Society of Actuaries Research Brief: Impact of Coronavirus COVID-19

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March 2020

Society of Actuaries Research Brief

Impact of COVID-19

March 10, 2020

Society of Actuaries Research Brief

Impact of COVID-19

March 10, 2020

Caveat and Disclaimer

This study is published by the Society of Actuaries (SOA) and contains information from a variety of sources. The study is fo

r informational purposes only

and should not be construed as professional or financial advice. The SOA does n

ot recommend or endorse any particular use of the information provided

in this study. The SOA makes no warranty, express or implied, or representation whatsoever and assumes no liability in connec

tion with the use or misuse

of this study.

AUTHOR

R. Dale Hall, FSA, MAAA, CERA, CFA

REVIEWERS

Mervyn Kopinsky, FSA, EA, MAAA

Cynthia S. MacDonald, FSA, MAAA

Max J

. Rudolph, FSA, MAAA, CERA

Steven C

. Siegel, ASA, MAAA

Ronora E

. Stryker, ASA, MAAA

TABLE OF CONTENTS

Section 1: Introduction ............................................................................................................................................. 4

Section 2: Key Statistics ............................................................................................................................................ 5

Reported Cases .......................................................................................................................................................... 5

Mortality Rates ........................................................................................................................................................... 5

Comparison to Past Pandemics and Influenza ........................................................................................................... 5

Health Care Cost and Utilization ................................................................................................................................ 6

Infection Spread Rate ................................................................................................................................................. 6

Section 3: Economic and Asset Impact ...................................................................................................................... 7

Macroeconomic Variables.......................................................................................................................................... 7

Asset Values and Volatility ......................................................................................................................................... 8

Low Interest Rate Environment ................................................................................................................................. 8

Reinvestment Risk ...................................................................................................................................................... 8

Section 4: Operational Risks ...................................................................................................................................... 9

Remote Work ............................................................................................................................................................. 9

Internet Service Provider Capacity ............................................................................................................................. 9

Cyber Risk ................................................................................................................................................................... 9

International Trade Dependency ............................................................................................................................. 10

Section 5: Previous SOA Research Highlights ........................................................................................................... 11

References .............................................................................................................................................................. 13

About the Society of Actuaries ................................................................................................................................ 16

Section 1: Introduction

In late December 2019, doctors in the Wuhan province of China began to piece together information from several

medical cases showing similar symptoms. As 2019 ended, Chinese officials announced a pneumonia-like outbreak

and began to identify a “novel coronavirus” linked to the cases. As the Lunar New Year banquet tradition occurred

in Wuhan in mid-January 2020, infections began to rapidly increase. By January 23, over 600 cases had been

confirmed and Wuhan and other areas in China instituted quarantines.

Through the month of February to today, the epidemic has spread. The number of confirmed cases involving the

novel coronavirus named “SARS-CoV2”, and causes the respiratory disease now named “coronavirus disease 2019”

(COVID-19), has reached over 110,000 world-wide. Over 60 countries have reported cases, and over 4,000 deaths

world-wide have now occurred. The health, mortality and economic focus has become one of international

concern beyond China, as countries like Italy, South Korea, Iran, France, Germany and Spain have also reported

well over 1,000 confirmed cases. Increases in cases in other locations may occur depending on the pace of

implementing testing protocols.

The impact of travel and shipping restrictions in a modern, interconnected international economy has had an

exacerbating effect of the outbreak into logistics and the financial markets. When the severe acute respiratory

syndrome (SARS) outbreak occurred in 2003, annual airline passenger traffic between the U.S. and China was well

under 2 million travelers per year. In more recent years, the number annually exceeds 8 million people. Supply

chains of international operations are greatly impacted as well, as many major worldwide manufacturers are ever-

more connected across continents.

The result in February and March 2020 has been one where a confluence of risks has come together. Morbidity,

mortality, asset/liability management and operational risks are all a part of the initial and evolving story. This

Society of Actuaries Research Brief has been constructed to highlight some of the key features of the epidemic and

contemplate the risks for the actuarial profession to consider in their work.

