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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the Reinsurance Group of America Fourth Quarter 2021 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 fourth quarter 2021 conference call. With me this morning on the call is Anna Manning, RGA’s President and Chief Executive Officer; Leslie Barbi, Chief Investment Officer; Jonathan Porter, Chief Risk Officer; and Jeff Hopson, Head of Investor Relations.
We will discuss the fourth quarter results after a quick reminder about forward-looking information and non-GAAP financial measures. Following our prepared remarks, we will 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 a discussion of these terms and reconciliations to GAAP measures.
And now, I’d like to turn the call over to Anna for her comments.
Good morning, everyone and thank you for joining our call today. Last night, we reported a loss of $0.56 in adjusted operating EPS, which included COVID-19 costs of $350 million pre-tax or $3.95 per share. This quarter is a story of continued strong underlying performance active capital management and favorable business momentum while absorbing a meaningful level of COVID-19 claim costs. In the quarter, COVID-19 claims were material in the U.S. and South Africa, while we had more moderate claim levels in other countries. Jonathan will provide further insights on our global COVID-19 claims shortly.
Turning to some notable performance highlights for the quarter, our Global Financial Solutions business delivered very strong earnings across all lines and regions. And for the full year, the GFS business had a record year for profits. I am very proud of the work the teams have done to continue to build this business to generate a growing stream of high-quality earnings. Our U.S. Individual Health business performed well, continuing a recent trend. Our Asia traditional business also had a record profit in the quarter as underwriting results were favorable and COVID-19 impacts were very modest.
The Australia traditional business reported a small profit. We are cautiously optimistic about ongoing market developments in Australia as pricing levels, terms and conditions, and general industry dynamics are showing progress towards more sustainable levels. We were again successful this quarter, deploying $106 million of capital into a number of in-force block transactions, including several notable longevity deals in Europe. This brought the full year capital deployment into transactions to a total of $543 million, the highest level of annual deployments in our history.
Also notably, the 2021 transactions were broad-based across all our regions, the U.S., EMEA and Asia and across a range of products. We start the new year with an active transactions pipeline. Organic new business activity was very good this quarter, building on a good third quarter and continuing our positive momentum. As we discussed at our Investor Day in December, we see favorable dynamics for insurance products in many of our traditional markets and strong demand from clients for our reinsurance solutions. Investment results were favorable in the quarter despite the continued challenges of the low market yields, impairments were minimal and we realized some nice gains from our real estate joint ventures and limited partnerships.
And in addition to deploying capital to support organic new business and in-force block transactions, we also repurchased $50 million in shares in the quarter, bringing the total for the year to $96 million. These highlights from this quarter demonstrate the continued resilience of our people, our business and our balance sheet. And as we shared during our Investor Day, we see many reasons to be optimistic about the future. First, although uncertainty remains, there are signs that infection levels from the Omicron variant are declining in many places. And as such, we would expect to see death decline from their current levels as we move forward.
Second, our value proposition and client partnerships have been strengthened and we have been adding material long-term earnings through our new business efforts. And finally, the RGA global platform, combined with the depth of our technical expertise and capabilities and the strength of our client relationships, positions us extremely well to capitalize on the many attractive growth opportunities as we move forward. I continue to be proud of all that we have achieved during these difficult times and I remain confident and excited about our future.
Thank you for your interest in RGA. I hope you all remain safe and stay well. Let me now turn it over to Todd to go over the detailed financial results.
Thanks, Anna. RGA reported pre-tax adjusted operating loss of $36 million for the quarter and adjusted operating EPS loss of $0.56 per share, which includes a negative COVID-19 impact of $3.95 per share. While we did experience a meaningful level of COVID-19 claims, our underlying non-COVID-19 results were strong. Our trailing 12 months adjusted operating return on equity was 0.8%, which was net of COVID-19 impacts of 10.1%. For the full year, our book value per share, excluding AOCI, grew 5% to $139.53. This was achieved after absorbing approximately $1.4 billion of pre-tax COVID-19 claim costs.
Consolidated reported premiums increased 4.5% in the quarter. When adjusting for currency effects and one-time items, organic growth was 6.5% for the quarter as we saw good growth across all segments. The effective tax rate for the quarter was 5.2% expense on pre-tax adjusted – on a pre-tax adjusted operating loss. The income tax expense is primarily due to income earned in high tax jurisdictions and losses incurred in lower tax jurisdictions. And in the quarter, GAAP net income benefited from the significant FIN 48 release of the tax liability.
