RGA explored pandemic risk transfer, including catastrophe bonds

Reinsurance Group of America (RGA) has explored a variety of ways of transferring mortality risks related to pandemics off its books, including capital markets backed instruments such as catastrophe bonds.

The life focused reinsurance firm has a significant mortality book, of course, as a result of which pandemics are one of the peak modelled exposures that RGA faces.

The outbreak of the Covid-19 pandemic drove the company to consider its capital adequacy and ways of ensuring it had the necessary funds to ride out the coronavirus, with all the uncertainty it presented to a major holder of mortality risk.

The company raised $500 million in an equity raise, which executives recently said was a prudent way to ensure it was sufficiently capitalised for what could have come.

Speaking during the RGA second-quarter earnings call recently, Anna Manning, President and CEO explained, “Specifically, as to why we raised equity, I’ll start by saying, when we looked out at the crisis we couldn’t see a quick end.

“We felt the pandemic would likely continue until there were therapies, or treatments or vaccines and the timing of those vaccines and therapies were highly uncertain and in addition to the virus, the picture was developing on the impacts to the global economy, just how much damage was being done and on the uncertainty around how, when and over how long a period of time, you would see a recovery.

“So facing that, we felt it was prudent to increase our capital buffers, because we’re in a long-term business and strength and stability are important for protecting the valuable franchise and making sure we’re well-positioned to pursue these attractive opportunities growth, long-term value, opportunities.”

Manning added that, on Covid-19, “Not a lot has resolved and we continue to believe that increasing our buffers was the right decision, a prudent choice. It’s consistent with how we’ve managed shareholder capital over the long term.”

She also warned that the pandemic threat has not yet diminished either, saying, “We’re not at the end of this, I think it’s premature to draw any conclusions at this point.”

But, as well as this equity raise to bolster its capitalisation, RGA has in the past also looked at forms of reinsurance capital and hedging solutions, that had they been in place would also have bolstered its capital stack.

Manning said, “From time-to-time we have looked at buying some type of pandemic protection, be that a cat bond or some other instrument.”

But, “What we always found, was that to get a meaningful amount of protection, given the scale of our mortality business, it was hard to find capacity and then the costs were too expensive for the protection provided.”

“So we didn’t and continue not to see good cost-benefit options,” Manning added.

Instead, the company is managing its exposure with diversification and application of its risk appetite, the CEO explained, “That’s the risk framework through which we look at our business and we will continue to do so going forwards.”

It’s a shame, as RGA would be an excellent sponsor to come to the catastrophe bond market for mortality and in particular pandemic type protection. It’s scale is significant and the capital a cat bond could deliver would benefit the company, but seemingly only at the right price.