Q1 2020 Earnings Call
Good day and welcome to the reinsurance group of America Fritz Quantia Twentytwenty results Conference call today's call is being recorded.
It's 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 RG <unk> first quarter 2020 conference call.
And our first working from home conference call.
With me this morning on the call. It 30, RG <unk>, President and Chief Executive Officer.
When do you mean, chief operating officer.
Lastly, Barbie Chief Investment Officer, Johnson, Porter, our chief risk Officer.
Jeff Hopson ahead of our Investor Relations.
Considering the unprecedented barb.
Included additional members of our management team on the call.
And made available and earnings presentation supplement this quarter.
Which we will be referring to during the call.
More information or on our investment portfolio and our global mortality exposures amongst other things.
I will discuss the first quarter results. After a quick reminder, about forward looking information.
Non-GAAP financial measures.
Following our prepared remarks, we'll be happy to take your questions.
Her comments or answers your questions may contain forward looking information and statements.
<unk> results could differ materially from expected results.
Where do you perks <unk> earnings release, we issued yesterday for most of the important factors that could cause actual results.
Differ materially from expected results.
Additionally, during the course of this call information we provide they include non-GAAP financial measures.
We see our earnings release earnings presentation quarterly financial supplement and website for discussion of these firms and reconciliations to GAAP measures.
Now I'll turn the call overpaying for her comments.
Thank you Todd good morning, everyone.
These are extremely challenging times for all of US, particularly for those who have lost loved ones starting to pandemic.
Our thoughts are with them and with all of those on the front lines of this crisis Horbury a disproportionate share of the burden.
Oh Gee were focused on supporting our employees our clients in our communities.
The families around the world rely on the financial support doesn't shirts companies provide in times like these NRG remains committed to helping our clients need our shared responsibility to those families.
Our June it's also supporting cold that might change global response efforts to grants from the R.J. Foundation.
Like others, we have been operating with most of our employees working from home.
I'm pleased to report that our operations are functioning normally.
Jay change has lived in each of the challenge of working remotely and we're very proud of what they have accomplished.
Although there remain many mills RJ entered the pandemic in a position of strength you haven't strong balance sheet.
I spent portfolios defensively position.
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 Claude.
Risk a leading brands I left strong track record of success in short I believe we have the best like it helps to them in the global reinsurance industry and I'm confident that this gene will manage through the challenges ahead and come up strong.
Moving to our first quarter operating results were below expectations as we reported adjusted operating EPS of $1.41 for the quarter compared to $2 and 61 a year ago.
We also reported GAAP loss of a dollars 41 per share, which is partly reflects the accounting treatment. So a number of items that are directly attributable to the turmoil in the financial markets.
And we'll provide a more comprehensive com commentary on the deleverage, but I did note, but its financial markets stabilize we would expect to see a reversal of some of those items overtime.
In the quarter. The two biggest sources of negative variances were operating results were elevated U.S. individual mortality claims and very low levels of variable investment income.
These claims and are you left individual mortality business was largely the result of a higher than expected frequency of smaller claims.
Even after adjusting for normal seasonality sandy impact of the leap day this year.
As discussed at our reach at Investor Day impact of seasonality has increased in recent years as our block aegis, which impacts the pattern burns emergence throughout the year.
Yes, that's claim impact is highly concentrated at age 70 in a thought.
Briefly outlined in our earnings release and earnings presentation, what causes of death and definitive cope with 19 impacts are difficult to establish especially in the early days of the pen Dudnik. We believe that some of these additional claims might have been directly or indirectly. The latest took hold at 19.
I'm positive side most of our other segments of business, it's performed well in the quarter, including the traditional segments in Canada and the media.
Our financial solutions business, our U.S. group business, and our Australia business performed better than expected and produced a modest profit.
Lots of course, we continue to support our clients and executed on several in sports transactions deployed 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 on attractive transactions. Following our disciplined approach of pursuing those that that's the aligned with our capabilities and advantages.
Let me comment on Cold Midnight, you more broadly.
Because we worked our way through this fantastic, we do expect to see additional cold it might change claims as well as claims from other causes of death that are accelerated or exacerbated by the pandemic.
Well the alternate level and timing of claims is difficult to forget legally, but our financial strength positions us well for a wide range of potential stress scenarios.
Our chief risk officer, Jonathan quarter, we'll 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 Pesticidal changes.
Sure, Yes, we'll likely see some ongoing financial impacts, but the lead that the effects are manageable given our strong financial position and live demonstrated ongoing earnings power of our global business.
Hi, James talented teams gives 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.
Thanks for your interest in Archie and I Hope you all the names safe and well and with that I'll hand, it back to talk to provide more detail on our results.
For example.
The financial results discuss argued capital.
Would it be.
