quarter that was down over the prior year quarter with pretax adjusted operating income of $36,000,000 Results this quarter reflect favorable individual mortality experience, while the year ago period was particularly favorable. In the Europe, Middle East and Africa segment, our traditional business reported pretax adjusted operating income of $17,000,000 primarily reflecting favorable underwriting experience in The UK. Reported premiums totaled 390,000,000, up 7% on a reported basis versus a year ago and up 11% on a constant currency basis. India Financial Solutions business, which includes asset intensive, longevity, and fee based fee based transactions reported pretax adjusted operating income of 36,000,000, relatively flat compared to the prior year, reflecting modestly unfavorable longevity experience and some client catch up reporting.

Turning to our Asia Pacific Traditional business. Pretax adjusted operating income totaled $24,000,000 This quarter reflects the negative effect of client reporting catch ups, particularly related to one client. Results in Australia were better than expected, reducing the modest profit this quarter. Reported Asia Pacific traditional premiums were slightly down, reflecting slower growth in Asia. Our Asia Pacific Financial Solutions business reported pretax adjusted operating income of $10,000,000 reflecting strong new business in Asia, where we are where we continue to provide broad based solutions to our clients by combining our capabilities and product development and financial solutions.

The Corporate and Other segment reported a pretax adjusted operating loss of 19,000,000 lower than the expected average run rate, particularly primarily from lower expense levels. We did report a net loss in the quarter as we had some below line items that were more significant than what we have seen in past quarters and were reflective of the turmoil in the financial markets, especially towards the March. We provided a reconciliation of pretax income and loss to pretax adjusted operating income on Slide nine of the earnings presentation. There is a modest amount of investment impairments, related to the energy sector and emerging markets. Leslie, our Chief Investment Officer, will comment on our investment portfolio after my comments.

We reported a loss on embedded derivatives, or what's known as D36, primarily due to the widening of credit spreads in the quarter. This primarily relates to trading structure on a funds withheld basis. The accounting is such that there can be volatility in the short term during periods of stress in the market, and that accounting volatility should reverse over time with minimal net effect. We continue to execute on a prudent capital management strategy with the goal of having sufficient capital to run our operations, support our ratings and provide solid returns to our shareholders. We believe RGA's balance sheet is strong, and our excess capital position stands at $700,000,000 We have considerable liquidity and have substantially increased our liquidity in the quarter as cash and cash equivalents increased from $1,400,000,000 at the 2019

Speaker 3

to $2,800,000,000

Speaker 1

at the March. RGA's leverage ratio is at a comfortable level relative to our targets and limits. I'd like to highlight that we have a relatively stable liability profile, as you can see on Slide 11, with low liquidity and disintermediation risk. We are confident that RGA is in a position to manage through the current environment. We do expect to see some ongoing COVID related claims that will negatively affect our earnings, although at this time, it's difficult to accurately predict the ultimate impact.

Given the fluidity of the situation, there are simply too many unknowns. Clearly, earnings will be impacted this year, and it will be difficult to achieve our intermediate targets. We will provide more information as we gain more clarity into the ultimate impact of this pandemic. And now I'd like to turn the call over to Leslie Barbee, RGA's chief investment officer, to provide additional comments on RGA's investment portfolio.

Speaker 4

Thanks, Todd. As we know, in addition to the health consequences of COVID-nineteen, the actions to flatten the curve in affected regions have significantly impacted economies and markets globally. Monumental central bank and fiscal policy actions have been launched to help bridge this period of economic interruption. And many companies have moved to build cash to weather this period, including from record corporate market issuance. Nonetheless, this is a stressful time for the economy and market.

We believe RTA's high quality investment portfolio is well positioned for a challenging economic period. It is well diversified across asset classes, sectors, issuers and by geography. As highlighted on Slide 15, as of March 31, our average portfolio quality was single A, with over 95% of our fixed maturity securities in investment grade. The portfolio has a low amount of subordinated debt and equity investments. Our investment strategy positioned us well with an underweight to energy and to over leverage BBB investments, while our commercial mortgage loan portfolio had an average loan to value ratio of 58% and our CLO portfolio had an average quality of AA.

Importantly, we are a financially strong reinsurance company and while we proactively manage the asset portfolio, RTA's liability profile and liquidity management enhances our ability to hold valuable investments through the cycle. Accommodation of people, process and strategy resulted in our defensively positioned portfolio coming into 2020. I'm so impressed with the engagement and expertise of our global investment professionals and the energy they bring to meet this challenging environment every day. Our investment leaders average twenty nine years of experience across public, private and real estate. I can tell you from my own career, began over thirty years ago, how impactful it is to have seasoned investors at the helm who have successfully navigated multiple difficult economic and market cycles.