Section 2: Key Statistics

Reported Cases

National health organizations around the world have been fast at work in connecting with health care providers in

order to collect current case information. As of March 10, 2020, over 118,000 cases have been reported world-

wide, and these countries have all reported over 300 cases of COVID-19:

Country

Confirmed Cases

Percentage of World-Wide Cases

China

80,757

68.4%

Italy

10,149

8.6%

Iran

8,042

6.8%

South Korea

7,513

6.4%

France

1,784

1.5%

Spain

1,646

1.4%

Germany

1,457

1.2%

United States of America

808

0.7%

Japan

581

0.5%

The Netherlands

382

0.3%

Switzerland

374

0.3%

United Kingdom

325

0.3%

Mortality Rates

World-wide mortality is currently crudely estimated at approximately 3.6% and are generally reported by health

and media publications in the 3.0% – 4.0% range. These crude estimates, however, often are adjusted due to likely

under-reporting of actual cases. Many potential cases may be asymptomatic, and mild cases may not seek

treatment in the local health care systems. Initial crude mortality rates in the U.S. are currently estimated at 3.5%

- 4.5%, slightly higher than the world-wide rate, primarily due to the disease initially being seen in higher age

groups. Mortality rates appear to be emerging as very dependent on age, with much higher mortality rates being

seen for patients over ages 70, especially for those with health conditions that weaken the lungs and immune

system. Estimates for older age groups have been estimated in the 8.0% - 10.0% range from various health

officials and media sources.

The ultimate rate of mortality from COVID-19 will evolve over time. Some key health officials in the U.S. expect an

ultimate population mortality rate from the disease to settle in the 0.5% - 1.0% range. Life insurance companies

will focus on how the population mortality rate translates into the ultimate mortality of their own insured

populations. Socioeconomic factors may be a key driver of how mortality plays out, as an individual’s access to

healthcare services and current health condition are often factors that drive survival rates in a confirmed case.

Comparison to Past Pandemics and Influenza

By comparison, the spread of COVID-19 has been much greater than similar epidemics witnessed in the 21

century, but also with much lower mortality rates. The following table shows comparative statistics of COVID-19

compared to the severe acute respiratory syndrome (SARS) outbreak of 2003 and the Middle East Respiratory

Syndrome (MERS) in 2012.

Epidemic

Number of

Countries

Reporting Cases

Estimated Deaths

Estimated

Contracted Cases

Estimated

Mortality Rate

SARS (2002 – 2003)

774

8,098

9.6%

MERS (2012 – 2014)

858

2,494

34.4%

COVID-19 (2019 – 2020)

60+

4,262

118,101

3.6%

The U.S. was a very small part of these previous outbreaks in comparison to the level of activity seen with COVID-

19. Eight U.S. patients had evidence of the SARS infection, and no deaths occurred in the U.S. due to SARS. The

U.S. saw only two cases and no deaths due to MERS in 2014, both associated with individuals who had lived or

worked on the Arabian Peninsula.

In addition, in can be beneficial to compare the extent of the impact of a sample influenza year to understand the

magnitude and strain on health care systems and population mortality. The most recent full year of mortality in

the U.S. is from 2018, which was also a fairly harsh year for the age-adjusted influenza mortality rate. The overall

U.S. population age-adjusted rate for influenza grew by 4.2% in 2018. The U.S. influenza season across 2017-2018

saw over 48 million people become ill, with over 950,000 people hospitalized and over 79,000 deaths. The annual

mortality rate for influenza in the U.S. typically is observed between 0.1% and 0.3%.

Additionally, in 1918 the world faced an influenza H1N1 pandemic as World War I was ending. Mortality was high

in people younger than 5 years old, 20-40 years old, and 65 years and older. The high mortality in healthy people,

including those in the 20-40-year age group, was a unique feature of this pandemic. Health officials estimate that

about 500 million people became infected with this virus, and mortality was estimated to be approximately 50

million worldwide. Since 1918, the world has experienced three additional pandemics, in 1957, 1968, and most

recently in 2009. These subsequent pandemics were less severe and caused considerably lower mortality rates

than the 1918 pandemic. The 1957 H2N2 pandemic and the 1968 H3N2 pandemic each resulted in an estimated 1

million global deaths, while the 2009 H1N1 pandemic resulted in fewer than 300,000 deaths in its first year.