Reported bringing both was 3% slick water.
Organic growth on a constant currency basis, some slides themselves.
But well that is down some that's exactly what's not that we have good when do you see more recently, we view the 5% of attractive given the current slowdown in growth in Asia Pacific.
The Santa mentioned, we deployed approximately 55 million to capital transactions this quarter.
The transaction, we completed well diverse.
Oh part product and by region.
Earlier, but earlier in the quarter, we repurchased 153 million.
<unk> common stock.
We have certain expenditure Barbara.
We ended the period conductor capital position of approximately 700 million.
Our adjusted operating return on equity for the trailing 12 months' will knock him or her response.
You talked a tax rate on pretax adjusted operating income of 24.7% this quarter.
Certainly above the expected range of 23% to 24%.
Early due to the geographical mix of ordering.
I will comment on that we both sides segment.
But you can see on slide seven of the earnings presentation.
The U.S. in Latin America, its traditional business reported a pretax adjusted.
Operating loss of 55 million.
Luckily on favorable individual mortality experience.
Primarily due to higher than expected frequency of Don large claims.
Very low levels of variable investment income.
We have to bodies and further commentary in the earnings presentation materials.
We saw a particularly large concentration and claims for mode over 70 years of age.
Well, it's from older issue you're vintages.
There's also a boat there's also growing.
And I know incidental evidence anecdotal evidence Florida.
That's all cause mortality in the general population with higher beginning in March.
And possibly early.
Well, it's difficult to provide vindictive attribution at this time.
Characteristics of the excess claims lead us to believe it is possible that some of these like the directly or indirectly related to cope with Mike.
Overtime, we do expect to get more information and data the better the sources of adverse experience.
Following our assumption going forward.
Right after the kinds of business reported pre tax.
Adjusted operating income of 43 million this quarter lower than expected run rate, reflecting the impact of we capital markets become related deferred acquisition cost with her.
Capital markets resulted in lower fee income on who will be.
Lower account balances.
Moving to Canada. The traditional segment had another good quarter those down over the prior year quarter.
Pes adjusted operating income of 36 million.
Results this quarter, we flipped favorable individual mortality experience, while the year ago, GERD was particularly favorable.
And the Europe Middle East Africa segment, our traditional business reported pretax adjusted operating income of 17 million.
Earlier talking favorable underwriting experience.
Reported premiums totaled 300 embarking on.
Sub 70% on reported basis.
Versus a year ago like up 11% on a constant currency basis.
And be a financial solutions business, which includes asset intensive longevity and feed to be based transactions reported pre tax.
Adjusted operating income of 36 million relatively flat compared to the prior year. This lucky bought absolutely.
Favorable long term w. experience and some calling it catch up reporting.
Turning to our Asia Pacific traditional business and tax adjusted operating income totaled 24 billion.
Quarterly swaps the negative effect.
Reporting catch ups for two quarterly related to one corn.
Result, in Australia were better than expected, reducing the modest profit this quarter.
Reported Asia Pacific traditional premiums was slightly down reflecting slower growth in Asia.
Asia Pacific Financial solutions business reported pretax adjusted operating income of Pendleton.
The second strong new business of age or.
We are well we continue to provide broad based solutions work or it's like a bunch of our capabilities and product development.
And financial solutions.
The corporate and other segment reported a pretax adjusted operating loss of 19 million.
Lower than they expected average run rate.
It really primarily from lower expense levels.
You did reported net loss for the quarter.
We had some below Lauren items that were more significant than what we have seen in past quarters.
And what was lucky, but reflective of the turmoil in the financial markets.
Definitely towards the end of March.
The bothered about conciliation of pre tax income or loss to pre tax.
Adjusted operating income on slide going to burdens presentation.
There's a modest amount of investment performance, primarily related to the energy sector and emerging markets.
Lastly, our chief investment Officer will comment on our investment portfolio. After my comments.
We reported a loss.
Credit derivatives are well known as the 36, primarily due to the widening of credit spreads in the quarter.
It's primarily relates to create structure funds withheld basis.
How are your folks out there can be volatility in the short term during periods of stress in the market.
Now to county volatility should be berks overtime minimal that buffer.
We continue to execute on the prudent capital management strategies.
The goal of having sufficient capital to run our operations.
For our ratings and provide solid returns for shareholders.
We believe argues balance sheet is wrong.
Excellent access capital position stands at 700 million.
We are comfortable liquidity.
Substantially increased our liquidity in the quarter. That's casting parents equivalent increased from 1.4 billion that's the into 2019.
Good point 8 billion up your March.
Argues leverage ratios that are comfortable level relative to our targets and limit.
Like the highlights that we have a relatively stable liability profile.
Slide 11.
What blow liquidity and disintermediation worse.
