Reinsurance Group of America, Incorporated

Good day and welcome to the Reinsurance Group of America First Quarter 2020 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.

Thank you. Good morning, everyone, and welcome to RGA's First Quarter 2020 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 Meany, Chief Operating Officer, Leslie Barbee, Chief Investment Officer, Jonathan Porter, our Chief Risk Officer, and Jeff Hobson, 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, the information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation, quarterly financial supplements, 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.

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-19 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 million. 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 gap 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 block ages, 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-19 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-19. 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 million 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 unattractive transactions following our disciplined approach of pursuing those that best align with our capabilities and advantages. Let me comment on COVID-19 more broadly. As we work our way through this pandemic, we do expect to see additional COVID-19 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 as well for 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, including 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.

Thanks, Anna. I'll review the financial results and discuss RGA capital and liquidity. Reported premium growth was 3% for the quarter, but 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 million 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 million of common stock. We have since suspended share buybacks. The end of the period was an excess capital position of approximately $700 million. Our adjusted operating return on equity for the trailing 12 months was 9.5%. The effective tax rate on pre-tax 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 pre-tax adjusted operating loss of $55 million, 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 growing incidental evidence, anecdotal evidence, sorry about that, that all-cars 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-19. Over time, we do expect to get more information and data to better assess the sources of adverse experience to define our assumptions going forward. Our asset-intensive business reported pre-tax adjusted operating income of $43 million this quarter, lower than the 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 pre-tax adjusted operating income of $36 million. Results this quarter reflect favorable individual mortality experiences while the year-ago period was particularly favorable. In the Europe, Middle East, and Africa segment, our traditional business reported pre-tax adjusted operating income of $17 million, primarily reflecting favorable underwriting experience in the UK. Reported premiums totaled $390 million, 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 transactions, reported pre-tax adjusted operating income of $36 million, 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, pre-tax adjusted operating income totaled $24 million. This quarter reflects the negative effects of client reporting catch-ups, particularly related to one client. The 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 pre-tax adjusted operating income of $10 million, reflecting strong new business in Asia, where we continue to provide broad-based solutions to our clients by combining our capabilities in product development and financial solutions. The corporate and other segment reported a pre-tax adjusted operating loss of $19 million, lower than the expected average run rate, particularly primarily from lower expense levels. We did report a net loss in the quarter. is 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 end of March. We provided a reconciliation of pre-tax income and loss to pre-tax adjusted operating income on slide nine of the earnings presentation. There was a modest amount of investment impairments, primarily 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 from embedded derivatives, or what's known as D36, primarily due to the widening of credit spreads in the quarter. This primarily relates to treaties structured on a funds-withheld basis. The accounting assesses 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 volatility. 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 million. We have considerable liquidity and have substantially increased our liquidity in the quarter as cash and cash equivalents increased from 1.4 billion at the end of 2019 to 2.8 billion at the end of March. RGA's leverage ratios are 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.

Thanks, Todd.

As we know, in addition to the health consequences of COVID-19, 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 31st, 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 coordinated debt and equity investment. Our investment strategy positioned us well, with an underweight to energy and to over-leveraged triple B 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, RGA'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 29 years of experience across public, private, and real estate. I can tell you from my own career, which we began over 30 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 long-standing strategies with respect to BBBs and our investments in energy. Information is provided on slides 16 and 18. 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-leveraged BBBs, except where we assessed they were 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 31st, 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 not only have a lower portion of our BBBs in BBB minus than the market index proportion, our BBB minus holdings notably outperform the BBB minus slice of the index in the turbulent market action in March. On the energy front, we have had a longstanding underweight due to our assessment of risk 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 4.20%. This was supported by a strong start to the year in private asset production and a healthy spread over public market costs. Starting in March, we focused on accumulating cash, given negative developments related to COVID, the economic outlook, and volatile capital markets, so paused on putting money to work. The last topic I'll comment on is variable investment income, or BII. In the first quarter, we had minimal BII. We believe this is primarily a timing issue. We expect to catch up on the majority of our expected 2020 run rate for BII 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, and 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 portfolios. With that, I'll hand it over to our Chief Risk Officer, Jonathan Porter.