Turning to the segment results listed on Slides 6 and 7 of the earnings presentation, the U.S. and Latin America traditional segment included approximately $277 million of COVID-19 claim cost. $247 million of which was in our U.S. individual mortality business with the majority of the balance in our U.S. group business. We also saw non-COVID-19 excess claims, which we believe to be directly or indirectly related to COVID-19. This is consistent with the higher non-COVID-19 population mortality as per the CDC reporting.
The U.S. Individual Health business performed better than our expectations to the favorable experience overall. Our group business performed in line with expectations as the impact of COVID-19 claims was offset by non-COVID-19 favorable experience. Variable investment income was strong in the quarter due to real estate joint venture and limited partnership realizations. The U.S. Asset Intensive business reported strong results with favorable overall experience and higher variable investment income, demonstrating continued strong performance from this segment.
The Canada Traditional segment results reflected unfavorable individual life mortality experience due to a handful of large claims and the impact of COVID-19 claim cost of $10 million. The Canada Financial Solutions segment results reflect favorable longevity experience. In the Europe, Middle East and Africa segment, the traditional business results reflected COVID-19 claim cost of $61 million in total, of which $35 million was in South Africa and $21 million in the UK. We also saw some excess mortality claims in South Africa, believed to be directly or indirectly COVID-19 related. EMEA’s Financial Solutions had a good quarter as business results reflected favorable longevity experience and the impact of growth of this business.
Turning to our Asia-Pacific traditional business, Asia results achieved a record quarter reflecting favorable underwriting experience with minimal COVID-19 impact in India. Australia reported a small profit for the quarter. The Asia-Pacific Financial Solutions business had a very good quarter, reflecting favorable experience and strong growth in new business. The Corporate and Other segment reported a pre-tax adjusted operating loss of $41 million, which is higher than our quarterly average run-rate, primarily due to higher general expenses, including some one-time cost. The full year pre-tax adjusted operating loss reflected a one-time adjustment of $92 million recorded in the first quarter to correct the accounting for equity method, limited partnerships to reflect unrealized gains in investment income. Excluding this item, the full year adjusted operating loss was in line with the expected annual run-rate.
Moving on to investments, the non-spread portfolio yield for the quarter was 4.7%, reflecting strong variable investment income, primarily due to real estate joint venture and limited partnership realizations. While hard to predict from a timing perspective, variable investment income is a core part of our investment earnings. And in the quarter, investment impairments were again nominal.
Moving on to capital management, our excess capital position at the end of the quarter was approximately $1.3 billion. Our capital position remains strong and we have ample liquidity. We deployed $106 million into in-force transactions and repurchased $50 million of shares. This quarter highlights our balanced approach to capital management and our ability to absorb impacts from COVID-19, fund organic growth, deploy capital into transactions and return capital through share repurchases and dividends.
In the quarter, RGA Reinsurance Company, our main U.S. based operating company, took advantage of attractive market conditions and issued $500 million of surplus notes, which enhances our financial flexibility. I would also like to highlight that RGA executed our inaugural funding agreement backed note issuance in the quarter, followed by a second issuance in January.
In summary, we believe the impacts of COVID-19 are manageable. Also, we believe our well-diversified global platform, strong balance sheet and underlying earnings power positions – our underlying earnings power positioned us to emerge from the pandemic in good shape to continue to deliver attractive financial returns to our shareholders over time.
I will now turn the call over to Jonathan Porter, our Chief Risk Officer, who will provide additional comments on our COVID-19 related experience.
Thanks, Todd. I am going to review our Q4 COVID claims experience and then provide some views on expectations for Q1. The past 2 months has seen a global shift to the Omicron variant, which is now responsible for the vast majority of new case transmission. General population mortality experience from Q4, however, is still largely based on impacts of the Delta variant.
Slide 13 shows U.S. general population mortality based on updated CDC reporting. The notable takeaways from the CDC reported data are: COVID-19 general population deaths were up about 30% in Q4 compared to Q3; excess non-COVID-19 population deaths were still material, but lower on an absolute and relative basis compared to Q3. We continue to believe that the majority of these excess deaths are directly or indirectly related to COVID-19.
