Reinsurance Group Of America Inc Q2 FY2020 Earnings Call

Good day, everyone. Welcome to the Reinsurance Group of America's Second Quarter 2020 Results Conference Call. Today's call is being recorded. At this time, I would like to introduce Mr. Todd Larson, Senior Executive Vice President and Chief Financial Officer; and Ms. Anna Manning, President and Chief Executive Officer. Please go ahead, Mr. Larson.

Thank you. Good morning, and welcome to RGA's Second Quarter 2020 Conference Call. With me this morning on the call are Anna Manning, RGA's President and Chief Executive Officer; Alain Néemeh, Chief Operating Officer; Leslie Barbi, Chief Investment Officer; Jonathan Porter, Global Chief Risk Officer; and Jeff Hopson, Head of our Investor Relations. We will discuss the second 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 statements. Actual results could differ materially from expected results. Please refer to the earnings release we issued yesterday for a list of important factors that could cause actual results to differ materially from expected results. Additionally, during the course of this call, information we provide may include non-GAAP financial measures. Please see our earnings release, earnings presentation, quarterly financial supplement and website for discussion of these terms and reconciliations to GAAP measures. And now I'll turn the call over to Anna for her comments.

Thank you, Todd. Good morning, and welcome to everyone on the call. I hope you are all well and staying healthy. Let me take a moment to express my heartfelt sympathy to everyone who has lost a member of their family or friends, and to all who are suffering from the devastating economic consequences of this pandemic. The health and safety of RGA's employees and their families continues to be a top priority and I would like to express my ongoing appreciation for their dedication and commitment to ensuring that our global operations continue to run smoothly and productively. Throughout the quarter, RGA teams provided uninterrupted and seamless services and support to our clients. We shared our expertise and knowledge through numerous webinars, virtual meetings and published articles, all of which were well received and much appreciated. We are proud of these ongoing contributions to thought leadership during this crisis. Turning to the quarter results. We reported adjusted operating EPS of $1.36 for the quarter and are pleased with these results in the context of this pandemic environment. Specifically reported COVID-19 claims in the quarter totaled $161 million, of which $128 million were in the U.S., adjusting for cause-of-death reporting lags and IBNR. Total COVID-19 related claim costs in the quarter are estimated to be $300 million globally, of which $240 million were in the U.S. individual mortality business. The remaining $60 million claim costs were mainly in the U.K. and Canada. COVID-19 claims outside of the U.S. individual business were in large part offset by favorable morbidity and non-COVID-19 related mortality experience. We have revised our mortality model assumptions and scenarios to reflect our own emerging experience, updated information and data on the pandemic and in consideration of the ongoing uncertainty on the future path of the virus. These updates have resulted in an overall modest decrease in the estimated impact on our results despite projecting a higher ultimate level of U.S. population deaths, reflecting some of the conservatism we previously highlighted when describing our model. Jonathan Porter, our global Chief Risk Officer, will provide additional information on the model updates shortly. Beyond the effects of COVID-19, we were pleased with the performance of our business as results for most operations were in line or better-than-expected and some operations performed particularly well. We have long highlighted the power of the earnings engine that has been built over the last five decades and highlighted the diversification benefits from our global platform. This quarter again reinforced the resilience and the value of that platform. We completed several capital motivated financial reinsurance transactions in the quarter. This quarter, we deployed a minimal amount of capital into in-force transactions, in part reflecting increasing competition, especially on U.S. asset-intensive opportunities. We continue to see opportunities in North America, Europe and Asia. We're taking a prudent, balanced and disciplined approach to capital deployment during this crisis by carefully weighing opportunities against long-term financial and strategic value. We have been and will continue to be very good long-term stewards of our investors' capital. Although there remain some challenges and unknowns, RGA entered the pandemic in a position of strength. During the quarter, we took proactive and measured actions to raise capital to further strengthen our balance sheet and build additional buffers. We also reduced risk in our investment portfolio, increased our liquidity and ended the quarter with excess capital of $1.4 billion. I think there's plenty of evidence in our results this quarter to demonstrate that our underlying earnings power is largely intact and that we are well positioned to successfully manage through a period of continuing uncertainty for the virus and the global economy. We are well placed to emerge from this pandemic in good shape to capitalize on opportunities and to continue to build on our strong track record of creating long-term value. I remain confident in the long-term value of our business, in the RGA team, and in the strength of the RGA franchise. We are leaders in the life and health reinsurance industry and expect to remain so for many years to come. Thank you for your interest in RGA, and I hope you all remain safe and well. Let me now turn it back over to Todd to go over the detailed financial results.