Thank you, Leslie. This morning, I would like to provide some insights into RGA's global mortality business and our exposure to COVID-19 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 7%, again, spread across multiple countries. The combined mortality exposure in Italy, Spain, and France, which are seeing some of the highest reported death rates of COVID-19, represent approximately one-third of the 7%, or about 2.5% of our global mortality risk. The age profile of the mortality business is an extremely important factor to take into account when assessing any company's exposure to COVID-19. Emerging global data is clearly indicating that the virus has a much more severe impact on older-aged individuals, and in particular, and in those particularly age 70 and older. Age-specific reporting in our key markets is showing that 70% to 80% 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 pre-existing risk factors in 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 90% of U.S. COVID-19 hospitalizations involve one or more of these types of comorbidities, and more than 80% of U.S. 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-19 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-19 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-19, If we were to calibrate to 100,000 U.S. general population deaths and apply a similar set of impacts globally, which implies 1.4 million additional global general population deaths, we estimate this would result in extra pre-tax mortality claims to RGAs of between $400 million and $500 million. 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 assumes 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 RJA in those markets. It also assumes that different population subsegments within a country will be equally impacted, and we are seeing emerging data that, 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 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, raising 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-19 will be well below our 1 in 200 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.

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

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is switched off to allow your signal to reach our equipment. Again, it is star 1 to ask a question. We will now take the first question from Hans-Brilli from Dowling & Partners. Please go ahead.

Good morning, and thank you for taking the question. In terms of the U.S. mortality, I appreciate the additional disclosure that Jonathan provided. But I guess when you think about the impact for the quarter, I guess how many elevated claims did you see in this quarter and how is that compared to and how did the number of claims trended through the quarter and into April?

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

Sure. So this is Elaine. Thank you, Humphrey. In terms of reporting claims in the quarter, certainly there 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 we're seeing more in April. So clearly in April, I think we are seeing evidence of COVID claims. And, you know, as we said before, it's really difficult to comment on any one month at a time. But going back to the first quarter, we did have some impact from COVID, but I don't want anyone walking away with the idea that it was all COVID.

Jonathan, anything to add?

No, nothing for me.

I might add 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.

Understood. So in the shipping gear to capital management, so I understand you currently suspended your share of purchases. I guess what factors do you have to see before you start contemplating resuming BIDACs? I'm sorry, what factors would we look at for reinstate buybacks? Yeah, so what do you need to see in order for you to resume buybacks? Yeah, so sure. You know, so we're pretty consistent. You know, we, of course, want to deploy capital, as we've talked in the past, back into the business to support, you know, transactional activities. So That message hasn't changed. We'd still like to deploy the capital back into the business to support attractive transactions. But more specifically, we need some more clarity around the ultimate path of the pandemic, both on what does it mean from additional mortality claims over time, as well as ultimately with all the different global economies, what does it mean for the investment side? So we want to see some more clarity around where we expect this ultimately to go before we would reinstate share repurchases.

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

Good morning, everyone.

I'm going 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 2% to 4% range. 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 U.S. and the rest of the world? And then the second, the Part D of it being, how do you think demand will be affected in the longer term with respect to buying with individual life insurance?

If I could turn that over to Alain to comment.

Yep, sure. 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 kinds of elements. I'd like to think, though, first of all, I think it's definitely too early to talk about sort of long-term repercussions, 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. 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 premium growth standpoint there, I would expect to see continuation of transactions over the course of either the year or into next year. And as you talk about transactions, could you give a little color on what types of transactions you're seeing? I think Anna mentioned the pipeline is good at the beginning of the call and maybe tie line horn into it as well. So what I'd suggest is the test 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 the current economic environment, there will be some for sellers, but there may also be some people who prefer to just take a pause and see how all of this plays out before transacting. So we talk about transactions are typically lumpy in normal times. I think that's probably very true and probably more so what we're seeing today.

And maybe if I could just add a comment or two. We continue to see the PRT opportunities in Europe. and perhaps in part because the pension plans there have had less equity exposure relative to their U.S. counterparts, so funding ratios are not as impacted. In the North America PRT market, we do expect it to grow, although perhaps delayed somewhat to later in the year or maybe into next year for the reasons just alluded to in Europe. As Alain mentioned, continued interest in Asia for the combined product development and capital solutions, that is very good in our pipeline. And I would say in the U.S. 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.