Health Care Cost and Utilization

Data on the cost and utilization of treatment for individuals who are diagnosed with COVID-19 still appears to be

emerging. Future research briefs will focus on emerging data for the cost of detection and treatment. In an effort

to encourage early detection and treatment, some U.S. health insurers announced that they would waive copays

and cost sharing for COVID-19 detection tests. Several pharmaceutical companies have been developing and

testing treatments for COVID-19, though results are still preliminary. In addition to these antiviral and anti-

infective treatments, preventive medicines and therapeutic antibodies are being reviewed.

Infection Spread Rate

Transmission rates for diseases, and the intensity of an outbreak, are highly dependent on how the pathogen

travels between people. Coronaviruses generally can travel up to six feet from an infected person, as they move

through respiratory droplets produced through sneezes, coughs or conversations. Some estimates suggest that

each person with the new coronavirus could infect between two and four people without effective containment

measures. The incubation period for COVID-19 is also relatively long compared to other diseases, with estimates

running from 2- 14 days from the time of exposure to when the individual shows symptoms. With concerns about

the spread of the disease and the length of the incubation period, many countries have implemented quarantines.

The quarantines vary broadly, including limitations on entering the country to full regional or national quarantines

of the population. Recently, the Italian government declared the entire country a "red zone," meaning people

should stay home except for work and emergencies.

By comparison, other pathogens more easily travel through the air for longer distances, such as up to 30 meters

for tuberculosis, chickenpox and measles. With the SARS coronavirus in 2003, world health authorities were able

to eventually track and isolate cases. The result was to bring the average number each sick person infected down

to 0.4, suppressing the outbreak.

Health and public officials have responded in several cases by canceling spectator events that would bring large

groups of individuals into close proximity to each other. As examples:

• The BNP Paribas Open, a main tennis tournament held in Indian Wells, CA for the Association of Tennis

Professionals and Women’s Tennis Association, was canceled due to due to concerns surrounding the

coronavirus and the safety of the participants and attendees at the event.

• Several Union of European Football Associations (UEFA) Champions League matches, which often feature

large fanbases travelling across Europe to support their teams, will be played behind closed doors without

spectators in attendance.

• The South by Southwest music, film and technology festival, held annually in Austin, TX has been canceled

due to concerns about the coronavirus.

Section 3: Economic and Asset Impact

Macroeconomic Variables

With COVID- 19 impacting business around the world, domestic and international financial markets have reacted

to reflect potential lower levels of economic activity.

The U.S. Bureau of Labor Statistics released its initial report for February 2020 on March 6 and noted that the U.S.

labor markets were little changed from previous months. Nonfarm payroll employment rose by 273,000 in

February, the unemployment rate was relatively unchanged at 3.5%, and the number of unemployed persons in

the U.S. remained at 5.8 million. This reflected the continuing general steadiness within the U.S. labor market

prior to trade and commerce disruptions that resulted as impacts of COVID-19 emerged in international trade.

On Tuesday March 3, in an attempt to limit the economic and financial fallout from COVID-19, the Federal Reserve

reduced the benchmark U.S. interest rate by half a percentage point to just below 1.25%, down from about 1.75%.

As the impact of the epidemic was seen to impact global economic activity, the Organization for Economic

Cooperation and Development estimated that global growth could slow to 1.5% in 2020. This was approximately

half the rate it projected in November 2019. Similarly, the International Monetary Fund indicated it expected

global growth could slow to 2.9%, following an estimation of 3.3% in January 2020.

Asset Values and Volatility

International financial markets have reacted to COVID-19 as some investors sought increasing shelter in

government bonds amid uncertain future economic activity arising from the impact of COVID-19. Equity trading at

the New York Stock Exchange was halted for 15 minutes early in the session on Monday March 9 as the Standard &

Poor’s 500 Index fell 7% from its previous close. Major U.S. indexes are approximately 15 – 20% lower than recent

highs from mid-February 2020, with current values similar to levels seen in August and October 2019 prior to

general run-ups in equity values between October 2019 through mid-February 2020.

Low Interest Rate Environment

Low Interest rates in major international financial markets have been more the norm over recent years, and the

current impact of COVID-19 has further driven down interest rate levels. Benchmark Treasury yields in the U.S.

have fallen nearly 100 basis points since mid-February, with the benchmark 10-year Treasury yield temporarily

reaching a record low of under 0.40% and the 30-year Treasury moving below 1.00% for the first time ever. While

some widening of corporate spreads was initially seen as interest rates fell in late February 2020 to maintain

reinvestment yields, spread widening has not kept up with the decline in Treasury yields in more recent

observations.