Thanks, Anna. I will review the financial results, make some comments on investments in RGA's capital and liquidity position. Beginning with consolidated premiums, we reported premium growth of 1% for the quarter, our organic growth on a constant currency basis was approximately 2%, down from the mid- to high single digits of prior periods, reflecting in part a temporary slowdown of growth in Asia markets from the lockdown actions as well as expected reduction in Australia. Turning to the segment results lifted on Slides 6 and 7 of the earnings presentation. Starting with the U.S. segment, the U.S. and Latin American traditional business was negatively affected by excess individual mortality claim costs of approximately $240 million. We believe that the excess mortality is related to COVID-19 based on our analysis of emerging data, specifically, a significant amount of the claims this quarter have been reported with COVID-19 as the cause of death. And we assume a similar percentage across the remaining claims where we did not have a known cause of death yet. The majority of excess claims were concentrated in policies over the age of 70 and policies underwritten more than 15 years ago, which are consistent with the wearing off of underwriting selection and the potential for more comorbidities. And we also saw the highest mortality ratios in states that recorded the highest general population COVID-19 deaths, specifically in New York and New Jersey. Mortality ratios in those states were significantly elevated when compared to other states. Our conclusions are also consistent with CDC reports of significant levels of excess death in the quarter that indicates that the vast majority of these are believed to be COVID-19 related. Also in our U.S. traditional segment, both our U.S. group and individual health lines of the business reported results that were modestly better than our expectations. Our U.S. and Latin America asset-intensive business reported a good result, benefiting from the rebound in the equity markets. U.S. and Latin America Capital Solutions reported an increase in adjusted operating income, resulting from new business growth. Moving to Canada. The Traditional segment had another good quarter. This reflected a moderate amount of COVID-19 claims, partially offset by favorable performance by our group business, absent the impact of COVID-19, Canada's traditional segment would have had another solid quarter. In the Europe, Middle East and Africa segment, our Traditional business performed in line with our expectations overall. This segment was impacted by a moderate amount of COVID-19 claims in the U.K., but this was offset by favorable morbidity results across the region and favorable mortality in Continental Europe. EMEA's Financial Solutions business had a very good quarter, reflecting favorable longevity, including some client catch-up reporting. Due to the lags in reporting, we don't believe results reflect any material impact from COVID-19, but we would expect to start seeing some benefit in the second half of the year. Turning to our Asia Pacific Traditional business. Asia had a solid quarter, benefiting from in-line underwriting experience with most geographies in line and no real outliers. The results in Australia were better than expected at a breakeven as the group business was profitable while individual disability was at a loss. Our Asia Pacific Financial Solutions had another very good quarter, benefiting from the growing in-force and new business activity. The Corporate and other segment reported pretax adjusted operating loss of $11 million, lower than the average run rate, primarily from lower incentive compensation and travel-related expenses. The effective tax rate on pretax adjusted operating income was 20.3% for the quarter, below the expected range of 23% to 24%, primarily due to the geographic mix of the earnings, lower global intangible low tax income or GILTI, and favorable adjustments from filed tax returns. Looking at Slides 8, 9 and 10 in the earnings presentation. As we expected, we saw the reversal of certain first quarter below-the-line items based upon a rebound in the financial markets and their influence to hedging and embedded derivatives. The non-spread portfolio investment yields ended the quarter at 4.07%, relatively unchanged versus March 31. Our increased cash levels put some downward pressure on yields as did a lower new money rate. Variable investment income improved slightly versus the first quarter, but were still below the average run rate that we would expect. We believe our investment portfolio was defensively positioned coming into the crisis. Overall, the portfolio of credit impairments was relatively modest in the quarter. Our portfolio average quality of A rating was maintained. We also took actions to reposition public securities where we assessed the risk-reward outlook has become less favorable. On Slide 11, our excess capital position has increased to $1.4 billion, following the capital raise of $500 million of common stock and the net $200 million of senior debt issuance. I'd like to point out that our earnings engine was strong enough to absorb the impact of COVID-19 this quarter under our organic growth and fund our dividend. We had considerable liquidity at the end of the first quarter, and we added to that in the second quarter, cash and cash equivalents increased to $4.3 billion from $2.8 billion at the end of the first quarter. RGA's leverage ratios are in a comfortable level relative to our targets and limits. Our current liquidity and capital levels combined with the underlying earnings power of our business reinforces our confidence that we are in a position to manage the uncertainty of the current environment and to capitalize on opportunities, support our clients and continue our strong track record of creating long-term value. Looking forward, we expect to see some level of ongoing COVID-19 impacts that will negatively affect our earnings. Although at this time, it is difficult to accurately predict the timing and the ultimate impact. We expect that RGA's strong franchise will continue to produce long-term value for our shareholders. However, given the obvious hurdles and uncertainties, it will be difficult to achieve our intermediate targets in the near term. We will not provide more information as we gain greater insight into the ultimate impact of the pandemic. I will now turn the call over to Jonathan Porter, our Global Chief Risk Officer, who will provide some thoughts on how we view COVID-19 exposure looking forward.

