美國再保險集團 (RGA) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Reinsurance Group of America fourth-quarter conference call.

Today's call is being recorded.

At this time I would like to introduce the President and Chief Executive Officer, Mr. Greig Woodring, and Executive Vice President and Chief Financial Officer, Mr. Jack Lay.

Please go ahead, Mr. Lay.

Okay, thank you.

Good morning to everyone and welcome to RGA's fourth quarter 2004 conference call.

I'll turn the call over to Greig in just a second.

David Atkinson, our Chief Operating Officer, is here with us this morning as well.

Greig will comment on our results and then we'll respond to any questions from our participants.

As a reminder, during this call, we plan to make certain statements and discuss certain subjects that will contain forward-looking information, including among others, statements relating to projections of revenue and earnings and future financial performance and growth potential of RGA and its subsidiaries.

You are cautioned that actual results could differ materially from expected results.

A list of important factors that could cause those actual results to differ materially from the expected results is included in the earnings release issued yesterday.

In addition, during the course of the call, we will make comments about our results that are based on operating income both on a pretax and after-tax basis.

Under SEC regulations, operating income is considered a non-GAAP financial measure.

We believe this measure better reflects the ongoing profitability and underlying trends of our continuing operations.

Please refer to the tables in our press release for more information on this measure and reconciliations of operating income to net income for the various business segments.

With that, I'll turn it over to Greig for his comments on the fourth quarter.

Good morning.

Thank you for joining us.

Results for the quarter were good with the exception of a couple items.

Let me hit the highlights.

Company-wide operating income for the quarter totaled $55.5 million, 15 percent above the fourth quarter of 2003, total of 48.2 million.

On a per-share basis, our reported operating income for the quarter was 87 cents per diluted share, slightly ahead of the prior-year result of 85 cents per diluted share.

The quarter's results were affected by a couple of atypical items.

Those are estimated claims from the December 26th tsunami, $7.5 million pretax or about 8 cents per share.

This estimate is fairly subjective since loss information is still developing.

We currently have eight claims reported for $1.6 million, so the majority of this obligation represents our best estimate of the level of claims which will be associated with this tragedy as the coming weeks unfold.

Additionally, we have reflected $10 million pretax increase or about 10 cents per share in the pension reserves associated with our runoff business in Argentina.

The situation in Argentina continues to evolve and we thought it prudent to adjust our total liability upward, given the uncertainties associated with the ultimate claim runoff and adjudication from the liabilities.

We hope to aggressively pursue commutationable (ph) liabilities that put this business completely behind us as quickly as we can.

For the year, operating income per share increased 11 percent over last year.

That's 3.57 per share versus 3.22.

The 3.57 per share in the current year exceeded the midpoint of the guidance range we provided last year at this time.

The year had shaped up for a higher rate of increase if not for the impact of the tsunami.

Our average stock price for the quarter was nearly $45 per share, which resulted in an additional 627,000 common stock equivalents in our EPS calculation for our peer securities.

For each additional dollar of average stock price increase, we can expect roughly 100,000 of additional common stock equivalents for the peers.

The fourth quarter marks the first time that this effect has been meaningful, and the effect of the fourth quarter was approximately a penny per share on net operating earnings.

Net income for the quarter totaled $55.4 million or about 87 cents per diluted share.

Consolidated net premiums increased 27 percent for the year, ahead of our 18 to 20 percent expectation.

That increase has been helped by quite favorable currency exchange rates (technical difficulty).

In discussing individual operating segments, let's start with the U.S. operation, our largest segment.

For the quarter, pretax operating income was $77.5 million compared with 58 million in the prior year, overall a good quarter.

Mortality experienced in the U.S. segment for the quarter was in line with expectations.

Results in the asset-intensive segment distorted a bit as we refined final accounting for a treaty that was converted to coinsurance from funds with Helco (ph) Insurance in the third quarter.

Refinement reflects the difference between the market and book values of the securities transfer in connection with that transaction.