And just to mention Al Langhorne, does that just sort of fit into this scenario or is there anything different there?

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

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

Hi, thank you. A bigger question on mortality. Claims have now had a negative variance of 50 million 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?

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

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, you 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 Invest Today a couple of years ago. If you go back over 50 years, you do see ups and downs on that. And in fact, I think over the last 50 years, we've seen 15 or so years of slowing mortality improvement. But what we're seeing this quarter in terms of higher frequency 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 27th. The first death in the U.S. in Santa Clara is now, I think, February 6th, which is two or three weeks earlier than previously thought. It 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.

Yeah, and then maybe I'll just add that, you know, just to the question about reassessing, I mean, we regularly and constantly reassess our mortality expectations, not just in the U.S., but globally. So it's a process that we go through to make sure that we're comfortable with our go-forward expectations.

Thank you. And then I can 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?

Hi, it's Leslie. Why don't we start? Oh, I'm sorry. Go ahead, Anna.

No, 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. 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 severe cycles to our portfolio characteristics, meaning historical rating migration impairments, loss severities, and so forth, and in some cases, increased the stresses. So we're considering a range of cases at the moment that can happen. Our current expectation is 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 best estimate over the next several quarters for impairments could be in the $300 million to $400 million 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 in our highlight of 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 connect those to capital and tax, they're all very manageable, and that's without even assuming that we take any portfolio management action.

And maybe just to wrap it up, on the RBC-related companies, based on the analysis that Leslie just walked through and gave an overview of, we think it's very manageable on the RBC ratio. It probably could absorb impacts even without taking management action, but very manageable. And then for the entire enterprise, looking at it from an economic capital and a rating agency capital perspective, the way we are viewing it is a very manageable scenario.

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 of the company.

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

Hi, thanks. Good morning. Going back to the 400 to 500 million mortality scenario for 100,000 U.S. deaths, Can you provide a little bit more detail on that? I guess in particular, were there any adjustments made for the age distribution or differences in insured population versus the general population, or did that assume kind of, did it not make any, I guess, adjustments for those types of factors?

I'll turn this one over to Jonathan.

Hi, Ryan. Thanks for the question. Specifically, we have made adjustments for both of those factors. 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. We've also adjusted for observed differences in 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. It does vary by country. As an example, 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 lower, although there is an adjustment in all cases because our population has less concentration of 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.

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

Uh, yeah, that's right. So, so our longevity offset where we would, we estimate it would be approximately or up to 10% of that amount. So that would be a reduction, I guess, on a net basis, if you include a longevity exposure. Um, but, but yeah, that's not built into the 400 to 500.

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

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

Yeah, in the quarter, Brian, there was, you know, given the market turmoil, 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, I call it, come back to normal, I mean, I think the run rate is probably still valid, albeit probably at that, you know, lower end of what we provided.

Okay. Great.

Thank you. The next question comes from Dan Bergman from Citi. Please go.

Hi. Good morning. I 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 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 about like debt issuance if the ultimate impact ends up being a little bit more severe? Any thoughts on that would be great. Yeah.

Anna, you want me to take that?

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

As far as liquidity, we're in very good shape there. Over the course of the last few weeks, we have built up some additional liquidity, as I mentioned, to make sure that we can cover what we feel are even some of the more stressful scenarios on the claim side. And also, as you know, the claims will be paid out over several quarters. It won't be a one-time type event. So we feel very good on the liquidity side. On the capital side, 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 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 and when we execute on I think is still an open question as we see how this evolves.

Got it. Thanks so much.

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?

Perhaps Alain and Todd?

Sure. Look, I'd say obviously we're very pleased with the results, but I'd be hesitant to suggest that the turnaround is over. We're benefiting from rate increases to a greater extent as 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 I think it's very early and I'd like to see a couple more quarters play out. I agree with And the only thing I would add is that it was nice to see Australia perform fairly well pretty much across the different business lines and both individual and group sides. So it was a positive sign, but we still need to be managing that block very closely.

Thank you.

Great, thanks so much for taking the question.