You're confident that argues in a position the barron's through the current environment.
[music].
Do expect would be some ongoing cold weather 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.
We're 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. Good Leslie Barbie argue action can basketball for and provide additional comments on our drugs investment portal.
Thanks Todd.
As we know in addition to their health consequences of Cobot 19, the actions to flatten the curve it affected regions has significantly impacted economies and markets globally.
Monumental central Bank and fiscal policy actions have been launch to help bridge this period of economic interruption.
Many companies have moved to build cash to whether this period, including a record corporate more conditions.
Nonetheless, it was a stressful time for the economy in market.
Equally Archie eight high quality investment portfolio is well positioned for a challenging economic period.
Well diversified across asset classes sectors issuers and by geography.
As highlighted on slide 15 as of March 31st our average portfolio quality with single agent with over 95% of our fixed maturity securities and investment grade.
Portfolio has a lower mouth ordinated debt and equity investments.
Hours, our investment strategy positioned us well within underway to entertain entrant overhead leverage triple B investments.
All our commercial mortgage loan portfolio had an average loan to value ratio of 58% and our CLL portfolio had an average quality of double.
Importantly, we are financially strong reinsurance company and while we proactively manage the asset portfolio arcade 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 position portfolio coming into 2020.
Hi, so impressed with things each man and expertise support global investment professionals and the energy they bring to me that's 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 make it began over 30 years ago. How impactful. It is to have seen things that starts at the house slip successfully navigated multiple difficult economic and market cycles.
That perspective drives our investment process commitment to ongoing deep diligence and risk management.
Okay upon downsides, whereas and principal protection in our investment collections in our surveillance.
From a top down portfolio management perspective, we utilized scenario stress analysis.
For more asset allocation I total portfolio with taking.
Our mission is to contribute arcades financial strength and liquidity as well as our th 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 or where it.
Our defensive portfolio positioning with insights well ahead of 2020 because of our gets put in risk management approach focused on avoiding uncompensated risks. As example, I'll highlight two of our long standing strategy could perspective, triple B and our investment.
In energy.
Information is provided on slide 16 at 18.
It has been a known feature of this credit cycle, but a portion of companies within the Triple B rating category had pushed leveraged on traditional triple the metrics our strategy was to avoid over levered triple B, except will reassess their appropriately compensated.
It looks like at they've provided some analysis that we think demonstrates the success of our strategies. For example, as of March 31st one nature. One major rating agency had put 8.8 percentage of the Triple B index Universal on negative breathing watch.
Our portfolio has about half of that amount in that category.
Simply better outcome.
As another indicator, we had we not only have a lower portion of our triple deeds in Triple B minus then the market index proportion.
Our triple B minus holdings, notably outperformed the triple they want it quite to the index and the turbulent market action in March.
On the energy front, we have had a long standing underweight due to our assessment of rents relative to the previous higher oil prices.
As shown on slide 18, almost half of our holdings were in midstream, which are the more defensive less oil price sensitive sector.
And 87% of our total holding for an investment grade.
With regard to our portfolio non spread investment yield.
First quarter is 4.08%.
Yes for since the fourth quarter was primarily related to less upsets full variable investment income.
The new money rates in the first quarter was 4.2 old percent. It's was supported by strong first fear in private after production at helping spread over public market crops.
Starting in March we focused on accumulating cash given negative developments related to cope with the economic outlook, because all capital markets. So paused started putting money to work.
The last topic I'll comment on its variable investment income or the I.
First quarter, we admit all pie. We believe this is primarily a timing issue we expect to catch up on the majority of our expected 2021 run rate for VI over time, although current market conditions in meaningful portion of that income could be pushed fleet given year or into 2021.
Private equity realizations and real estate choice venture sales, such a quick and trade at a large share of our strong performance over time.
If you want those assets being sold in the first quarter those assets still were tied in our portfolio and provide income at a future point of sale to occur.
That said activity right now both of those markets for all market participants is primarily focused on managing existing investments. It maybe a few quarters before market conditions are favorable realization, so sales and those types of assets.
Those are two of the key portfolio picture Congrats to chart gains that I hope will help you better understand fix fishing of our asset portfolio.
With that call handed over to our chief risk officer accounts importers.
Thank you Leslie just.
One thing I would like to provide some insights into our chase global mortality business and our exposure to cope with 19 impacts, including why we believed that the additional mortality rates in our business will be less than those from the general population.
I'll begin with a review of the geographic and age characteristics several mortality portfolio on slide 23.
Our chase mortality risk is diversified across multiple geographic regions as measured by risk announce our largest walks in the United States, which represents 45% to our global exposure.
The next largest walkie order or the UK at 17%, 12% in Canada, 5% in Australia, and 4% in Hong Kong and total be five countries represent 83% of our global mortality exposure.