That perspective drives our investment process commitment to ongoing deep diligence and risk management. We focus on downside risk and principal protection in our investment collections and our surveillance. From a top down portfolio management perspective, we utilize scenario stress analysis to inform our asset allocation and total portfolio risk taking. Our mission is to contribute to RGA's financial strength and liquidity as well as RGA's earnings power. We deliver that by having the right talent, capabilities and investment process.

We emphasize higher quality fixed income investments and disciplined approach to underwriting and diversification of risk. Our defensive portfolio positioning was in place well ahead of 2020 because of our disciplined risk management approach focused on avoiding uncompensated risk. As examples, I'll highlight two of our longstanding strategies with respect to triple Bs and our investment in energy. Information is provided on slide sixteen and eighteen. It has been a known feature of this credit cycle that a portion of companies within the BBB rating category had pushed leverage beyond traditional BBB metrics.

Our strategy was to avoid over levered BBBs except where we assess we are appropriately compensated. In the slide deck, we have provided some analysis that we think demonstrates the success of our strategy. For example, as of March 30 one major rating agency had put 8.8% of the BBB index universe on negative rating watch. Our portfolio has about half of that amount in that category, a meaningfully better outcome. As another indicator, we have we not only have a lower portion of our triple b and triple b minus than the market index proportion.

Our triple b minus holdings notably outperformed the BBB minus slice of the index in the turbulent market action in March. On the energy front, we have had a long standing underweight due to our assessment of risks relative to the previous higher oil prices. As shown on Slide 18, almost half of our holdings were in midstream, which is a more defensive, less oil price sensitive sector and 87% of our total holdings were in investment grade. With regard to our portfolio's non spread investment yield, in the first quarter it was 4.08%. The difference versus the fourth quarter was primarily related to less uplift from variable investment income.

The new money rate in the first quarter was 4.2. This was supported by a strong start to the year in private asset production at a healthy spread over public market comp. Starting in March, we focused on accumulating cash given negative developments related to COVID, the economic outlook and all capital markets, so paused on putting money to work. The last topic I'll comment on is variable investment income or VII. In the first quarter, we had minimal VII.

We believe this is primarily a timing issue. We expect to catch up on the majority of our expected 2021 run rate for VII over time. Although in current market conditions, a meaningful portion of that income could be pushed late in the year or into 2021. Private equity realizations and real estate joint venture sales have typically contributed a large share of our strong VII performance over time. With few of those assets being sold in the first quarter, those assets still reside in our portfolio and can provide income at a future point when sales occur.

That said activity right now in both of those markets for all market participants is primarily focused on managing existing investments It may be a few quarters before market conditions are favorable for realizations and sales in those two types of assets. Those are a few of the key portfolio features and investment strategies that I hope will help you better understand the positioning of our asset portfolio. With that, I'll hand it over to our Chief Risk Officer, Jonathan Porter.

Speaker 5

Thank you, Leslie. This morning, I would like to provide some insights into RJ's global mortality business and our exposure to COVID-nineteen impacts, including why we believe that the additional mortality rates in our business will be less than those in the general population. I'll begin with a review of the geographic and age characteristics of our mortality portfolio on Slide 23. RGA's mortality risk is diversified across multiple geographic regions as measured by risk amounts. Our largest block is in The United States, which represents 45% of our global exposure.

The next largest blocks in order are The UK at 17%, 12% in Canada, 5% in Australia and 4% in Hong Kong. In total, these five countries represent 83% of our global mortality exposure. The balance of Asia, excluding Hong Kong, is 11% of the global total, spread across multiple countries in the region. The exposure in EMEA, excluding The UK, is seven percent, again spread across multiple countries. The combined mortality exposure in Italy, Spain, and France, which are seeing some of the highest reported death rates for COVID-nineteen, represent approximately one third of the seven percent or about two point five percent of our global mortality risk.

The age profile of the mortality business is an extremely important factor to take into account assessing any company's exposure to COVID-nineteen. Emerging global data is clearly indicating that the virus has a much more severe impact on older aged individuals and in those particularly age 70 and older. Age specific reporting in our key markets is showing that seventy percent to eighty percent of general population deaths are occurring at ages 70 and older. The table on the bottom right of Slide 23 shows the portion of RGA's mortality exposure as measured by amount at risk for ages 70 and older compared to each country's general population. In total, our key market exposures to ages 70 and older is approximately one third of the general population.