The proportion of COVID-19 population deaths at ages below 65, ages where there is more life insurance exposure declined from the Q3 peak to about 34% in Q4, but is still elevated from levels observed earlier in the pandemic. Our U.S. individual mortality results were consistent with the CDC reporting. Our COVID-19 mortality claim costs of $247 million were within our $10 million to $20 million rule of thumb range at approximately $19 million for every 10,000 general population desk. This is an improvement from the prior quarter driven by lower average claim size, which declined by about 25% from the Q3 level. We believe this is partly due to the lower proportion of deaths in younger ages as well as a return to claim sizes that are more in line with what we experienced in early periods of the pandemic. Excess non-COVID-19 mortality experience in the quarter was driven by a higher frequency of claims, consistent with the levels of excess mortality in the general population. There was no notable trend when looking at the underlying experience in our U.S. mortality book by policy size, age or issue in your cohorts.
Full year 2021 results for U.S. individual mortality reflects $777 million of estimated COVID-19 claim costs, slightly above the midpoint of our rule of thumb range. COVID-19 impacts in South Africa are estimated at $35 million in the quarter. Approximately half of this amount is due to adverse claim development on updated reporting from the large Delta wave in Q3. Q4 incurred claim estimates account for the remainder of the impact and are based on our updated experience, industry data and the lower level of general population mortality. Other non-U.S. markets, including the UK, Canada and India accounted for $44 million of estimated COVID-19 claim costs. Notably, India COVID-19 claim costs this quarter are estimated at $1 million as favorable development from prior quarter reporting largely offset Q4 claims, which were relatively modest, given the lower level of general population deaths.
As we look ahead, uncertainty persists due to the developing nature and impact of the Omicron variant. Evidence is clear that the Omicron variant is more infectious than previous variants. Preliminary data also indicates that there is a material reduction in the severity of outcomes, in particular, in populations with high levels of vaccination and/or prior infection. Although new case counts are now falling in many markets, COVID-19 general population deaths remain at elevated levels in January due to the very high number of infections caused by the Omicron variant. This will result in additional mortality claims. We do expect to see deaths decline from the current levels over the remainder of Q1, consistent with the current drop in cases.
Q1 is also the quarter, where we would expect to see higher mortality due to the seasonal flu. The Northern Hemisphere season is still developing,, but data so far points to a favorable result relative to a typical flu season. At this time, we are maintaining our previously stated claim cost rules of thumb ranges for the US, UK and Canada, recognizing that Q1 experience may be at the higher end of those ranges, reflecting mortality that is still partly driven by Delta variant impacts. We expect to have more insights into Omicron mortality data over the course of Q1, which we will incorporate into our models as it becomes available and update our rules of thumb, if needed. We remain confident that future impacts will be manageable.
Let me now hand it back to Todd.
Thanks, Jonathan. That concludes our prepared remarks. We’d now like to open it up for your questions.
Thank you, sir. [Operator Instructions] Our first question comes from Dan Bergman with Jefferies. Your line is open. Please go ahead.
I guess to start, just in terms of the excess non-COVID population deaths, it came down this quarter in the U.S., but as you said, remained elevated. I was just hoping you could expand a little bit on what you’re seeing kind of the main drivers and any thoughts on how you expect that to trend going forward? If COVID does do hopefully moderate as we move further into 2022, should we expect a similar trend in the non-COVID excess desk? Or could there be some lag due to deferrals of preventative care and screenings over the past few years? Is there any color on how you’re thinking about how this is going to evolve over the quarter that would be great?
Yes. Hi, Dan, this is Jonathan. So I think it’s pretty reasonable to expect that excess population mortality will continue while COVID is still material. That does vary country by country, though. So we definitely have seen a correlation as you pointed out, between increases in excess mortality and increases in COVID mortality when we look at the data. I think one of the things that makes us believe that these are really direct or indirect COVID is the causes of death tend to be comorbid with COVID. So Alzheimer’s, diabetes, things like that. But in addition, they tend to move with the COVID deaths. So we would expect those to decline as COVID death would come down. But again, it may vary in timing and by country.
We will take our next question from John Barnidge with Piper Sandler. Your line is open. Please go ahead.
Thank you. Can you maybe talk about the funding agreement note opportunity? You did an issuance in the fourth quarter, talked about doing another one in January. Can you maybe talk about the size of the opportunity as well as geographies? Thank you.