Reinvestment Risk

With the material drop in interest rates to even lower levels, the opportunity to reinvest maturing assets becomes

even more difficult for financial institutions. Maintenance of fixed income portfolio yields that support fixed

interest crediting rates will pose a continuing challenge as the prolonged low interest rate environment continues.

Section 4: Operational Risks

As businesses around the world work with their employees to minimize the impact of COVID-19, new operational

risks and concerns begin to emerge. The following risks have been identified as key ones to watch through

discussions with actuarial profession thought leaders.

Remote Work

A common step implemented by many organizations around the world has been to encourage remote work

environments. In this setup, employees work from a remote location outside the normal office setting, often from

their own personal residence. Often, the organization will provide key technology items, such as a laptop

computer or access to systems through internet connections, in order to facilitate a productive work environment.

This helps maintain physical distance and reduce the chance of spreading disease among an employee population.

While remote work is not a new concept, the volume of remote work that is expected to be implemented due to

COVID-19 may greatly exceed previous expectations. Employers will be looking to maintain productivity and keep

processes moving. Many organizations may need to quickly convert paper-based processes and educate

employees on effective communication through technology solutions.

A mitigation to this risk is that many employers have already implemented some form of remote work, ranging

from arrangements that allow employees to periodically work remotely up to full time remote work. The previous

investment of these work arrangements may be beneficial to companies in any prolonged transition for their

employees.

Physical asset and information security risk also increases as remote work becomes more the norm. Organizations

are often encouraged to remind staff of basic security practices, like ensuring that they don’t leave company

assets, documentation, confidential information or property unattended in public places, and to be aware of

others who may be working around them.

Internet Service Provider Capacity

With the growth of remote work, many employers are looking to determine if there will be any new or different

strains on internet service provider (ISP) capacity. Remote work in large volumes across many organizations may

put different pressure loads on internet service providers. Organizations and their employees will be monitoring

connection speeds needed for a range of work, especially if work is done using a remote desktop connection.

Cyber Risk

Cyber criminals may take the opportunity, with both less physical presence at offices and more remote nodes

connecting to an organization’s network, to increase cyber-attacks. Distributed denial of service (DDoS) attacks

may increase where attackers flood the bandwidth or resources of a targeted system, usually one or more web

servers. These types of attacks can severely slow or cut off system access at critical times for organizations.

Organizations will look to refresh or implement additional cyber protections, such as ensuring devices use full disk

encryption. If a physical computer asset is lost or stolen, organizations will look to further ensure that data on the

device would not be accessible. Virtual Private Network (VPN) connections are expected to further increase in

their usage to enable access to corporate networks remotely, but also creating a higher risk of unauthorized access

and data leakage. The use of personal ISPs, and an expected growth in the use of public Wi-Fi services, create

opportunities that enhance cyber risk. In a growing era of data privacy, and the costs associated with reconciling

the loss of customer data, this risk may become more prominent.

International Trade Dependency

Many manufacturing organizations around the world today are dependent on international trade and shipping

systems in order to receive supplies, facilitate sales and distribute products. Financial services companies may be

less exposed to these operational risks on a short-term basis, but longer-term events could cause risks when

physical assets (such as computers, and network servers) need maintained or replaced.

Section 5: Previous SOA Research Highlights

Over the years, many committees and sections with in the Society of Actuaries (SOA) have helped support, fund

and promote research related to disease outbreaks. The following is a short highlight of key reports previously

released by the SOA or highlighted at SOA professional development sessions that may be of benefit for the

actuarial profession. The SOA is committed to updating these types of reports as new information emerges.