What this means is that we would expect the additional death rate for our business to be materially less than those observed in the population statistics. Emerging data is also showing that individuals with preexisting risk factors and conditions such as cardiovascular disease, chronic lung disease, diabetes, hypertension, and obesity make up the vast majority of deaths. Early April CDC data indicated that almost ninety percent of US COVID nineteen hospitalizations involve one or more of these types of comorbidities, and more than eighty percent of US ICU admissions have chronic health problems. Similar results are being reported in other countries. This is an important factor when estimating the ultimate mortality rate on a block of insured lives as the underwriting process, as well as higher socioeconomic status of those buying insurance, results in an overall healthier profile relative to the general population.

Evidence of the generally healthier profile of insurance compared to the general population is seen when comparing all cause mortality rates between these two groups. While we believe that our mortality portfolio will experience lower additional mortality rates than the general population due to these age and health status differences, it is still too early to accurately estimate the ultimate impact that COVID nineteen will have on claims. There are many additional factors that will influence the future course of the virus, including country specific circumstances such as hospital capacity, testing infrastructure, and contact tracing, as well as how both public and private actions are managed. Further, it is still not clear how COVID nineteen is impacting all other causes of death, both in the short term and long term. And the timing and effectiveness of treatments or vaccine will play a significant role in the ultimate impact of the virus.

As an illustration of the potential impact of COVID nineteen, if we were to calibrate to one hundred thousand US general population deaths and apply a similar set of impacts globally, which implies one point four million additional global general population deaths, we estimate this would result in extra pretax mortality claims to RGA of between $400,000,000 and $500,000,000 I want to emphasize that this range is based on multiple underlying assumptions that are still developing and wanted to particularly highlight three areas that could lead to lower impacts as we see actual experience emerge. First, this estimate assumes that all claims are from marginal extra deaths, and it is likely that some of these will be accelerations of deaths from people who would have died from other comorbid causes in the current or future years. It also seems that countries will experience a similar age adjusted impact of additional mortality, which we can already see developing differently. For example, Australia and Hong Kong have had very little additional mortality thus far, which will mean no material impact to RGA in those markets. It also assumes that different population sub subsegments within a country will be equally impacted, and we are seeing emerging data that in For example, lower socioeconomic frontline service roles, long term care facility workers, and residents.

To the extent that there is a lower life insurance penetration in some harder hit subsegments, this will result in lower overall claims for both the insurance industry and RGA. Finally, it is worth noting that RGA also has a material block of longevity risk, which acts which acts as a partial hedge for our mortality exposure. The majority of our longevity business is concentrated at the older ages with approximately 70% of that exposure at ages 70 and older. As you would expect, we continue to devote significant resources to gathering and analyzing data, liaising with external experts and drawing on our decades of knowledge gained as one of the world's premier life and health reinsurers. Given what we know now and looking at a range of potential stress scenarios, we believe that additional claims from COVID-nineteen will be well below our one in two hundred capital stress level and that our diversified global franchise and strong focus on risk, capital and liquidity management will allow us to manage through this crisis.

With that, I'll turn it back over to Todd Larson.

Speaker 1

Thank you, Jonathan. That concludes our prepared remarks. So we would now like to, open it up to you for your questions.

Speaker 0

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. We will now take the first question from Humphrey Lee from Dowling and Partners. Please go ahead.

Speaker 6

Good morning, and thank you for taking my question. In terms of The U. Mortality, I appreciate that the the additional disclosure that Jonathan provided. But I guess when we think about the impact for the quarter, like, I guess, how many elevated claims did you see in this quarter, and how does that compare to and and then how did the the number of claims trended kind of through the quarter and into April?

Speaker 2

Good morning, Humphrey. I think I will turn that question over to Elaine and Jonathan.

Speaker 3

Sure. So this is Elaine. Thank you, Humphrey. In terms of reporting claims in the quarter, certainly, were very few COVID identified claims that appeared in the quarter, although some have started to come in after the end of the quarter related to the quarter, and and we're seeing more in April. So so clearly, in April, I think we are seeing evidence of COVID claims.

And, you know, as we said before, it's it's really difficult to comment on any one month at a time. But but going back to, the first quarter, we we did have some impact from COVID, but I don't want anyone walking away with the idea that it was all COVID.