This is Todd, John. Yes, we had actually set up the program a couple of years ago. We have a $3 billion, I guess, program that’s been set up. As you mentioned, we did issue $500 million back in November and another $400 million in January. And we like it because I think it adds a nice spread lending business to RGA’s balance sheet as well as allows us to exercise our investment capabilities as well. So I think you’ll see us periodically in the market that time or cadence of issuance, but we will be in the market when we think it’s a good time to continue to issue. But overall, it’s a $3 billion program.
We will go next to Humphrey Lee with Dowling & Partners. Your line is open. Please go ahead.
Good morning and thank you for taking my question. Just to follow-up on Dan’s earlier question. As we think about the post pandemic mortality trend, not necessarily based on looking at comorbidity, but more thinking about the impact of the pandemic on the general populations physical and mental health, how you may think that would affect the kind of the near-term mortality trend post the pandemic. I think on one hand that could be an impact. But on the other side, the medical advancements could help. So yes, I just wanted to hear kind of how you’re thinking about let’s say, by ‘24 or ‘25, like how that near-term mortality trend will shape up?
Hi, Humphrey, it’s Jonathan. Yes, so no firm conclusions yet. Obviously, we’re devoting a lot of resources as you would expect internally to assessing the impacts beyond the impact of the pandemic itself. I think what you said is correct. There is going to be some pluses and minuses. So things like delayed diagnosis of certain conditions might cause increases in mortality, but then medical advances and other items, like you said as well, could go the other direction. I think on balance, and like we communicated at Investor Day in December, we feel that there is probably a little bit more negative or headwind for mortality in the shorter term or beyond the pandemic, but we still feel like the long-term benefits of mortality improvement will still be there, and in fact, could even be more positive because of some of these developments, but no specific quantification at this point.
We will go next to Tom Gallagher with Evercore. Your line is open. Please go ahead.
Hi, sorry if I missed this and you already went through it. But can you talk a little bit about why your excess capital went up by $300 million sequentially. What drove that?
Hi, Tom, it’s Todd. Yes. So we actually – even though we had an operating loss for the quarter, we actually had positive net income generation. So that’s one piece of it. Then also we opportunistically issued a $500 million surplus note given its good market conditions, and we have the ability to place the surplus note that we thought was a relatively attractive price for a very long-term securities that added to the capital base as well.
Got it. Thank you.
We will go next to Ryan Krueger with KBW. Your line is open. Please go ahead.
Hi, thanks. Are you able to quantify the amount of estimated non-COVID excess mortality claims that you – in the U.S. for both the fourth quarter and the full year?
Ryan, it’s Todd. For the quarter, I’d size it for the U.S. at about $0.55 related to the excess mortality. I don’t have my fingertips the full year would have to get back to you on that.
Got it. Thanks. And then I guess, I think some companies have talked about negative development on third quarter COVID claims that they have recognized in the fourth quarter. If you – are you able to, at this point in time, if you – can you, I guess, give an updated view of what the incurred claims in the third quarter actually were and if they were higher than you had thought they were last quarter?
Yes. Hi, it’s Jonathan. Let me take that one. There is two factors, I guess, that go into our amount of COVID claims for Q3. One is just developments in cause of death reporting and that actually, I think, came down a little bit quarter-over-quarter. So as we got more information, that would have reduced the estimate. But as you said, we did see some mortality, I think, which was related to Q3, recognized in Q4, so that would have brought it up. So I’d say, on balance, it’s probably a little bit higher for COVID in Q3 than what we would have mentioned last quarter, but not dramatically so.
Got it. Thank you.
We will go next to Andrew Kligerman with Credit Suisse. Your line is open. Please go ahead.
Hi, good morning. Just in case I get cut off, I’ll ask my questions in orders. Hey, just to clarify on the incremental excess claims. I think last quarter you were guiding to like 30% of the COVID claims. So I just want to get a little guidance on that. Some of your reinsurance competitors in Europe have said that they can’t really this dissect whether the claims are actually COVID or not COVID, the classification is really a challenge. So my question to you is, are you confident in these COVID numbers. Maybe you could give us a little clarity on why you’re confident in the COVID-19 numbers that you specify? And then just lastly, Part C, I don’t sneaking one in, but the renewals in January, as we look towards the year, you had 7% growth in U.S. and Latin America net premiums. Could you talk about what was driving that growth and what your outlook is for 2022? Thank you.