The balance of Asia, Excluding Hong Kong is 11% of the global tool spread across multiple countries in the region exposure in a meal, 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 colder 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 assessing any companies exposure to cope with my team.
Rich and global data is clearly, indicating that the virus has a much more severe impact on older age individuals and particularly in those particularly age 70 older.
Page specific reporting in our key markets are showing that 70% 80% of general population guests are occurring at age is 70 anywhere.
The table on the bottom right of slide 23 shows the portion of our games mortality exposure as measured by not at risk the age of 78 older compared to each country's general population.
In total our key market exposure stages sediment holder is approximately one third of the general population.
This means that we would expect the additional death rate for our business to be materially less than those of joking population statistics.
Emerging data is also showing the individuals as pre existing risk factors and conditions, such as cardiovascular disease, chronic lung disease diabetes hypertension, and obesity make up the vast majority of that.
Early April CDC data indicated that almost 90% of U.S. cut was 19 hospitalizations involved one or more of these types of some of it it is more than 80% of U.S. I see you admission to chronic health problems.
Similar results will be reported in other countries.
This is an important stock at an estimated ultimate mortality rate on a block of insured lives. That's the other wedding process as well as higher socioeconomic status at those buying insurance, resulting in overall healthier profile relative to the general population.
Evidence of the gateway healthier profile of insurance compared to the general population is seen we can bring all cause mortality rates between these two groups.
Well I believe it or mortality portfolio were experienced lower additional mortality rates into general population due to these agents health status differences. It is still too early to accurately estimated ultimate impact in closing I too want claims.
There are many additional factors that will influence the future caution to virus, including country specific circumstances, such as hospitals capacity testing infrastructure and concentration as well as helpful public and private actions are managed.
Sure there is still not clear out given my team has been talking all other causes of death, both in the short term along to him.
And the timing and effectiveness of treatment or vaccine will play a significant won't impact to the virus.
As an illustration of the potential impact a token 19, if it works a calibrated to 100000 U.S. general population guests and apply similar set of impacts globally, which implies 1.4 million additional global General population does we estimate this should result in extra pretax mortality claims.
RG age of between 400 million in $500 million.
Want to emphasize that this range is based on multiple underlying assumptions that are still developing and why don't you, particularly Holly three areas that could lead to lower impacts as you see actually experienced emerge.
First this estimate assumes that all claims are from marginal extra guests and it is likely that somebody's will be acceleration just gets some people who would have died from other co morbid causes an exciting future years.
It also seems like countries will experience a similar age adjusting and talk of additional house, which we can always she developing differently. For example, Australia in Hong Kong has had very little additional mortality, thus far which I mean, no material impact RJ in those markets.
Also in the different populations such sub segment with any country will be equally in package and we are seeing emerging data that anything.
For example, lower socioeconomic someone service rules long term chose told me what fish English to the extent that there was a lower life insurance penetration in some hard look at some shaking. It should result in lower overall claims for both featuring chemistry and Archie.
[noise] finally, it was worth noting Archie also has to material balked at longevity risk.
Which actually is a partial hedge settlements pellet exposure. The majority of all Ingevity business is concentrated at the older ages, approximately 70% of that exposure. It just 70.
Thank you would expect you can teach devoted significant resources to gathering in analyzing data liaising with external exports and drawing when they get change at knowledge gained as one of the world premiere life and health insurers.
Given what we know now and looking at a range of potential session or else. We believe that additional claims she until the Nike will be well below a wanting to other 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.
I'll turn it back over the top motion.
Thank you Jonathan that concludes our prepared remarks that we'd now like to open it up to you for your questions.
Thank you if you'd like to ask a question. Please take note by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function switched off Tonight, you pick up the retail equipment.
I just I want to ask a question when I take the first question from BT come to having a patent it. Please go ahead.
Hi, Good morning, Thank you for taking my question Oh.
In terms will be used smoke. So we appreciate a or b b, but they should disclosure that jumped people bronze coupon.
Just wanted to get Bobby in touch with a quarter like I guess, how many other basically did you see in this quarter and has their computer shoot and then how do you didn't have it creates trends that kind of two kilograms in April.
Hi, good morning hands free I think I'm maturing that question over to Alain and Jonathan.
Sure. So so this is glenn.
You want pretty well in terms of reporting planes in the quarter certainly there were very few.
Colgate identified claims that appeared in the quarter. Although some have started to come in after the ended the quarter related to <unk> to the quarter and then we're seeing more in April.
So so clearly in April I think we are seeing evidence to cope with the claims.
And you know as we said before it's really difficult to comment on.
Any one month at a time, but but going back to the first quarter.
The we did have some impact from program, but I don't want anyone walking away with the idea that it was all code.