Speaker 2

Jonathan, anything to add?

Speaker 5

No. No. Nothing for me.

Speaker 2

I I might I might add one one thing, Humphrey. As you're well aware, cause of death reporting for us is always lagged. So our first quarter analysis is limited on that basis, and it will take time for that cause of death analysis to complete. And in addition, there is some uncertainty with respect to the coding of COVID and COVID related deaths, throughout the course of the early part of the pandemic.

Speaker 6

Understood. So and then shifting gear to to capital management. So I understand you currently suspended your your share repurchases. I guess what factors do you have to see before you start contemplating the resuming buybacks?

Speaker 1

I'm sorry. You you asked what factors would we look at for for reinstate buyback?

Speaker 6

Yeah. So what yeah. So what what what do you need to see in order to, for you to to resume a buybacks?

Speaker 1

Yeah. So sure. You know, so we're pretty consistent. You know, we, of course, wanna deploy capital, as we've talked in the past, back into the business to support, you know, transactional activity. So that message hasn't changed.

We'd still like to deploy the capital back into the business to support, you know, attractive transactions. But more specifically, you know, we need some more clarity around the ultimate, I think, path of the, you know, pandemic both on what does it mean from additional, you know, mortality, you know, claims over time as well as ultimately, you know, with all the different global economies, what does it mean for the investment, you know, side? So we wanna see some more, you know, clarity around where we expect this ultimately to go before, we would reinstate, you know, share repurchases.

Speaker 0

We will now take the next question from Andrew Kligerman from Credit Suisse. Please go ahead.

Speaker 6

Hey. Good morning, everyone. I wanted to, get a sense of your premium growth outlook. In The United States, we saw, in traditional net premium growth of about 1% versus historically more likely in the two to 4% range. And and then, of course, there were pressures in Asia.

So the part a of it would be in the near term, how do you see premium growth in both The US and and and the rest of world? And then the second the part b of it, being, you know, how do you how do you think demand will be affected in the longer term with respect to buying of individual life insurance?

Speaker 2

If I could, turn that over to, Elaine to comment.

Speaker 3

Yes, sure. So I think certainly, in the short term, I think you can expect premium growth to be somewhat pressured. We are seeing signs of slowing production, both in The U. S. And in Asia as a result of, the impact of COVID, stay at home, those those kinds of elements.

I'd like to think, though, first of all, I think it's it's definitely too early to talk about sort of long term repercussion, but I'd like to think that the value of life insurance will have proven out through this pandemic. And that in fact, we might be able to bridge the gap with the underserved markets that exist in different markets.

Speaker 6

Got it.

Speaker 3

And then certainly from a transactional standpoint, I think it's fair to say we are continuing to see good opportunities, primarily in Asia right now. And so certainly from a from a premium growth standpoint there, I I would expect to see a continuation of transactions over the course of as of the year into next year.

Speaker 6

And as you talk about transactions, could you give a little color on what types of transactions you're seeing? I I I think Anna mentioned the pipeline is good at the beginning of the call, and maybe tie Linehorn into it as well.

Speaker 3

So so what I suggest is the those transactions we're looking at are very consistent with the types of things we've been doing in the past, whether it be longevity, asset intensive, financial reinsurance in some cases. I think it varies by market. And it's quite possible that as we work our way through our economic the the current economic environment, there will be some forced sellers, but there may also be some people who prefer to, just take a pause and see how all of this plays out, before before transacting. So it's it's you know, we talk about transactions are are typically lumpy in normal times. I think that's probably very true of and and probably more so what we're seeing today.

Speaker 2

Yeah. And then maybe if I could oh, I'm sorry. Maybe if I could just add a comment or two. We continue to see the PRT opportunities in Europe. And so and perhaps in part because the pension plans there have had less equity exposure relative to their US counterparts.

So funding ratios are not as impacted. In the North America PRT market, we do expect it to grow, although perhaps delayed somewhat later in the year or maybe into next year, for the reasons, just alluded to in in Europe. As Alen mentioned, continued interest in Asia for the combined product development and capital solutions that that is, that is very good in our pipeline. And I would say in The US asset intensive market, maybe a little slower than in the recent past, Although there are opportunities in that pipeline, we are aware that some companies are, thinking about and actively preparing to bring additional blocks to market. So overall, again, good pipeline, similar type of opportunities as we've, spoken about in the past.

Speaker 6

And then just to mention, Langhorne, is that just sort of fit into this scenario? Or is there anything different there?