Thanks, Todd. This morning, I'll provide an update on our assessment of the potential future impact of COVID-19 on our global mortality businesses. As Anna mentioned, our estimated mortality claim cost for each general population death has improved, but this is expected to be partially offset by a higher possible range of general population deaths, in particular in the U.S. Let me walk through this in a little more detail. Recall last quarter, we provided an illustration of the potential impact of COVID-19 on global mortality claims based on a scenario, which included 100,000 deaths in the U.S. At that time, our estimate of the extra pretax mortality claim costs for this scenario was between $400 million and $500 million. We have updated our model and for the same number of general population deaths, we are now estimating a range of $200 million to $300 million pretax of additional mortality claim costs, a decrease of approximately $200 million. These figures are shown on Slide 13 in the presentation material. Several key assumptions that are used to estimate the impact of general population deaths on our insured book of business were updated based on our own emerging claims experience as well as reviewing multiple other data sources. The most impactful model change that drove this reduction in estimates is a larger assumed selection factor between insured lives and general population lives. In other words, we expect that the COVID-19 related mortality of individuals who own life insurance will be lower than we had previously assumed. We also made other refinements, including applying country-specific age and general mortality rates to our insured book. These impacts were less material, some resulting in increases to future claims and some resulting in reductions. Overall, we believe that these updates better calibrate our models to the experience we are seeing in the general population in the markets in which we operate. As you can appreciate, our model is based on a number of underlying assumptions, which are set based on analysis of external data, our own claims experience as well as the application and expert judgment, and therefore, estimates are subject to a range of uncertainty. As provided last quarter, and shown again on Slide 13 of the material, our mortality exposure is globally diversified with more than half of our amounts at risk outside of the U.S. However, given the current global course of the virus and the underlying demographics of our country exposures, we expect the U.S. will continue to be the key driver of COVID-19 mortality claims for RGA in the near term. The next largest mortality claim costs are expected to be in the U.K. and Canada, although both are expected to be considerably lower than the U.S. Slide 13 also shows estimates of our models for every 10,000 population deaths for these three countries in order to calibrate our claims estimates to future additional COVID-19 general population death. Slide 14 takes these estimates for the U.S., U.K. and Canada as well as estimates for all other countries where we have mortality exposure and apply them to a scenario for additional general population deaths starting in Q3 2020 and beyond, of 200,000 in the U.S., 50,000 in the U.K., 10,000 in Canada and representative amounts in other geographies. In this scenario, we would estimate future additional pretax mortality claim costs between $400 million and $600 million. Obviously, there remains a level of uncertainty regarding the future path of the virus and how it ultimately impacts global population mortality. Finally, it is worth noting that our modeling continues to assume that whole COVID-19 claims are marginal extra claims and not accelerations of claims that otherwise would occur over the short or medium term, as this impact is unknown and difficult to estimate at this time. Additionally, the range of mortality claims provided does not include any future benefit from our longevity business, although we would expect to see a positive impact of earnings as experience emerges. With that, I'll hand it back to Todd.

Thanks, Jonathan. That concludes our prepared remarks. We'd now like to open it up for questions.

And we'll take our first question from Humphrey Lee from Dowling & Partners.