Jonathan to add.
I don't know nothing for me.
No I might I might add one one thing I have three as you're well aware a cause of death reporting trashes always like a show our first quarter and outlets shares is limited on that basis and it will take time for that.
I've got to analysis to complete and in addition, there is some uncertainty with respect to the coding Oh Cobra and cobot related deaths throughout the course of the early part of the pandemic.
Understood.
So that makes you can get she or he topping management, so and that's been viewed.
Currently suspended share repurchases I guess, what factors do you see before you start contemplating because of some buybacks.
I'm sorry.
What factors will be look out for.
What we see part of that so.
Yes, what do you need to see another two or for each year, two person or buybacks.
You know for sure. So we're pretty consistent you know we reports one are deployed capital Oh as we've talked in the path back into the business to support the transactional activity. So that message has been trained we'd still like to deploy the capital back into the business can support no track.
Transactions, all but more specifically you know we need some more clarity around the ultimate okay path of the.
No pandemic spoke wrong, what does that mean from Oh.
Additional mortality you know claims overtime as well as ultimately you know.
All the different global economies, what does that mean for these investments will start to we want to see some more.
Year to year round, where we expected ultimately to go before.
He would reinstate.
Our share repurchases.
We wouldn't I take the next question from and you take a man from credit Suisse. Please go ahead.
Hey, good morning, everyone I'm going to get a sense of G.
<unk> gross out book in the United States, we saw.
Traditional net premium close.
About 1% versus historically more likely in 2% to 4% range and and then of course it would pressures in Asia. So.
<unk> as it would be in the near term.
How do you see premium grooves and boost the U.S.
And.
And the rest of World and then the second part D.
Being how did you how do you think demand will be affected.
The longer term with respect to buying individual life insurance.
Well I could turn that over to lend to commence.
Yes, sure. So I think certainly in the short term Ah I think you can expect premium growth to be somewhat pressured we are seeing signs of slowing production.
Both in the U.S. and Indonesia, as a result of being Dr. Cope with.
And stay at home those those kinds of elements now I'd like to think though for sports I think it's it's definitely too early to talk about sort of long term repercussion I'd like to think that the value of life insurance will have proven hopes to this through this pandemic and that in fact, we might be able to bridge the gap.
A with the underserved markets that exist in different in different markets.
Got it and then certainly from a 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 prudent go standpoint, there are we'd expect to see a continuation of transactions over the course of over the year into next year.
And as you talked about transactions.
Can you give a little color on what types of transactions, you've seen I I think Dan mentioned the pipelines.
Getting called and maybe tie.
Intuit as well.
So what I'd suggest is the Dutch transactions were looking at a 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.
Worked our way through their economic <unk>, the current economic environment.
It would 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 a before transacting slippage you know we talk about transactions or are typically a lumpy in normal times.
And that's probably very true of ER and probably more so what we're seeing today.
Yeah.
And maybe if I could.
Oh gosh, maybe if I could just at a common churches, we continue to see the P.R.T. opportunities in Europe.
And so and perhaps in part because the pension plans there had less equity exposure relative to their U.S. counterparts show funding ratios are not 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 or for the region's just alluded to in Europe as a lend mentioned continued interest in Asia for the combined product.
Elements from capital solutions that that age that is very good in our pipeline.
And I'd say in the U.S., often intensive markets, maybe a little slower than in the recent past, although there are opportunities in that pipeline. A we are aware that some companies are.
Thinking about an actively preparing to bring additional blocks to market. So overall again good pipeline similar type of opportunities as we just spoken about in the past.
They haven't just just mentioned that whole thing.
It's actually sort of fit into this scenario is there anything different there.
I had no there's nothing different there and yes, it fits into the use of various opportunities that I've described.
When I take the next question from Erik Bass from Autonomous Research. Please go ahead.
Hi, Thank you a bigger question on mortality claims of now had negative variance of 50 million plus for the three straight quarters I think have been adverse and in total for brown fixed rate real is the drivers has a 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 a alleging that Jonathan to comment.
Sure why don't why don't I start its certainly we have seen a number of off quarters in the U.S. over the last few years <unk>.
I'm not sure it's quite fixed rate, but you know what I'd say the experience. We're seeing this time around as maybe a little bit different from what we've seen in the past typically when we miss on on U.S. mortality is attributable to a large claims volatility.
Which as we've talked about tend to average out over over longer periods of time, we've also called out a slowing of mortality improvement in younger in Middle Ages.
In recent years and I think we've talked about this at Investor Day 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 few years we've seen.
15, or so years of of slowing mortality improvement.
But what we're seeing but we're seeing this quarter in terms of higher frequency on on small policies claims that 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 everyday.