Yes. Let me start, Todd, and then you can take the premium question. So just on the excess relative to COVID, I think the number this quarter is down from what we would see in prior quarter. And again, that’s consistent with CDC reporting where the level of access is lower as a percentage of the total deaths in the U.S. So I’d say it’s more in the 20% ish range or so, maybe a little bit higher. As far as what we classify as COVID, we actually take a what I think is probably the most conservative position we can in what we call COVID because all we do is we look at what actually comes in as a COVID reported claim. So it’s specifically identified to us as a COVID claim. And then we do an extrapolation for unknown cause of death, but really just proportionate to the amount of information we have. So we don’t include anything that does not come in unless it’s designated as a COVID claim, which I think means that we’re not including things that we feel are potentially directly and directly COVID.
That’s what you mean by extrapolating that 20% number. There was something you saw on the label that made you believe that it was indirectly related.
Yes, so just let me clarify. So when I say extrapolate, we don’t get cause of death reporting on all of our claims on a timely basis. So what we report to you as a COVID claim in the current quarter will be based on what we know is COVID for sure because it’s reported to us that way. And let’s say, as an example, we would have 75% cause of death information, we would then gross up that number to account for the 25% where we don’t have cause of death yet. So basically, assuming it’s proportionate to our business, which historically, when we go back as we get the reporting has turned out to be pretty accurate. So we feel comfortable with that. The piece that we’re seeing is non-COVID excess that doesn’t enter into that COVID number at all. So that’s that 20% on top of the COVID claims, which again is sort of how – when you look at the graph we showed for the CDC reporting, that’s how it’s split there as well where it’s COVID and then non-COVID excess in the general population. Then a premium question, I guess...
Yes. Hi, Andrew, it’s Todd. On the premiums, I mean, in the quarter, there is an impact from – we had a treaty that change. I think we’ve discussed this last quarter. We had a treaty that went from what we call low-risk accounting to full risk accounting, which added to the premium growth. And then if I take a step back and look at the full year, we had probably about a 4% organic growth, which is a combination of some – a small in-force, transaction wins, continued facultative underwriting and wins on that case. And then just some good flow from clients across the board?
We will move to our next question from Jimmy Bhullar of JPMorgan. Your line is open. Please go ahead.
Hi, good morning. So first, I just had a question on your international business and specifically Asia and EMEA. It seems like the claims that you report as COVID and just the overall margins tend to move around a lot more than what’s really happening in terms of population. That’s – and I’m not sure to what extent it’s because of delayed reporting and stuff. And if you could talk about how 3Q was very different than 4Q in both South Africa and then especially India as well? And then to the extent it is delayed reporting, do you think you’ve got the issue or you’re caught up to it or is this something that you’ll see over the next few quarters as well?
Yes, Jimmy, so let me start with India. So you’re right. So this quarter, we had a nominal impact from COVID from India. Really two things driving that, one is the population deaths were down significantly versus the peak of the Delta wave, which was in Q2 of last year. So that’s one of the main reasons was the new incurred claims were not that – our estimate of those was not that large. I’d say high single-digit millions. The other piece offsetting that to get it down to 1 million overall impact was favorable development from our past IBNR. So we estimated claims in Q3 that ended up being a little bit on the conservative side. So when you net those two, it’s the $1 million impact. For South Africa, the story is a little bit of the opposite. So we had more than half of the $35 million COVID impact that we talked about, about $20 million of that was related to Q3 experience. So really, as information developed on the insurance population, it turned out that the COVID impact was more significant than what we had estimated back in Q3, so sort of the opposite of what I described in India. So that accounted for about $20 million of the $35 million, about $15 million of the $35 million was specific to Q4 experience. Just relative to kind of our – the approach we use for IBNR, I mean, its nature because of its nature, it is an estimate each quarter. So there is going to be pluses and minuses like I described. But I do think based on the data updates that we’ve had in South Africa as well as just the general decrease in the most recent mortality wave, which is substantially lower than what we saw in Q3. I think the likelihood of a material true-up plus or minus, will be lower going forward. And overall, we feel quite comfortable with our IBNR.
We will go next to Mark Dwelle with RBC Capital Markets. Your line is open. Please go ahead.