Todd, in your prepared remarks, you mentioned that you didn’t observe much of an offset from COVID-19 related to longevity this quarter, but you anticipate this will become apparent in the second half. Last quarter, you indicated that a 10% potential offset was still valid. Is this how you currently view the potential benefit? Is this still the appropriate figure to consider, considering the adjusted earnings sensitivity?

I sort of missed the last part of your question, Humphrey. But yes, we didn't see a lot in the first half of the year because there's reporting lag on that business because you have to go from the underlying scheme to the insurance come then ultimately to us. But as far as the potential offset, we still view that the 10% range as far as an offset to the mortality is still the reasonable estimate of how to look at it.

Okay. Got it. And then Anna, in your remarks, you talked about the kind of deal pipeline in the U.S. for asset intensity becoming more competitive, but I don't see opportunities in Asia and other countries. Can you just maybe let a little bit more in terms of kind of your outlook for potential capital performance in the second half of the year?

Sure. I'll just say and reemphasize, overall, we see a generally healthy pipeline. I'm going to ask Alain to provide a little bit more color on the pipeline and the competitive environment. Alain?

Sure. Thanks, Anna. I think, Humphrey, in normal times, the deal process is fairly lumpy. And I think that applies here as well. Generally speaking, we are, as Todd mentioned, seeing a very healthy pipeline. Although we've got different levels of competition at different times. I think, generally speaking, the Asian business, as you alluded to, I think, is pretty strong. And while in the U.S., there's a certain level of competition. I wouldn't diminish the fact that we do have opportunities and we're looking at them. Similarly, in EMEA, I think there's a reasonably healthy pipeline as well. But I want to reiterate, in these times, I think we're going to see some lumpiness in terms of closing those transactions.

Yes. And let me provide some additional comments, if I may, Humphrey. We've shown in the past that we navigate periods and pockets of changing competition. We do that by focusing on opportunities that play to our sweet spot, like our capital-efficient solutions. We're very good at those solutions. And we've had a very good quarter in executing on those transactions. And then as I look at this low interest rate environment, if we're facing this for a protracted period of time, we'd expect to see greater demand for those solutions and for general product innovation as well as continuing demand for innovation in the underwriting process. All of that really plays to our strength, our strength in product development and underwriting. So I would echo Alain's comments. They're somewhat lumpy, but we are remaining very focused, and we are finding two sweet spots, where we do have an advantage.

Do you believe the current environment will lead to more inconsistencies and create challenges for your premium growth outlook in the next couple of years?

I'm sorry, I didn't catch the last part of that question. It was about the lumpiness increasing? Do we expect lumpiness? Is that the premise of your question?

No. Do you think the current environment will make the lumpiness worse and materially impact your premium growth outlook?

The lumpiness, we're referring to our in-force transactions. Our premium growth is in large part driven by our underlying organic flow business. Because these in-force transactions are in large part fee-based or spread-based transactions, although we do mortality blocks as well. In terms of the organic premium growth, I think it is a reflection of the temporary environment, the lockdowns in most parts of the world, would expect that as we come out of the crisis to pick back up, potentially even stronger with some pent-up demand. Does that address the question you were asking?

Yes.

And we'll take our next question from Andrew Kligerman with Crédit Suisse.

I would like to begin with APAC. I noticed that in Slide 13 there isn't any mention of mortality claim cost sensitivity, which makes me wonder if that implies you expect a very low mortality rate from COVID-19 in APAC. Additionally, it appeared that Australia was at breakeven. Todd mentioned during the call that the numbers were better than anticipated. Should we assume that this group's business profitability will decline again, or is this a sustainable rate?

Andrew, I'll turn the first question over to Jonathan, your mortality question and then ask Todd and Alain to address the Australia-specific questions. Jonathan, can we start with the mortality question, please?

Yes. Yes. So we have provided, as you noted, the calibrated impacts for the U.S., the U.K. and Canada on Slide 13. At this point, we're estimating that the three of those countries combined will account for about 90% of our COVID-19 mortality claims costs. And that's why we didn't break out all of the other countries. So I think your assumption that our current projections assumes that's the impact of a relatively modest or small in Asia is correct. And just to add, that's a function of both our exposure amount as well as the demographic distribution of our business and the efforts and the relative mortality rates in some of those countries.