The suggests that or some of the co. Good reporting for example is a little bit late.
You've seen I think recently a report, but the first diagnosis in France might have been as early as December 27.
The first death in the U.S. in Santa Clara is now I think February six which is two or three weeks earlier than than previously thought.
Is sort of tends to point to influenza like or potentially beginning coated 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 weakness this quarter.
Yeah, and then got Oakland, maybe I'll just add that.
Just to the question on Reassessing I mean, we regularly and constantly reassessing metallic sick patients not just me U.S., but the globally. So [laughter]. The POS system, you should not be go through to make sure we're comfortable with our all around our go forward expectations.
Thank you and then they could switch to the investment portfolio. Appreciate the additional disclosure could you just provided 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 to ratings downgrades affect your capital given that a lot of your businesses outside of U.S. statutory entities.
Oh, Hi, but let me start Oh I'm sorry go ahead now [laughter] I don't know, how it's going to say why don't we start with lastly, and then perhaps turning it to Todd on the capital crushed.
I love that plan.
This looks like so odd you know that there's certainly a difficult period to predict I'm, giving any unusual mandated shutdowns that offsetting policy.
So our approach has been actually look at a variety of stress scenarios and eat Napster factor is from past mirror cycle to our portfolio characteristics, meaning historical rating migration impairment loss severities, and so forth and in some cases.
Increase the stresses Ah so we're considering a range of cases at the moment, the second half and our current expectation.
Oh ironic not economic activity, which is an important factor here is that a it's somewhat been sales into second quarter and continued gradual recovery over multiple quarters.
Given given our stress testing and building off that central case, but not focused on only that our top down lastly, with their current cats estimate over the next several quarters for impairments could be that 300 billion to 400 million range.
Like say that to give you guidance, but importantly, based on our bottom up a walk so we really dug into all the credits to see how they're doing listen environment.
Based on that bottom up look we're not seeing that level of problems in the portfolio, we just want to.
Plans for unrealistically managed through a difficult environment I'll note that somebody aspects I discussed before in are highlighted that deck point out that we have any defensively positioned portfolio with in our category, but we did apply those top down a more generic stresses to make sure we're prepared demand.
That's through this.
And then I would say I know toggle comment, but what we connect those two capital and tax are all very manageable and that's without even assuming a that take any portfolio management action.
Maybe just wrap it up.
On the though the RBC related companies they'll based on the analysis that sort of locally they'll just walk through will give an overview of we think it's very man as Warner RBC ratio.
Probably could absorb impacts either the crowd Ticky management action, but but very manageable and then.
Don't forget it.
Enterprise looking at it from or no economic capital and are very big capital perspective.
The way we are would be when it's 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 at the company.
We will now take the next question from Ryan Krueger from KBW. Please go ahead.
Hi, Thanks, Good morning, I'm going back to the 400, the 500 million mortality scenario for 100000 U.S. that it can it can provide a little bit more detail on that I guess in particular I.
I guess, where there were there any adjustment made for the age distribution or.
Or general who are different than insured population versus the general population or did that steel.
I'm kind of did not make any adjustments for those types of backers.
I'll, now turn which will help it to Jonathan.
Yeah, Hi, Ryan Thanks to the call. Her question Yeah. So just specifically we have made adjustments are both of those factors. So what we've done as we've taken.
Fraction of population related deaths, and then layered on top of specific to teach distribution and geographic distribution.
Also adjusted for observed differences and expectations between the health status of insured lives for Cisternal population lives just to give you a sensor that the impact of both of those factors combined on a global level is about a 50% production, though it does vary.
By country. So as an example, you know each distributions are not uniform across our global business are you would expect to see.
Your friends adjustment for geographies with higher exposure to older ages, the most with lower although there isn't an adjustment in all cases, because our population is younger for certain has less concentration of those older age is fungible collision and.
And of course, it is still unclear what the ultimate difference will be between insured lives in general population lives, but that's becoming clear and as we get experience and claims reporting refine adjustments.
Okay got it adjusts for insured population versus general population needs distribution I get that does not adjusts for co morbidity offsets and longevity exactly right to think about it.
Yeah, that's right. So so our lunch evident awesome, where we would we estimate it would be approximately or up to 10% of that amount. So that would be a reduction I guess basis, which include a lunch or that exposure, but you know that's not built into the 400 500.
Got it and then there was some noise enough intensive this quarter can you just give updated.
Outlook for your normal run rate earnings in that business at this point.
I'll hand that went over to talk to comment.
During the quarter right there.
And ER market turmoil the Oh.
Some of the primarily on the variable annuity portfolio that we have your account values work down so the expected.
No projected future figure income if you will walk down in that accelerated some DAC amortization.
But you know once things get back to.
No I call it.