Speaker 2

No. There is nothing different there. And, it fits into the various opportunities that I've described.

Speaker 0

We will now take the next question from Eric Bass from Autonomous Research. Please go ahead.

Speaker 6

Hi. Thank you. A bigger question on mortality. If claims have now had a negative variance of $50,000,000 plus for the three straight quarters, I think it's been adverse in total for around six straight. I realize the drivers have been different each quarter, but at what point do you need to reconsider your base claims assumptions and potentially reset expectations?

Speaker 2

I will turn that over to Owen and Jonathan to comment.

Speaker 3

Sure. Why don't I start? Certainly, we have seen a number of off quarters in The U. S. Over the last few years.

I'm not sure it's quite six straight, but know what? I'd say the experience we're seeing this time around is maybe a little bit different from what we've seen in the past. Typically, when we miss on U. S. Mortality, it's attributable to large claim volatility, which, as we've talked about, tend to average out over longer periods of time.

We've also called out a slowing of mortality improvement in younger and middle ages in recent years. And I think we talked about this at Investor Day a couple of years ago. If you go back over fifty years, you do see ups and downs on that. And in fact, I think over the last fifty years, we've seen fifteen or so years of of slowing mortality improvement. But what we're seeing what we're seeing this quarter in terms of higher frequency on on small policies, claims at the older ages, claims in older writing vintages, together with some evidence that we're seeing of higher influenza like illness hospitalizations.

We're certainly seeing new information every day that suggests that some of the COVID reporting, for example, is a little bit late. You've seen, I think, recently a report that the first diagnosis in France might have been as early as December 27. The first death in The US in Santa Clara is now, I think, February 6, which is two or three weeks earlier than than previously thought. Sort of tends to point to influenza like or potentially beginning COVID like impacts on the book. And I think that given that, I think I'm reasonably comfortable that there are specific underlying indicators as to why we've missed this quarter.

Speaker 5

Yes. And then maybe I'll just add that just to the question about reassessing, I mean, we regularly and constantly reassess our metallic expectations, not S, but globally. So that's a process that we go through to make sure that we're comfortable with our go forward expectations.

Speaker 6

Thank you. Then if I could switch to the investment portfolio, I appreciate the additional disclosure. Could you just provide some additional color maybe on how you expect the portfolio to perform in a recession? And do you have any estimate for what potential impairments could look like in a stress scenario? And also how do ratings downgrades affect your capital given that a lot of your business is outside of U.

S. Statutory entities?

Speaker 2

Hi, it's Leslie. Why don't we start Oh, I'm sorry. Go ahead, Diana. No. I I was going to say why don't we start with Leslie and then perhaps turn it to Todd on the capital question.

I love that plan.

Speaker 4

This is Leslie. So, you know, this is certainly a difficult period to predict, given the unusual mandated shutdowns and offsetting policy. So our approach has been to look at a variety of stress scenarios, and we mapped factors from past year cycles to our portfolio characteristics, meaning historical rating migration, impairments, loss severities, and so forth, and in some cases, increase the stresses. So we're considering a range of cases at the moment as that can happen. Our current expectation around economic activity, which is an important factor here, is that it somewhat resumes in the second quarter and then continues a gradual recovery over multiple quarters.

Given our stress testing and building off that central case, but not focused on only that, Our top down loss, we would say our current debt estimate over the next several quarters for impairments could be in the 300,000,000 to 400,000,000 range. And I say that to give you guidance, but importantly, based on our bottom up look, so we've really dug into all the credits to see how they're doing in this environment. Based on that bottom up look, we're not seeing that level of problems in the portfolio. We just want to plan for and realistically manage through a difficult environment. I'll note that some of the aspects I discussed before and are highlighted in the deck point out that we have a defensively positioned portfolio within our categories, but we did apply those top down, more generic stresses to make sure we're prepared to manage through this.

And then I would say, I know Todd will comment, but we what we connect those two, capital impacts, they're all very, manageable, and that's without even assuming, that we take any portfolio management action.

Speaker 1

And maybe just to wrap it up. Yes. On the, you know, the RBC related companies, you know, based on the analysis that sort of Leslie will, you know, just walk through and give an overview of, you think it's very manageable on their RBC ratio? I mean, probably could absorb impacts even without taking management action, but but very manageable. And then, you know, for the entire enterprise, looking at it from a, you economic capital and a rating agency capital perspective.

Now based the way we are viewing it, it's, you know, very manageable, scenario.