The report series on “Potential Impact of Pandemic Influenza on the U.S. Life Insurance Industry” gives guidance

through several reports on the potential impact of a disease outbreak on population and insured mortality in the

United States, and additionally has information on the potential impact on financial markets, corporate bond

spreads, monetary policy and economic output.

https://www.soa.org/resources/research-reports/2007/research-impact-pan-influ-life-ins/

The report series “Potential Impact of Pandemic Influenza on the U.S. Health Insurance Industry Report”

highlights the potential impact of an outbreak on health care costs, including information on how costs may vary

by the site of care, and the impact on operational risks to health care providers.

https://www.soa.org/resources/research-reports/2010/research-pandemic/

References

Key Statistics:

World Health Organization. “Coronavirus disease (COVID-2019) situation reports.”

https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports

Centers for Disease Control and Prevention. “Coronavirus Disease 2019 (COVID-19).”

https://www.cdc.gov/coronavirus/2019-ncov/index.html

European Centre for Disease Prevention and Control. “Situation update worldwide.”

https://www.ecdc.europa.eu/en/geographical-distribution-2019-ncov-cases

National Health Commission of the People’s Republic of China. “Outbreak notification.”

http://www.nhc.gov.cn/xcs/yqtb/list_gzbd.shtml

https://ncov.dxy.cn/ncovh5/view/pneumonia?scene=2&clicktime=1579582238&enterid=1579582238&from=singl

emessage&isappinstalled=0

Bureau of Transportation Statistics. https://www.transtats.bts.gov/Data_Elements.aspx?Data=5

Weixel, Nathaniel. (2020, March 6). “Coronavirus mortality rate likely to drop, say health experts.” The Hill.

https://thehill.com/policy/healthcare/486231-health-experts-warn-coronavirus-mortality-rate-likely-to-drop

Doyle, Liam. (2020, March 10). “Coronavirus named: What does COVID-19 stand for?” Express.

https://www.express.co.uk/life-style/health/1241302/Coronavirus-named-COVID-19-meaning-WHO-coronavirus-

latest-update

Holman, R. J., C. S. MacDonald, and P. J. Miller. (March 2020). “U.S. Population Mortality Observations-Updated

with 2018 Experience.” Society of Actuaries.

https://www.soa.org/resources/research-reports/2020/population-

mortality-observations/

Helathline.com. (March 2020). https://www.healthline.com/health-news/if-you-get-the-coronavirus-what-will-it-

cost-you#How-much-will-coronavirus-testing-cost?

Aon.com (2020, March 2). “Pandemic Flu vs. 2019 Novel Coronavirus – Comparison and Context”

https://www.aon.com/getmedia/10f63fe6-9da4-4b96-9b38-c6c3acf27d01/Pandemic-Flu-VS-COVID-Comparison-

And-Context-Mar-02-2020.aspx

Centers for Disease Control and Prevention. 1918 Pandemic (H1N1 virus). https://www.cdc.gov/flu/pandemic-

resources/1918-pandemic-h1n1.html

Amin, Priya. (2020, March 9). “Early mortality rates for coronavirus are likely misleading, experts say.” ABC News.

https://abcnews.go.com/Health/early-mortality-rates-covid-19-misleading-experts/story?id=69477312

Ducharme, Jamie. (2019, June 20). “This Past Flu Season Was the Longest in 10 Years, the CDC Says.” Time.

https://time.com/5610878/2018-2019-flu-season/

Cigna.com. (2020, March 5). “Cigna Covers Cost Of Coronavirus Tests For Customers.”

https://www.cigna.com/newsroom/news-releases/2020/cigna-covers-cost-of-coronavirus-tests-for-customers

Centers for Disease Control and Prevention. “Information about Middle East Respiratory Syndrome (MERS)”

https://www.cdc.gov/coronavirus/mers/downloads/factsheet-mers_en.pdf

McKay, Betsy. (2020, March 10). “What We Know About the Coronavirus, From Symptoms to Who Is at Risk.”

Wall Street Journal.

https://www.wsj.com/articles/what-we-know-about-the-wuhan-virus-

11579716128?mod=article_inline

Centers for Disease Control and Prevention. “Revised U.S. Surveillance Case Definition for Severe Acute Respiratory

Syndrome (SARS) and Update on SARS Cases --- United States and Worldwide, December 2003”

https://www.cdc.gov/mmwr/preview/mmwrhtml/mm5249a2.htm

World Health Organization. “Middle East respiratory syndrome coronavirus (MERS-CoV)”

https://www.who.int/emergencies/mers-cov/en/

Bureau of Labor Statistics. (2020, March 6). “The Employment Situation — February 2020.”

https://www.bls.gov/news.release/pdf/empsit.pdf

Sheikh, Knvul, Derek Watkins, Jin Wu and Mika Gröndahl. (2020, February 8). “How Bad Will the Coronavirus

Outbreak Get? Here Are 6 Key Factors.” The New York Times.

https://www.nytimes.com/interactive/2020/world/asia/china-coronavirus-contain.html

Elliott, Helene. (2020, March 8). “BNP Paribas Open at Indian Wells canceled because of coronavirus concerns.”