Come back to normal I mean, other run rate, it's probably still valid, albeit probably at the lower end, though.
Weve provided.
Okay, great. Thank you.
The next question comes from Dan Bergman from Citi. Please.
Hi.
Good morning, I guess first thing just talk a little bit about the sources of cash refunds you have to fund any potential could 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 domain likely funding sources or are there other things we should be taken I like that is.
So you know the alternative content to be able to more severe and he thought that would be great.
Yeah.
And they want me to take that.
Yeah, I'm, sorry talk that is a todd crushing [laughter] here as far as some liquidity.
Were very good shape, there no over the course of Alaska.
A few we probably have.
Built up some additional liquidity is but as I mentioned to make sure that we can cover what we feel are you going some are more stressful.
Scenarios on the claim sorry, and also you know as you know that the claims will be paid out over several quarters it won't be a onetime.
Hi, Good brand so we feel very good on the.
On the liquidity sorry on the capital side, we came into this with some excess capital.
Are we always are looking at various forms of capital can make sure week or in a position too.
Yes on attractive transactions that we are seeing the market as well our.
Comping paid no capital levels sufficient.
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 had been the execute on I think it's still an open question that as we see how this evolves.
Got it saying thanks, so much and then maybe shifting gears a little bit just with the improvement and Australia results. This quarter, you're following a period of weakness. So could you give a little bit more color and what drove the improvement there relative to the recent trends and just any updated thoughts on the outlook for profitability not reaching going forward.
Or perhaps Oh line and that Todd.
True like why I'd say, obviously, we're very pleased with the results, but I'd be hesitant to suggest that the you know the turnaround is over we're benefiting from rate increases to a greater extent as the year a in the quarters progress.
Certainly continue to engage with clients in all aspects to remedy the business, but in terms of guidance for the rest of year I'm guessing, but you know was probably.
Phil Guide to a loss.
But maybe smaller than we might have thought but up but I think it's it's very early in the I'd like to see a couple more quarters play out.
Yes, I agree with Al's comments and everything I would add is that there were very nice to see the Australia or performed fairly well.
Pretty much across the different business lines, and both individual and group side. So.
The positive positive signs, but we still need to be even begun gene no doubt block very closely.
Great. Thanks, much for taking my question.
The next question comes from Alex <unk> from Goldman Sachs. Please go ahead.
Hi, Good morning, first personally I had is just sort of higher level on capital.
When you when you.
Go through the scenarios you've laid out thinking through your your one and 200 years scenario and so for US I mean, there's anything about this experience change through the ways you could think about capitalization kind of on you always cognizant and on a go forward basis.
Is there anything that would change the way that you view.
Excess capital and as you read through that.
Jonathan do you want to take that they Ah first part of that question about are thinking on 2200 type of capital level.
Yes, I mean, I think you know obviously, we're still in the middle of the Pandemics or 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 or one or 200 sort of assessment of other exposure. I think you noted that the dollar amounts that we have attached to that top level I still feel very comfortable with.
Still believes that the spend and the cool result, and no one else would impact which will be well within the one or 200 capitalism. So at this time I wouldn't have an expectation that we would revise or change your expectation on on what the total level of capital would be.
Yeah, and how it's on the second part of that question.
On a go forward basis, 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 you go through there for the.
If there is a different.
Capital Mic on capital structure or anything we should.
You know added brought our overall you know tool kit.
Going forward, but I think it's too early to give you a.
But it doesn't after I think what weve historically done as far as how we.
Well structured our legal entities that have.
No liquidity facilities across the various enterprises.
I will serve as well as we go forward here, but as far as change in the overall capital model and mix.
Too early to give you the clinic advances.
Got it.
And then maybe just on pricing could you talk at all about pricing in seating rates thing are you seeing and there was there.
And property and casualty yet.
You know usually situations, where you have a catastrophe and doing it helps pricing on the other side of it and here I get that question sometimes on the.
My wife's side and whether you know something like this would influence pricing you're not going forward. So you'd be interested is there any comments on that and you know maybe it's a good you can impact some of the in force transactions and pay for itself.
No I when I can turn that over to you.
Sure.
But I think there's two separate questions. There if you think it though the traditional business certainly we're pricing for.
The business for very long periods of time.
We do tend to a Josh.
Year over year as mortality.
And other factors involved whether they'd be interest durability elements I'm sitting here you know a few weeks maybe months into depends I make its probably difficult to.
Or talk about how that might impact pricing over the future because as Jonathan mentioned earlier I think it's it's still too early to determine for example, whether this might be an acceleration of Ah you know mortality in terms of people at the older Ages, who might have passed a in the next few months or whether there's something a little bit more.
Sure.