And it resulted in additional investment income offset in large part by amortization of all of the acquisition costs with the net positive of $3.2 million pretax operating income impact.

The market value of those securities will represent the cost basis to the Company going forward for financial reporting purposes.

As expected, premiums in the U.S. decreased for the quarter since the prior-year quarter included six months of activity on the Allianz block.

For the year, premiums increased about 23 percent.

The integration of the Allianz block is essentially complete at this point.

Turning to Canada, the Canadian operation had another strong quarter founded on favorable mortality results.

Pretax operating income totaled $17.2 million compared with the 14.7 million in the prior year quarter, a 17 percent increase; and that increase would be including (ph) foreign currency.

Mortality results added roughly $3 million pretax to the quarter's earnings and have been unusually better than expected all year long.

Offsetting that somewhat is the $1.6 million pretax provision for tsunami claims allocated to Canada.

Premiums increased about 90 percent to approximately 72.6 million for the quarter or 10 percent measured in Canadian dollars.

On a year-to-date basis, premiums have increased about 18 percent on a U.S. dollar basis and about 10 percent on a Canadian dollar basis.

Year-to-date pretax operating income totaled $62 million, up about 34 percent from 46.1 million in 2003.

On a Canadian dollar basis, the increase was about 26 (ph) percent.

It was an extremely strong year for our Canadian operation from the beginning to the end.

Regarding our international operations, it was a weak quarter in terms of bottom-line performance, driven by poor underlying mortality and capped off by burying the largest piece of our tsunami reserve.

Pretax operating income totaled $5.9 million for the quarter compared with 7 million a year ago.

The prior-year quarter was unusually strong, benefiting from both high premium flows and good mortality results.

In 2004, the result includes about $5.3 million of the estimated tsunami claims.

We experienced poor mortality in Australia and the Asia-Pacific region, and have also worked hard to improve the administration and refine accruals with better data in this rapidly growing book of business.

The combination of mortality and refinement of premium accruals and reserve levels had the effect of reducing expected earnings by roughly 3 to $4 million during the quarter.

Mortality experience in the UK, our second-largest premium market, was weak in the fourth quarter as well, but at expected levels for the year as a whole.

For the year, the international operations contributed $38.5 (ph) million in pretax operating income, up from 36.3 (ph) million in 2003.

Before tsunami effects, that represented a 21 percent increase.

Substantial but less than we would have expected.

We do expect premiums to grow in the 15 to 20 percent range; our North American operations growing in the lower teens over 20 (ph).

I'm off the notes here.

For the quarter, the net premiums for the international segment increased 18 percent to $234 million.

For the year, net premiums totaled nearly 878 million.

We do continue to expect strong growth internationally.

As indicated in the press release, foreign currency had a modestly favorable impact on the bottom-line results.

In the corporate segment, the $10 million Argentine reserve hike previously mentioned dominated the results.

So on a consolidated basis, our effective tax rate was a couple percentage points lower than normal due to a $1.9 million reduction in our tax liability associated with the favorable resolution to one of our tax positions.

In service of guidance for 2005, we've set an operating earnings target of between $3.85 to 4.15 per share.

This target represents underlying earnings per share growth rate of approximately 12 percent at the midpoint of the range.

We continue to fight a low interest rate environment, which makes it difficult to get that extra 1 or 2 percent of growth.

Obviously, though, mortality results will finally determine our success or failure in meeting that target.

Our capital position is strong and given our anticipating earnings level, we currently would not expect the need to raise capital during 2005.

We would expect premiums to grow in the 15 to 20 percent range with North America growing in the lower teens and over 20 percent internationally.

Earlier this month, we announced that we received approval for a representative office in China.

We hope to have that office opened and staffed in May but don't expect to have a meaningful impact to our 2005 results.

In conclusion, we're pleased with the results for 2004.

We absorbed a couple of negative items in the fourth quarter and so reported a good full-year results.