Yes. Good morning. I just have two questions. The first question is, could you share the amount of the gross loss COVID loss in India? You mentioned a couple of times on the $1 million net, if you could share the growth? And the second question, it seemed like earlier in the pandemic, you were enjoying relatively larger longevity benefits. The last couple of quarters have been fairly minimal. Do you have a thought as to why that – what’s changed?
Yes. So in India – so let me just make sure I’m in gross to net correctly. So you’re just looking for prior to the favorable development from prior quarters, what was the impact in Q4?
Correct.
Yes. So it’s high single-digit millions is our estimate of the Q4 experience, if you just isolate it to itself rather than taking into account the prior. So offset by almost the same amount going the other direction. Again, that’s consistent with what we saw earlier in the pandemic prior to the very large Delta waves in Q2. One thing to keep in mind with that large claims cost that we had in India, in that quarter is that we believe now based on data, we were seeing that there was a significant understating of mortality and what’s being reported in the general population mortality to the tune of maybe 5x to 7x more COVID death than what was actually reported. So, that just helps sort of size what probably happened in the quarter, even though the numbers don’t show that in the general population data. And then as far as longevity goes, you’re right, the impact – the benefits have been a little bit less than we would have seen early in the pandemic. That’s largely a function of the distribution of our business. So, most of our longevity business or a large proportion of it is in the UK. So, we have tended to see less impacts in a number of the past few quarters as far as adverse mortality in the UK, especially for the some of the older ages, which again is where our longevity business is centered and that’s probably due to just high levels of vaccinations in that older age population. So, going forward, because of the distribution geographically as well as vaccination prevalence over ages and boosters now, we probably would expect to see a more modest offset. We did have favorable longevity experience in the quarter in the UK. We just didn’t attribute it to COVID just based on the nature of the reporting and things we didn’t feel like we could confidently say it was COVID-driven.
We will move next to Alex Scott with Goldman Sachs. Your line is open. Please go ahead.
Hi, good morning. First question I had was around the sensitivity to COVID. I think relative to earlier in the pandemic, it has picked up the last couple of quarters. And I think some of that’s excess mortality, some of that appears to be sensitivity to under age 65 kind of being a bigger portion. So, I would just be interested to understand like how much of the experience recently has been associated with group life versus individual life. Are you feeling an impact on the group side? Is that part of this? And then maybe if you could compare and contrast sort of what you are seeing in Omicron so far through January versus Delta and what the things you are looking for to gauge whether changes to the rule of thumb are necessary on the sensitivity?
Yes. So, just on group and I will focus on U.S. group here specifically. We did see about $25 million of impact from COVID in Q4. About two-thirds of that is on our healthcare business and about one-third or so is on mortality. So, still a relatively modest impact on the mortality side. Now also, just keep in mind that, that is not an immaterial COVID amount, but we also had favorable non-COVID experience, which largely meant group was out our expectations as Todd said before. The – I am sorry, and I forgot the second part of your question.
I was interested in just some of the things you would compare in contrast from Omicron to Delta variant, which…?
Yes. Sorry, sorry about that. Yes. So, I mean I think it’s still too early. That’s one of the reasons why we wanted to just signal that we are going to be looking at that data as we evaluate it against the rules of thumb that we have. So, there is no credible data yet that we can point to, to look at the relationship between what we would see by age or other kind of demographic characteristics in the general population to use that to extrapolate to our insured lives so far. Most of what we have seen so far in January is likely Delta driven just given when the Omicron wave peaked. But we do think over the next couple of months, we will get a little more insight there. And then to the extent there is anything material, we would share that or update our rules of thumb accordingly.
We will go next to Erik Bass with Autonomous Research. Your line is open. Please go ahead.
Hi. Thank you. Can you talk about the level of excess capital that you want to maintain going forward? And then given the opportunities that you have to deploy capital for either growth or to repurchase your shares, are there other sources of inexpensive capital that you could tap kind of like what you did in the fourth quarter with the surplus note?
Hi Erik, it’s Todd. Yes. So, I think in a post-COVID environment, I think we have got very strong underlying earnings power as you mentioned, as we talked about at Investor Day as well and as we demonstrated in the fourth quarter, we are developing other ways to source the efficient means of capital and that could also be through embedded value type transactions or strategic retro sessions, etcetera. So, we would be – would expect to run below the current level of excess capital once we get back to a more normal or post-pandemic environment, again, given our comfort with our underlying earnings and capital generation power plus access to other sources of capital.