Fundamental that might setting so I think it's probably too early but typically we certainly don't tend to move pricing around adds drastically as in the PMC industry on a transactional basis I think certainly and this would apply to traditional as well we are certainly.
A very keenly looking at elements of anti selection or reasons why transactions, maybe coming to the market and then applying a I guess, what I would term our usual diligence.
The process and so.
I think it'd be very transactional specific as to whether a pricing moves up and down but it's also impacted by the economic environment. The ability to source. The right types of assets that you know those kinds of question. So I'm sure if I'm not giving a very clear answer, but it's a it tends to be I'm a little bit.
Specific to any one transaction.
And that sort of citizens Jonathan in me that can just to that as well that definitely from a risk selection perspective as you alluded to booking selection, we are making adjustments to our practices and the time for underwritten both on an individual cases and on a on more or larger transaction basis to take into account sort of the risk profile and then some expense.
Pinches.
And I think it's also fair to say on on group life and Health for example, where that is annually. We priced business. We may see earlier impacts there, but again, we're working our way through all right now.
Understood. Okay. Thank you.
The next question comes from Tom Gotta hair from Evercore. Please go ahead.
[laughter].
She's in check your mute function and switched off called <unk>.
Sorry, yeah. The four to 500 million dollar impact can you can you give a sense for how much of that we'd be from the U.S. versus non U.S.
Oh, 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 a particular at the geographic level.
That's what I would point you to just to give you a directional offenses. If you look at our minimum at risk distribution that weve that we provided in the slide.
That's sort of as a baseline, but then you would be to sort of factor in the fact that are older or businesses that are skewed more to older Ages would have to somebody who's done a higher proportion impact.
And what that minimum interest would show that will give you a directional sense, but but if it gets to really just given some uncertainties.
Got it and the reason I asked it should the sensitivity was 100000, U.S. dash and 4.4 million of.
Global if I took mercury one 1.4, yeah 1.4 global soon so it's what we're doing as effectively taking a scenario.
Oh applying to the U.S., which is about <unk> 0.3 per thousand tons. iOS population gives you 100000 doesn't apply net change scenario to other countries across the world and an eight major Justin.
Gotcha and does it is it fair to say I mean, given where we're at now I think we're over 70000 U.S. dash. This this might actually be that the two to impact.
Yeah, the pace based on current trajectory and maybe there's a lag and delay given me reporting of claims but.
I mean, it seems to me like this is a reasonable base case, just given where we're at <unk>. Good. Good we found high but you know it could be some underreporting going on there but is it fair to say that there's probably more of a base case at this point.
Yeah, I think your point about global wondering if that's very important to take into account affected our businesses global and it's not all in the U.S.. That's something you know as I mentioned, a couple of examples of Australia, Hong Kong site, where there's no I think in total between those two countries. There's 100, Jimmy population. That's will clearly that would be almost zero impact US also I guess I'd point you.
Back to some of my comments earlier, but.
You know some areas of uncertainty, which may result in lower overall impact to us I think that combined with no sort of the timing element that you put your run and I don't if we can definitively say this would be a number that we see a corner.
You know I think we need to see I guess, what what supporting comes in and you know maybe different than this.
Gotcha, and then be I'm.
Kind of within that the UK.
Related impact.
No there's another.
Big sensitivity given.
You know are you able to shed a little bit of light on since that is kind of a very overweight exposure for you what what you're kind of baseline mortality expectation within this sort of global.
Overall assumption as.
Oh, Yeah actually I'm glad you asked about the UK so.
Interesting dynamic we have in that market is that that's where most of the vast majority of our longevity business is written so when you look at the UK. The net exposure UK those two pieces largely offset I'm, just not perfect and things will.
Obviously moved kind of age distribution, but because our longevity business is skewed to older Ages.
We're somewhat unionized to the ultimate death rates in the general population UK because the losses, we would expect to see on mortality book would largely be offset the games on the longevity business.
Okay. That's helped Jonathan I don't think correct me if I'm wrong.
But in the UK.
Mortality side some of our underlying churns on that on the younger clog, because it's primarily tied the mortgage insurance.
Oh, yeah, but that's really taught me yeah. That's a good point another thing to point out as our UK age distribution, it's definitely skewed to be there to be much younger than some of the other countries, where we operate which will reduce the mortality claims expectation.
Got it that that's helpful. Thanks, guys.
[noise] [noise] as there no further questions on that kinda called back to your hosts for any additional are closing remarks.
Okay.
Thank you everyone for joining our call today for your continued support of RG a.
Before we go I wanted to mention at our Investor Day that was scheduled for June 4th.
We are postponing that through the coal that.
19, we will provide more information at this event is rescheduled for later date.
Thanks for your understanding and if you have any questions. Please feel free to reach out to Jeff's again. Thank you very much up for joining us this morning.
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