The next question comes from Alex Scott from Goldman Sachs. Please go ahead.

Hi, good morning. First question I have is just sort of higher level on capital. You know, when you... Go through the scenarios you've laid out, thinking through your one-in-200-year scenario and so forth. I mean, has anything about this experience changed the way you would think about capitalization kind of on the other side of it and on a go-forward basis? You know, is there anything that would change the way that you view, you know, excess capital and how you measure that?

Jonathan, do you want to take the first part of that question about our thinking on 1 in 200 type of capital levels?

Yeah. So, I mean, I think, you know, obviously we're still in the middle of a pandemic, so things will play out over time and we'll see sort of what the ultimate result is. But From just looking at our 1 in 200 sort of assessment of exposure, I think the dollar amount 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 1 in 200 capital level. So at this time, I wouldn't have an expectation that we would revise or change our expectation on what that total level of capital would be.

Okay. And the second part of that question, Alex.

Yeah, Alex, on a go-forward basis, it's probably a little bit too early to give you a definitive answer on that beyond. Certainly, we're going to take into account what we are learning through this to see if there's a different capital mix and capital structure or anything we should add into our overall 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've structured our legal entities and have liquidity facilities across the various enterprises will serve us well as we go forward here, but as far as changing the overall capital model and mix, it's too early to give you a definitive answer. Got it. And then maybe just on pricing, could you talk at all about pricing and season rates that you've seen? Is there property and casualty situations where you have a catastrophe and it helps pricing on the other side of it? I get that question sometimes on you know, the light side and whether, you know, something like this would influence pricing or not going forward. So I'd just be interested if there were any comments on that and, you know, maybe if it would even impact some of the enforced transactions and how you price this.

Alain, if I can turn that over to you.

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 a very long period of time. We do tend to adjust year over year as mortality and other factors evolve, whether they be interest or ability elements. Sitting here 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, I 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 probably too early, but typically we certainly don't tend to move pricing around as drastically as in the P&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 tends to be a little bit specific to any one transaction.

Okay.

This is Jonathan. Maybe I can just add to that as well. Definitely from a risk selection perspective, as you alluded to, we are making adjustments to our practices for underwriting, both on individual cases and on a larger transaction basis to take into account the heightened risk profile and some expectations.

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. But, again, we're working our way through all that now.

Understood. Okay. Thank you.

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

Sorry. Of the $400 million to $500 million impact, can you give us a sense for how much of that would be from the U.S. versus non-U.S.?

Yeah, 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 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 net amount at 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 uncertainties.

And the reason I asked, so the sensitivity was 100,000 U.S. deaths and 4.4 million of global, if I heard you correctly.

Yeah, 1.4 global. So what we're doing is effectively taking a scenario that we're applying to the U.S., which is about 0.3 per thousand times the U.S. population gives you 100,000 deaths, and applying that same scenario to other countries across the world, and then age-adjusting it.

Gotcha. And is it fair to say, I mean, given where we're at now, I think we're over 70,000 U.S. deaths. This might actually be the 2Q impact, you know, 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, you know, 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?

Yeah, I think your point about global, I mean, that's very important to take into account, the fact that our business is global and it's not all in the U.S. So that's something, you know, as I mentioned, a couple of examples of Australia and Hong Kong, right, where there's, you know, I think in total between those two countries, there's 100 general population deaths. So clearly that will be almost zero impact on us. Also, I guess I would point you back to some of my comments earlier about you know, 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 you brought in, I don't think we can definitively say this would be a number that we would see in a quarter. It's, you know, I think we need to see, I guess, what reporting comes in and, you know, it may be different than this.

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

Yeah, actually, I'm glad you asked about the UK. So, I mean, an interesting dynamic we have in that market is, you know, that's where most of 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, you know, obviously move depending on the age distribution. But because our longevity business is skewed to older ages, We're somewhat immunized to the ultimate death rates in the general population in the U.K. because the losses we would expect to see on a mortality book would largely be offset for the gains on the longevity business.

Jonathan, correct me if I'm wrong, but in the U.K., on the mortality side, some of our underlying insurance on the younger side, because it's primarily tied to mortgage insurance types,

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

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

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

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 4th, we are postponing that due to COVID-19. 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.

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