Speaker 4

And I guess the last thing I'll throw in there is certainly all of that has been, rolled up into the integrated look and planning at the company.

Speaker 0

We will now take the next question from Ryan Krueger from KBW. Please go ahead.

Speaker 7

Hi, thanks. Good morning. Going back to the the four hundred to five hundred million mortality scenario for a hundred thousand US deaths. I guess, can

Speaker 1

you can you provide a

Speaker 7

little bit more detail on that? I guess, in particular, I guess, were there were there any adjustments made for the age distribution or for general or or differences in insured population versus the general population, or did that assume kind of did it not make any, I guess, adjustments for for those types of factors?

Speaker 2

I'll turn this one over to Jonathan.

Speaker 5

Yeah. Hi, Ryan. Thanks for the call the question. So, yeah, so just specifically, we have made adjustments for both of those factors. So what we've done is we've taken a projection of population related deaths and then layered it on top of our specific age distribution and geographic distribution.

And we've also adjusted for observed differences and expectations between the health status of insured lives versus general population lives. Just to give you a sense of that, the impact of both of those factors combined at a global level is about a 50% reduction. Now it does vary by country. So as an example, you know, age distributions are not uniform across our global business, so you would expect to see a different adjustment for geographies with higher exposure to older ages than those with with lower, although there is an adjustment all cases because our population is younger or sorry, has less concentration in those older ages than the general population. And, of course, it is still unclear what the ultimate difference will be between insured lives and general population lives, but that's becoming clearer.

And as we get experience in claims reporting, we'll be able to refine that adjustment as well.

Speaker 7

Okay. Got it. So it adjusts for insured population versus general population, age distribution. I guess it it does not adjust for comorbidity offsets and longevity offsets. Is that the right way to think about it?

Speaker 5

Yeah. That's right. So so our longevity offset were we would we estimate it would be approximately up to 10% of that amount. So that would be a a reduction, I guess, on a net basis, if you include our longevity exposure. But yes, that's not built into the 400,000,000 to 500,000,000

Speaker 7

Got it. And then there was some noise in asset intensive this quarter. Can you just give an updated outlook for your normal run rate earnings in that business at this point?

Speaker 2

I'll hand that one over to Todd to comment.

Speaker 1

Yeah. In the quarter, Brian, there was given the market turmoil, the some some of the primarily on the variable annuity portfolio that we have, the account values went down, so the expected, you know, projected future fee income, if you will, went down, and that accelerated some DAC amortization. But, you know, once things get back to, you know, call it they come back to normal, and I think the run rate is probably still valid, albeit probably at that, you know, lower end of what we provided.

Speaker 7

Okay. Great. Thank you.

Speaker 0

The next question comes from Dan Bergman from Citi. I

Speaker 8

guess, first, could you talk a little bit about the sources of cash or funds you have to fund any potential COVID impact and near term credit losses? I mean should we be thinking about your normal free cash flow, capital freed from slower near term sales and the current excess capital as the main likely funding sources? Or are there other things we should be thinking of like debt issuance if the ultimate impact ends up being a little bit more severe? Any thoughts on

Speaker 7

that would be great.

Speaker 1

Andy, you want me to take that?

Speaker 2

Yeah. Yeah. I'm sorry, Todd. That is a Todd question.

Speaker 1

Yeah. As far as, liquidity, we're in very good shape there. You know, over the course of the last, you know, few weeks, we have, you know, built up some additional liquidity as as I mentioned, to make sure that we can cover, you know, what we feel are even some of the more stressful, scenarios on the claim side. And, also, you know, as as you know, the the claims will be paid out over several, you know, quarters. There won't be a a onetime, you know, type event.

So we feel very good on the on the liquidity side. On the capital side, you know, we came into this with some excess capital. We always are looking at various forms of capital to make sure we are in a position to, you know, act on attractive transactions that we see in the market as well as, you know, maintain, you know, capital levels sufficient to meet all of our subsidiary needs as well as, you know, rating agency capital. So we will look at various alternative forms of capital. What what and when we execute on, I think, is still an open question as we see how this evolves.

Speaker 8

Got it. And then maybe shifting gears a little bit, just with the improvement in Australia results this quarter following a period of weakness. Could you give a little bit more color on what drove the improvement there relative to the recent trend? And just any updated thoughts on the outlook for profitability in that region going forward?

Speaker 2

Perhaps Alain and Todd?