Got it. I think I mean historically, you had talked about $300 million to $500 million being the kind of target level for excess capital. Is that still the same level, or has it moved higher given the growth in the business?
I would expect it to. We haven’t sat in a specific amount, but I would expect it to be a little bit – higher than the pre-pandemic levels. Like you said, we have continued to grow the company and added quite a bit of value to the organization during the pandemic period. So – but we would expect to probably hold a little bit more than the $300 million to $500 million albeit again, I think it would be south of the current excess level.
We will go next to Tom Gallagher with Evercore. Your line is open. Please go ahead.
Hi. I just wanted to come back to how – and I am not asking for a precise number, but can you give a little more clarity on how you are thinking about COVID for the balance of 2022. I think one life insurer has put out 150,000 COVID mortality placeholder embedded in their guidance. But it’s obviously such a critical part of what you do. I would be curious what you are thinking if you do have an estimate, what – how you see this playing out? And specifically, could you even give some kind of indication of what you are thinking for Q1, because right now, I feel like the forecasting services that are out there are all over the place. It’s a little hard to get visibility on like how to think about a legitimate range of COVID mortality for Q1. Thank you.
Yes. No, and we agree, Tom, with what you are saying. There are – there is a very wide range that people are currently looking at. I think historically, we haven’t provided a longer-range forecast, partly because we just feel it’s extremely difficult for anybody to predict what’s going to happen beyond further than a couple of months. So, when we look at internally, we cover a wide range of outcomes, as you can imagine to make sure that we can plan and manage accordingly. So, I guess I would say we are not prepared to give a specific number or an estimate of the numbers for population deaths over the course of the year. We are pointing you back to our rules of thumb, as well as the guidance that I provided to say for Q1, we think it’s probably not unreasonable to assume that we will be towards the higher end of those ranges just given what we have seen for the last couple of quarters of Delta. And also, if you just look at even actual reporting so far this quarter, January, I think the deaths in the U.S. are sort of 70,000 level or so with two months to go in the quarter. Now we do expect, as I said, those deaths would follow cases dropping and should come down from the current run rate level. But hopefully, that gives you at least a reasonable bracket around what to think for the first quarter. But as you said, it’s very difficult to predict an absolute number.
And Tom, if I can add we have shown through the course of the pandemic that the underlying earnings power of our business has been able to absorb COVID claims and still produce meaningful level of earnings. We have continued to demonstrate that. We expect COVID will be manageable, will continue to be manageable. We have been active on the new business front. We have been adding meaningful earnings to that engine. And as I shared in my prepared remarks, I am confident, and I am also excited about the future once we get COVID behind us.
We will go next to Alex Scott with Goldman Sachs. Your line is open. Please go ahead.
Thanks for taking the follow-up questions. I just wanted to circle back to LDTI. I know you are probably not ready to give full sets of disclosure and so forth. But I think – at the Investor Day, you did mention that you expected a disaggregation of reserve calculation impact that would impact retained earnings. And I think as other companies have begun to come and it sounds like at least for the ones that have, it doesn’t sound like that’s going to be as much of an impact for the industry is maybe it sounds like it could be for you. So, I just wanted to find out sort of what’s driving that, if there is any way for us to think about the magnitude, high level. And what are the conversations with the rating agencies looking like in terms of how they are going to treat that?
Alex, it’s Todd. Yes. So LDTI, first point is the overall economics and cash flows of the block of business aren’t changing. This is financial reporting. It’s not changing the economics of the cash flow, the underlying value of the business. We continue to work through the details. So, we are not ready to provide quantitative numbers at this point, more targeting at least at this point, probably the middle of this year to provide the quantitative impact. And so as I think about it, there is going to be an opening balance sheet reserve adjustment and the opening balance sheet is at the end of 2020. And the way the standard works, reserves can only increase, and that’s because of a couple of reasons. One is you have to eliminate any negative reserves that you might have on the balance sheet. And then yes, as you mentioned, the level of aggregation is going to be much more granular, where now we can aggregate the, say, the entire block of business. Now, it’s going to be broken down more to treaty year issue here is going to be much more granular. So, all the positives don’t necessarily cover the potential negatives in certain areas. So, there will be an adjustment on the opening balance sheet. But as I have been thinking about it, I think what’s more important than the opening balance sheet reserve or equity adjustment is what do things look like when we go live in 2023, because as we go through and restate 2021 income and then 2022 income on the new accounting basis, some of that opening balance sheet adjustment is going to come back through as positive earnings over those couple of years. So, I think what I would point you towards what is more important to look at is sort of what do things look like at the end of 2022 as far as the overall equity position and balance sheet position. Then as far as the rating agencies – are beginning to have some discussions, but I would say they are still fairly early on as far as those discussions.