Yes. Andrew, this is Todd. Yes. On Australia, we are very pleased to see the results that we've seen through the first six months, given what we're seeing in the last year or two. But I think it's too premature to suggest that we've turned the corner. We're continuing to manage the in-force very closely managing claims very closely. And it's good to see the group performing better, but the individual disability is still reporting some losses. So we still need to continue to keep an eye on the entire block of business, and we'll continue to reform rate increases to the extent we can. So in summary, it's good to see the results so far, but I'm hesitant to say that we turned the corner. We still need to keep an eye on it going forward, and we still could likely see some volatility.

I see. And just a quick follow-up. In Slide 14, you cite an additional 200,000 U.S. general population deaths starting in the 3Q. And I'm wondering, is that just kind of a random scenario? Or is that what you think is likely to occur? And if so, what are your underlying assumptions?

Yes. Let me take that one. So again, because of the uncertainty that exists around all of the aspects of COVID-19, we don't think of just one scenario. We think it across a range of outcomes that we're considering the $400 million to $600 million scenario that was listed here with the underlying assumption. It's a range that we think is possible or reasonable, but no one including ourselves can really predict ultimately where it's going to end up. So it was meant to provide an illustration of a possible outcome from our perspective.

Which kind of leads me to wonder like 200 is a very big number moving forward. Any assumptions that you're assuming like a big second wave of COVID-19. Is that right?

Yes, we examine multiple perspectives on the potential for a second wave or slow progression under various conditions. From our viewpoint, the timing or occurrence of a second wave isn't particularly significant. Ultimately, it is the number of deaths that influences our results. We consider various scenarios, but given our current situation and the potential future developments, we believe this represents a plausible outcome.

Yes. This is Todd. Maybe just to add onto that real quick. It is very difficult. I don't think anyone can predict the ultimate outcome, everything that's going on and the uncertainty. And that's why we did provide. So you can sort of take your own view on the ultimate deaths we provided. These are estimates at this point, what every 10,000 general population best means as far as potential claims activity.

And we'll move on to our next question from Jimmy Bhullar from JPMorgan.

My first question is about how you define excess capital. It's peculiar that when companies discuss excess capital, they often refer to equity at the same time. You've mentioned an excess capital figure in the past, but haven't clarified how you calculate these numbers. That's my first point. Additionally, how do you approach the deployment of capital if, for instance, COVID becomes a manageable risk in terms of mortality and credit aligns with your expectations? Clearly, you would have more capital available than would have been used up by these situations. So, how do you plan to deploy that capital, and when will you start taking a more proactive approach to its deployment?

Right. So I'll ask Todd to address your first question on how we define excess capital. And I'll come back and provide some thoughts on your second question around capital management. And also ask Todd if he has any additional comments to provide. So Todd, can we start with the definition?

Yes. So what we do, first and foremost, we need to make sure all the various operating companies around the world have adequate capital to meet the local regulatory needs. And then also, we look at our own economic capital models that we used internally to look at various levels of capital and also that helps form our view of some of our underlying risk limits. And then we also pay a lot of attention to the rating agency models because ratings are very important to us as we want to be viewed as a very solid, long-term counterparty to our clients. We're in a long-term business. So what's important for them, the U.S. is a very strong counterparty. So looking at all those things and maybe tilted a little bit towards the rating agency models, we want to make sure we'll always appropriately capitalized to maintain our ratings and keep our operating companies where they need to be from a local perspective.

In response to your second question, I want to emphasize that during this crisis, we are actively pursuing opportunities while remaining cautious. We aim to position ourselves to navigate through the challenges effectively. The shift in this balance will depend on gaining certainty regarding the virus and its economic impacts, along with achieving some stability in our outlook. We do not anticipate this happening in the short term, so we will continue our current approach, supporting our clients and remaining engaged. There hasn’t been a change in our activity; if anything, it may have increased slightly. We will be careful to identify strong long-term opportunities while balancing them with the ongoing environment. Todd, is there anything else you would like to add?

No, I think you covered it, Anna, thanks.

I have a final question regarding the mortality rates observed in your U.S. business this quarter. Have you investigated the average age and other factors of the claims to determine if they are being recognized earlier than expected? Specifically, how many claims may have been reported a year or two earlier compared to those that could be pushed out by 10 or 15 years? As the population ages, a more recent pull forward would be evident. Could you share any thoughts on how this might influence your earnings outlook over the next couple of years, either positively or negatively?