Speaker 3

Sure. Look, I'd say, obviously, we're very pleased with the results. But I'd be hesitant to suggest that, you know, the turnaround is over. We're benefiting from rate increases to a greater extent of the year and the quarters progress. We certainly continue to engage with clients in all aspects to remedy the business.

But in terms of guidance for the rest of the year, I'm guessing that we'll probably still guide to a loss, but maybe smaller than we might have thought. But but I think it's it's very early, and I'd like to see a couple more quarters play out.

Speaker 1

Yeah. I I agree with Alan's comments. And the only thing I would add is that it was it was nice to see Australia perform fairly well pretty much across the different business lines in both, you know, individual and group sides. So it was a positive positive sign, but, we still need to be, you know, managing, you know, that block very closely.

Speaker 8

The

Speaker 0

next question comes from Alex Scott from Goldman Sachs. First

Speaker 9

question I had is just sort of higher level on capital. When you when you

Speaker 1

go through

Speaker 9

the scenarios you've laid out, thinking through your your one and two hundred year scenario and so forth, I mean, has anything about this experience changed to the way you would think about capitalization kind of on the other side of it and on a go forward basis? Like, you you know, is there anything that would change the way that you view, you know, excess capital, and and how you measure that?

Speaker 2

Jonathan, do you want to take the first part of that question about our thinking on one hundred and two hundred type of capital levels?

Speaker 5

Yeah. So, I mean, I think, you know, obviously, we're still in the middle of a pandemic, so things will will play out over time, and we'll see sort of what the ultimate result is. But from a you know, just looking at our one and two hundred sort of assessment of of of exposure, I think, you know, the the the dollar amounts that we have attached to that capital level, I still feel very comfortable with. We still believe that this pandemic will result in an ultimate impact, which will be well within the one hundred two hundred capital level. So at this time, I wouldn't have an expectation that we would revise or change our expectation on on what that total level of capital would be.

Speaker 2

Yep. And, Kyle, the second part of that question yeah.

Speaker 1

Yeah. Alex, on a go forward basis, it's probably a little bit too early to give you a definitive answer on that beyond. I mean, certainly, we're gonna take into account what we are learning, you know, through this to see if there's a different, you know, capital mix and capital structure or anything we should, you know, add into our our overall, you know, toolkit going forward. But I think it's too early to give you a definitive answer. I think what we've historically done as far as how we structured our legal entities and have, you know, liquidity facilities across the various enterprises, you know, will serve us, you know, well as we go forward here.

But as far as changing the overall capital model and mix, it's early to give you the definitive answer. Got

Speaker 9

it. And then maybe just on pricing. Could you talk at all about pricing and season rates you know, that you're seeing. And, you know, is there

Speaker 6

in property and casualty, you have

Speaker 9

you know, there's a situation where you have a catastrophe, and and it helps pricing on the other side of it. And, you know, I I get that question sometimes on, you know, the life side and whether, you know, something like this would influence pricing or not going forward. So I'd just be interested if if there are any comments on that. And, you know, maybe if if it would even impact some of the in force transactions and how you price those.

Speaker 2

Alwyn, if I can turn that over to you.

Speaker 3

Sure. So I think there's two separate questions there. If you think about the traditional business, certainly, we're pricing for, the business for very long periods of time. We do tend to adjust year over year as mortality, and other factors evolve, whether they be interest or morbidity elements. Sitting here, you know, a few weeks, maybe months into the pandemic, it's probably difficult to, talk about how that might impact pricing over the future because as Jonathan mentioned earlier, think it's still too early to determine, for example, whether this might be an acceleration of mortality in terms of people at the older ages who might have passed in the next few months, or whether there's something a little bit more fundamental that might set in.

So I think it's it's probably too early. But typically, we certainly don't tend to move pricing around as drastically as in the P and C industry. On a transactional basis, I think certainly and this would apply to traditional as well. We are certainly very keenly looking at elements of anti selection or reasons why transactions may be coming to the market and then applying, I guess, what I would term our usual diligence to the process. And so, you know, I think it'd be very transactional specific as to whether pricing might move up and down, but it's also impacted by, the economic environment, the ability to source the right types of assets, you know, those kinds of questions.

So, sorry if I'm not giving a very clear answer, but it's, it it tends to be a little bit specific to to any one transaction.

Speaker 5

Got it. Amanda, sir, this this is Jonathan. Maybe maybe I can just add to that as well that, you know, definitely from a risk selection perspective, as you alluded to, booking and selection, we are making adjustments to our practices and for underwriting, both on individual cases and on a larger transaction basis to take into account sort of the heightened risk profile and some expectations.