We will move next to Erik Bass with Autonomous Research. Your line is open. Please go ahead.
Thank you for taking the follow-ups. Two things. One, just on the LDTI, so is the implication then because you are bringing reserve levels up that it would actually translate to higher earnings prospectively? And then on a different topic, could you just quantify the level of VII this quarter? And then talk about what’s sort of a normal expectation going forward given that your portfolio has grown?
Yes. On the first LDTI question, that’s what I was trying to comment on is that you might set up some additional reserves on the opening balance sheet, but some of that’s going to come right back through earnings in the first couple of years under higher earnings under LDTI than what you would have seen under FAS 60. That’s why I think a more important data point to look like is what do things look like as we go into 2023 as we go live on the new standard. And then as far as the variable investment income for the quarter, we were probably about $0.35 over the average run-rate for the quarter.
We will move next to Ryan Krueger with KBW.
Hi. Thanks. I may have missed this, but do you have an updated view of the run rate for the U.S. asset-intensive business in terms of earnings, quarterly earnings?
Yes. For the U.S. asset intensive, is that…?
Yes, that’s right.
Yes. No, I think it’s still around. We put on new business and then some of the existing business amortizes off. But it’s still around, say, $65 million a quarter, $60 million to $65 million a quarter is my best estimate of the run rate.
Okay. Thank you.
We will move next to Tom Gallagher with Evercore. Your line is open. Please go ahead.
Hi. Thanks for taking the follow-up. Just curious if you have had any evolution in your thinking for whether you will look to get push for rate increases on our in-force treaties, just related to views of longer term mortality that you would expect or – and if not, changes in longer term mortality expectations, maybe just the volatility around mortality and future pandemics, any further thinking that you have had as you have gone through this and whether or not you might pursue rate increases and the view of future mortality? Thanks.
Yes. This is Jonathan. So, at this point, we haven’t changed our long-term view on mortality. As I mentioned before, we are obviously devoting a lot of resources into the thinking around this. And analyzing information as the pandemic unfolds and develops to see what the implications may or may not be on long-term mortality, but no changes right now. I mean clearly, we are reflecting price action on the immediate impacts of COVID, which we are experiencing. So, as we think about new business, we are definitely adjusting pricing to account for our estimates of COVID impacts. We are being cautious on new business where appropriate. We have modified underwriting things. So, quite a few actions related to new business. As far as in-force goes, I think as we develop our conclusions on the longer term impacts of COVID, we – and to the extent we believe that there will be negative long-lasting or medium-term lasting impacts related to COVID. We would certainly expect to review our in-force business on a client level, looking at those impacts and taking action or using options that we have available to us if we think there is a systemic or sort of a level shift in the expectations for mortality going forward.
We will move next back to John Barnidge at Piper Sandler. Your line is open. Please go ahead.
Great. Thank you. I would like to go back to something you said at your Investor Day about vaccination underwriting being – vaccination status being utilized for underwriting and pricing in South Africa. Has this expanded to other countries at all since then, or are there plans to? Thank you.
Yes. I think the – I am not the expert here, so we will follow-up with you, John, if we need to. But I don’t believe that there has been a material expansion to other markets. I think there is regulatory and other requirements, but may prevent you from asking specific questions like the related to vaccination, market-by-market. But certainly, we do take into account variables and elements which are kind of connected to COVID or connected to underlying health status and comorbidities market-by-market. So, we have definitely made underwriting adjustments for other reasons to account for and select – make sure we are selecting appropriately the risks that we are underwriting. But I think specifically the vaccination status I think there is a limited use case for that outside of South Africa.
With no other questions holding, I will turn the conference back to Mr. Larson for any additional or closing comments.
Okay. Thank you. Thank you, everyone, for joining us for our fourth quarter earnings call this morning and your continued interest in RGA. With that, we will conclude the call. Thank you.
Again, ladies and gentlemen that will conclude today’s call. We thank you for your participation. You may disconnect at this time and have a great day.