Yes. I'll respond first and then see if Jonathan or Todd would like to contribute. Regarding the question about whether any of the claims could be considered as accelerated from future periods, it's quite challenging to provide a definitive answer right now. We believe there is a possibility that some claims may have been accelerated, particularly since a significant portion of our additional deaths occurred among individuals aged 70 and above, especially those aged 80 and older. However, ultimately, people can only pass away once. At this moment, it is quite difficult to quantify how many we would have anticipated over the upcoming periods. Jonathan or Todd?

Yes. No, I think that's exactly right, Anna. And that's, again, just another reason why for our extra mortality projections on a go-forward basis, we haven't assumed acceleration, consistent with what you said.

Yes. I would add that what we're experiencing now is a temporary phase of increased claim activity. Once we move past this period, we may find that some of it was just an acceleration. However, I believe that the overall earnings potential of the organization, including the traditional mortality business, will remain intact as we move forward.

Yes. I would say that if the claims are advanced by one or two years, the present value of future earnings would be lower, but the earnings for next year would actually be higher, not lower. This assumption relies on the claims indeed being advanced by one or two years. However, if that is the case, then all else being equal, your earnings next year should be better than they would have been otherwise.

Like we said, it's hard to gauge to that at this point.

And we'll take our next question from Ryan Krueger from KBW.

I had a question about longevity in the U.K. I understand you mentioned a rough assumption of about a 10% offset from longevity to your overall risk, but considering that there hasn't been much impact from your longevity risks in the U.K., where the death rates have been significant, do you expect a more pronounced longevity offset in the near term because of this situation?

It's challenging to provide a definitive answer, but we believe it's probably the case based on our observations in the U.K. However, as Todd noted earlier, due to the lags, we haven't seen any of that so far, and it will be more applicable to our situation moving forward.

Got it. Can you provide some details, specifically regarding the U.S., on how you typically expect insured mortality to compare with the overall population mortality? Also, how does the impact of COVID fit into the usual difference between these two metrics?

For that question, I'm going to turn it over to Jonathan.

Yes. Yes. So our go-forward projections. What we're assuming now across most of the markets we're in, is that the difference between insured and general population for COVID-specific deaths will be basically the same or equivalent to what we're seeing just for all-cause mortality. So that's the assumption that we weren't sure when we determined our model last quarter, just was a lack of data, but now we're more comfortable applying that full differential that we would otherwise not see for all-cause mortality. Again, based on early experience as well as information that we're looking at extremely.

And we'll take our next question from Erik Bass from Autonomous Research.

Just a follow-up on the longevity experience in EMEA. And I think this is something you've seen as a favorable trend for a bit now. I was hoping you could maybe quantify the amount of the benefit or catch-up this quarter? And then talk about what is the typical lag, so that the experience you're seeing now kind of when was it actually incurred? And kind of how long does it take to come through your results?

Yes. Let me ask Todd to respond to your question.

Okay. Yes. You're right, Erik. Over time, there's been some lumpiness in the U.K. primarily the U.K. longevity business, given we get catch up and reporting and that type of thing. So I think you need to look at it a little bit more over a longer period of time. We still think the run rate that we've been mentioning for the past couple of quarters, at least, for total EMEA in that $60 million to $65 million range is still sort of the appropriate run rate to target in on. So that really hasn't changed at this point. It's just we do see from time to time of the client catch up. Unfortunately, they're usually to the positive because it's usually getting updated information and truing up the inventory and those types of things. So I don't have the exact quantification of the specific true-up for the quarter. But again, I'd tie back to looking at that total EMEA run rate of that $60 million to $65 million.

Got it. No, that's helpful. I mean, I guess, in general, the trend has been pretty consistently favorable, I think, relative to your pricing assumptions. What do you see is driving that? And does it seem like something that may continue?

Part of the answer may be related to the temporary slowdown in mortality improvements and how they are affecting the longevity business. It could also be influenced by the region. It's quite challenging to provide detailed attribution. When we price long-term business, we need to establish long-term assumptions, which can be subject to fluctuations. There is some volatility in both the short term and intermediate term, but we feel confident about the performance of that business. As Todd noted, and as you mentioned, it has been performing well for an extended period.