Speaker 3

And then I think it's also fair to say on group life and health, for example, where that is annually repriced business, we may see earlier impacts there. Again, we're working our way through all that now.

Speaker 9

Understood. Okay. Thank you.

Speaker 0

The next question comes from Tom Gallagher from Evercore. Please go ahead. Please ensure your mute function is switched off, caller.

Speaker 10

Sorry. Yes, of the $400 to $500,000,000 impact, can you give us a sense for how much of that would be from The U. S. Versus non U. S?

Speaker 5

Yes. So I don't think we want to split it out at this time, just given some of the uncertainties that we're seeing, in particular at the geographic level. I guess what I would point you to, just to give you a directional sense, is if you look at our net amount at risk distribution that we've provided in the slide, that's sort of a baseline. But then you would need to sort of factor in the fact that our older our businesses that are skewed more to older ages would have a slightly would have a higher proportion impact than what that minimum risk number would show. So that would give you a directional sense, but I think it's too early to split it out given some of the uncertainties.

Speaker 10

Got it. And the reason I asked, so the sensitivity was one hundred thousand U. S. Deaths and four point four million of global, if I want you correct?

Speaker 5

One one point four. Yeah. One point four global. So so so what we're doing is effectively taking a scenario that we're applying to The US, which is about point three per thousand times The US population gives you one hundred thousand deaths and applying that same scenario to to other countries across the world and then age adjustment.

Speaker 10

Gotcha. And is it is it fair to say I mean, given where we're at now, I think we're over seventy thousand US deaths. This might actually be the 2Q impact based on current trajectory. And maybe there's a lag and delay given the reporting of claims. But I mean, it seems to me like this is a reasonable base case just given where we're at.

Globally sounds high, but it could be some underreporting going on there. But is it fair to say that this is probably more of a base case at this point?

Speaker 5

Yeah. I think your point about global, I mean, that's very important to take into account, fact that our business is global and it's not all in The US. So that's something, you know, as I mentioned, a couple of examples of Australia and Hong Kong, right, where there's, I think in total between those two countries, there's one hundred general population deaths. So clearly, that will be almost zero impact to us. Also, I guess I would point you back to some of my comments earlier about some areas of uncertainty which may result in lower overall impact to us.

I think that combined with, you know, sort of the timing element that that you that you brought in, I I don't think we can definitively say this would be a number that we would see in in a quarter. It's, you know, I think we need to to see, I guess, what what reporting comes in, and, you know, it it may be different than this.

Speaker 10

Gotcha. And then the kind of within that, The UK related impact, I know, is another big sensitivity given you know, are are you able to shed a little bit of light on since that is kind of a very overweight exposure for you? What what your kind of baseline mortality expectation within this sort of global, overall assumption is?

Speaker 5

Yeah. Actually, I'm glad you asked about The UK. So, I mean, an interesting dynamic we have in that market is that's where most or the vast majority of our longevity business is written. So when you look at The UK, the net exposure in The UK, those two pieces largely offset, and it's not perfect. And things will, obviously move depending on the age distribution.

But because our longevity is skewed to older ages, we're somewhat immunized to the, ultimate death rates in the general population in The UK because the losses we would expect to see on a mortality book would largely be offset for the gains on the longevity business.

Speaker 1

And that's Jonathan. Jonathan, correct me if I'm wrong too. But in The UK, on the mortality side, some of our underlying insureds on the on the younger side because it's primarily tied to mortgage insurance type

Speaker 5

policy. Yeah. That that's right, Todd. I mean, yeah, that's a good point. Another thing to point out is our our UK age distribution is definitely skewed to be very to be much younger than some of the other countries where we operate, which will reduce the mortality claims expectation.

Speaker 10

Got it. That that's helpful. Thanks, guys.

Speaker 0

As there are no further questions, I'll now turn the call back to your host for any additional or closing remarks.

Speaker 1

Okay. Thank you everyone for joining our call today and for your continued support of RGA. Before we go, I wanted to mention that our Investor Day that was scheduled for June 4, we are postponing that due to COVID nineteen. We will provide more information as this event is rescheduled for a later date. Thanks for your understanding.

And if you have any questions, please feel free to reach out to Jeff. Again, thank you very much for joining us this morning.

Speaker 0

That will conclude today's call. Thank you for your participation. You may now disconnect.