Los Angeles Time.

https://www.latimes.com/sports/story/2020-03-08/bnp-paribas-open-at-indian-wells-canceled-

because-of-coronavirus-outbreak

Simpson, Christopher. (2020, March 10). “Multiple Champions League Matches to Be Behind Closed Doors Due to

Coronavirus.” Bleacher Report.

https://bleacherreport.com/articles/2880130-barcelona-confirm-ucl-tie-with-

napoli-behind-closed-doors-due-to-coronavirus

Elliott, Rebecca and Elizabeth Findell. (2020, March 6). “Austin’s South by Southwest Festival Canceled Due to

Coronavirus.” https://www.wsj.com/articles/south-by-southwest-festival-canceled-over-coronavirus-11583530566

Fonda, Daren. (2020, March 9). “Two Companies Are Making Progress on Coronavirus Treatments. The Stocks

Aren’t Responding.” Barron’s.

https://www.barrons.com/articles/two-companies-are-making-progress-on-

coronavirus-treatments-the-stocks-arent-responding-51583779661

Romo, Vanessa and Sylvia Poggioli. (2020, March 9). “Italy Expands Quarantine Measures Nationwide To Stem

Spread Of Coronavirus.” NPR.

https://www.npr.org/sections/goatsandsoda/2020/03/09/813791575/italy-

expands-quarantine-measures-nationwide-to-stem-spread-of-coronavirus

Economic and Asset Impact:

FederalReserve.gov. (2018, March 8). “Monetary Policy Strategies of Major Central Banks.”

https://www.federalreserve.gov/monetarypolicy/monetary-policy-strategies-of-major-central-banks.htm

Long, Heather. (2020, March 3). “Fed makes largest emergency cut to interest rates since the financial crisis.” The

Washington Post. https://www.washingtonpost.com/business/2020/03/03/economy-coronavirus-rate-cuts/

FederalReserve.gov. (2020, March 3). “Implementation Note issued March 3, 2020.”

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a1.htm

Mohamed, Theron. (2020, March 9). “The entire US yield curve plunged below 1% for the first time ever. Here's

why that's a big red flag for investors.” Markets Insider.

https://markets.businessinsider.com/news/stocks/us-

treasury-yield-curve-below-1-percent-red-flag-investors-2020-3-1028975968

YCharts.com. (2020, March 9). “Moody's Seasoned Aaa Corporate Bond Yield.”

https://ycharts.com/indicators/moodys_seasoned_aaa_corporate_bond_yield

Operational Risks:

Rudolph, Max. (January 2007). “Pandemic Influenza’s Impact on Health Systems.”

http://rudolph-

financial.com/Pandemic_articles.html

Aon.com. (March 2020). “COVID-19 Response Site.” https://www.aon.com/event-response/coronavirus.aspx

Mourselas, Costas. (2020, March 6). “A peek inside op risk managers’ coronavirus response.” Risk.net

https://www.risk.net/risk-management/7491576/a-peek-inside-op-risk-managers-coronavirus-toolkit

Gutman , Yotam. (2020, March 5). “COVID-19 Outbreak | Employees Working from Home? It’s Time to Prepare.”

Sentinel One.

https://www.sentinelone.com/blog/covid-19-outbreak-employees-working-from-home-its-time-to-

prepare/

Previous SOA Research Highlights:

Toole, Jim. (May 2007). “Potential Impact of Pandemic Influenza on the U.S. Life Insurance Industry.” Society of

Actuaries. https://www.soa.org/resources/research-reports/2007/research-impact-pan-influ-life-ins

Toole, Jim. (June 2010). “Potential Impact of Pandemic Influenza on the U.S. Health Insurance Industry.” Society of

Actuaries. https://www.soa.org/resources/research-reports/2010/research-pandemic/

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