And then if I could just switch to Asians. Curious about the near-term organic growth outlook. And also if you could talk about any potential impacts from some of the uncertainty in market disruptions in Hong Kong?

Let me ask Alain to address your question, if I may, Alain.

Yes. Thanks, Anna. I think as you pointed out, there has been quite a bit of disruption, particularly in Hong Kong over the last year, even pre-COVID. So I think we can expect that the near-term might continue to be a little bit below our normal run rate, but we fully expect over the course of, say the next year or more that our new business would ramp back up to expected levels.

And we'll take our next question from Tom Gallagher from Evercore.

First question. Do you think the pandemic will impact session rates at all for the primary life insurers? Are you seeing any changes there? And also, do you expect any impact on the terms and conditions on both new treaties and in-force to the renewals in the wake of what's happened here? Or does that continue to be pretty stable?

I think it's too early to determine what will happen to session rates. However, the pandemic has certainly underscored the value of reinsurance. We can expect growth in the underlying insurance market as consumers recognize this value, and life insurance companies see the benefits of not only risk transfer but also other reinsurance solutions. So, I believe we might see these developments. I would anticipate that, particularly in relation to sessions. Perhaps Alain has additional thoughts to share.

Yes. I think you're right, Anna. As you mentioned, there's really been no impact on session rate so far. And at this point, no reason to believe that there'd be any downward pressure on that. In terms of terms and conditions, again, probably too early to tell. But at the end of the day, I think we are reinsuring a life and whether that life dies through the course of the flu or a pandemic, I wouldn't see us and certainly, insurance companies on the front end excluding that. So I wouldn't expect any significant changes in terms and conditions.

Okay. And then my follow-up is, I guess, is kind of a follow-up to what Jimmy asked before about the way you're thinking about capital adequacy, risk in force. Does this cause you to reconsider how you're viewing just overall enterprise risk relative to the capital you hold given the equity raise here? I guess just a related question, would you consider materially growing some offsetting risks to mortality, whether that's adding more longevity or morbidity risks to the book as a way to better balance it out to, call it, lessen the pandemic net exposure that you would have? Or how are you thinking about that overall? And how do you really thought the strategy, just given that you ended up raising equity?

Let me address parts of your questions, starting with the equity raise. We decided to raise equity because, as we assessed the ongoing crisis, it was clear that there wouldn't be an immediate resolution. The pandemic seemed likely to persist until effective therapies or vaccines became available, and the timeline for these developments was very uncertain. Moreover, the situation was evolving regarding the global economic impact and the extent of the damage being inflicted. We had to consider how long it might take for recovery to begin. Given these factors, we deemed it wise to bolster our capital reserves since we operate in a long-term business where strength and stability are crucial for safeguarding our valuable franchise and ensuring we are well-positioned to pursue promising growth opportunities. Looking at the current situation, not much has changed, and we maintain that enhancing our capital buffers was a prudent decision aligned with our long-term management strategy for shareholder capital. We are not at the end of this process yet, and I believe it's too early to draw any definitive conclusions. I will now turn it over to Jonathan to respond to the remainder of your questions.

Yes, Anna. Thank you. From a capital perspective, I am still quite comfortable with the level of required capital we have established to manage pandemic exposure. There are no concerns there. Regarding diversification strategy, I would say that over the past several decades, we have implemented a diversification strategy. We aim to avoid morbidity across different geographies, as you mentioned, and this approach has been beneficial in the current environment. I believe the experience we are gaining now will also influence our future decisions.

I can add that we have occasionally considered purchasing some form of pandemic protection, such as a cap bond or another instrument. However, we consistently found it challenging to secure a significant amount of protection due to the scale of our mortality business. The available capacity was limited, and the costs were too high relative to the protection offered. Therefore, we have not identified any favorable benefit-cost options. As Jonathan mentioned, we address this by focusing on diversification and managing our risk appetite. This risk framework guides our business decisions now and into the future.

Our next question comes from Dan Bergman from Citi.

To start, I guess, excluding the capital raises, it looks like excess capital was roughly flat quarter-over-quarter. So looking forward, if buybacks and block reinsurance deals remain minimal and premium growth ranges around the current level, is the second quarter earnings a decent proxy for the level of earnings you'll need to generate to keep excess capital flat going forward? Or are there other adjustments or factors we need to be thinking about?

Yes. Todd, can I ask you to address the question, please?

Yes, Dan, I think that's not a bad perspective. However, if you consider our earnings potential excluding COVID for the rest of the year, and then evaluate our projections for COVID over time, you can estimate how much of that will occur in the second half of the year. I believe we have sufficient earnings to support organic growth and our dividend, while the uncertain factor remains how much capital we might allocate to any in-force transactions that appear appealing.

And maybe just a quick one on corporate. Should we expect the loss there to remain favorable to prior guidance near-term with travel and maybe some other expenses remaining depressed? Or is that prior kind of quarterly loss guidance still a reasonable expectation?

Yes. For now, I would say that the $25 million loss on average per quarter remains reasonable. We experienced a slight additional reduction in the loss during the second quarter. However, I hope that we may come in a bit under that moving forward, although I won't provide an updated average loss at this time. Certain expenses, like travel, should stay at a lower level for the rest of the year.

Our next question from comes from Kostas Agrogiannis from Legal & General.

I would like to discuss my thoughts on capital deferment. Regarding the excess capital and ratings, you previously indicated you expected that the COVID-19 losses would have been covered by our current earnings capacity. Based on the editing reports, we have maintained a capital buffer of around $700 million and the ratings are stable. Is this because S&P still has a stable outlook? I would like to return to the topic of capital deployment and inquire if you anticipate a significantly worse experience in claims for Q3 and Q4, especially considering the reporting lag.

I believe the comment about lag reporting pertains to our longevity business, which we anticipate will have a positive impact on earnings. Regarding our mortality business, we have accounted for all incurred claims in the quarter and do not expect any lag that would affect the upcoming quarters. Todd, am I interpreting your question correctly?

Yes, it does address the future capital deployments. There is a reporting lag, but it does address that issue.

And we'll take our next question from Brian Meredith from UBS.

This is Mike Ward on for Brian. I guess, kind of expanding on that natural hedge phenomenon that we've spoken about in the past. So you mentioned when we've got elevated mortality like this, of course, it comes through in the period that it occurs, maybe there's a little lag, but just kind of wondering, how long does it usually take for that benefit to flow through in the longevity piece? Does it take quarters or years? Just kind of curious how we should frame that thinking about that benefit that offset?

It's closer to the first, which is quarters, it has not lagged for years. Obviously, it depends. We have a number of transactions, and that means the number of clients. And clients have different operations. And then the underlying scheme, the pension schemes themselves also have underlying operational processes. So on average, in general, I think we're looking at it from a few quarters' perspective, not years' perspective necessarily. Todd, correct me or Jonathan.

Yes, I agree with the comment.

Yes.

Okay. And so that's helpful. So you said you didn't have any of that longevity benefit this quarter, but if we back out the $300 million of excess COVID claims, I think that would translate into an EPS for the quarter over $5 per share. And maybe I'm wrong on that, but I'm just curious if you could help us understand or quantify the other favorability that contributed this quarter?

Yes. There were other factors at play, so I will ask Todd to provide a high-level overview of some of the additional items to help clarify the calculation you just made.

Yes. In addition to considering the elevated mortality impacts that could be added back, it's important to also account for some expense savings from the quarter, particularly those related to travel. Additionally, a significant portion of the expense savings pertained to compensation, including variable pay and adjustments to long-term incentive programs based on the expected experience this year. These factors will require some adjustments. Therefore, you might need to reduce the mortality savings by some added expenses, which I estimate to be around $0.50 a share.

I would also like to mention that the global estimated cost is $300 million, with $240 million in the U.S. and the remaining $60 million coming from outside that operation. This amount was largely offset by favorable performance in the morbidity sector and other non-mortality areas. I believe that adjusting for that $60 million is a bit optimistic, as it implies a consistent contribution from the overperformance. While we would certainly appreciate that, it might be overly ambitious.

And unfortunately, ladies and gentlemen, that is all the time we have for questions today. I would like to turn the call back over to Mr. Todd Larson for any concluding remarks.

Thank you. Well, everyone, thank you for joining us on our second quarter earnings call today. As always, we appreciate the continued support and look forward to the continued dialogue as we go forward. Thank you very much.

And once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.