We look forward to the year ahead and thank you for your support.

We will now be happy to take any questions.

(Operator Instructions).

Jim Balar (ph) of J.P. Morgan.

Hearing no response, we'll hear from Nigel Dally of Morgan Stanley.

Great.

Thank you.

Good morning.

A couple of questions.

First, just on Argentina, maybe you could provide us some details on how large that block is?

How quickly it is running off, and how can we get comfortable that there won't be any further charges with respect to that block?

Second, on the annuity contract, does that have any ongoing impact on earnings?

Or should we view the income, which was recorded this quarter as let's say a onetime in nature?

And then just lastly, on your capital needs, I know you mentioned you don't require any additional capital this year, but as we look forward, would you be ending the year in a position where potentially you would need to raise some capital at that point?

And if you were to raise capital, do you have debt capacity or would it need to be equity?

Thanks.

Okay, Nigel.

This is Jack.

I'll handle at least some of that, maybe starting with the Argentine situation.

In terms of how large -- where we are in the runoff and how large the reserve level is and that sort of thing; the size that we have roughly $55 million of reserves set up.

And that's running off at a pace that will likely have us out of that business within two to three years, and it could accelerate to the extent that we're successful in any commutation activities -- that negotiation will be upcoming this year.

The $10 million (technical difficulty) to a reserve level that we consider to be our best estimate at this point.

So that's the best we can do there in terms of determining really what level the reserves at which they should reside.

I think the next question related to the restructuring of the funds withheld treaty.

And whether the 3 million or so impact was onetime.

You should really view that as onetime.

That's onetime or nonrecurring.

We really wouldn't expect to see that.

That was solely associated with the restructuring effort.

In terms of capital, we are in a fairly good capital position at this point, in part because of the earnings throw off -- just the retained earnings of our block of business.

We would not expect, based upon our current growth rate, that we would be back in the capital market -- let's take it one piece at a time -- back in the equity capital markets this year and perhaps not in 2006.

It really depends on the rate of growth.

But certainly this year, we would not expect to be back in the equity capital markets.

In terms of debt, we're probably underlevered somewhat now.

So you could see us terming out some of our short-term debt this year.

We continually monitor that situation.

So that would not be surprising.

Just to follow up on the capital site, I guess this means some certain capital market solutions brought around by various companies, and (indiscernible) obviously announced the transaction rates (indiscernible).

I'd be interested in your impression as to that transaction and whether that's a potential -- if that's a type of transaction of something you would consider.

Yes, we've taken a look at structured transactions similar to the one that -- at least our understanding -- the one that was issued by Swiss Re.

We've looked at those for several years now.

And as you're probably aware, there are a number of capital markets providers or investment banks that have been shopping those sorts of solutions.

Some we think would work well for us.

Some of the structures aren't as attractive to us.

But it wouldn't be surprising for us at some point to pursue a solution like that.

We've used other means to accommodate XXX redundant reserves and related collateral requirements for those reserves in the past.

But we like to have a fairly full array of solutions to accommodate that sort of financing.

So as I said, we are looking at those sorts of structures and some could be attractive to us.

Great thank you.

Michael Lassey (ph) of Lehman Brothers.

Good morning.

I was wondering if you could go into some additional detail about why there was a claim in Canada for the tsunami.

This is Greig, Michael.

We are using our best information and knowledge here.

It is a little bit a shot in the dark if you will.

But we have done things like monitor newspaper lists of names and so forth to come up with where we think we might have claims coming.

We do believe we'll have some more claims in the works.

One of the five possibilities is that we would have some claims from tourists from Canada.

But we've taken our best shot at it.

I understand.

How much of your business exactly is written in those regions?

I was a little surprised that the number was so high.

Specifically, how much business do you reinsure in Thailand and I guess Indonesia and Sri Lanka? (multiple speakers) variations of Pacific Asia?

Our claims are not going to come from indigenous populations, by the way.

They're going to come from tourists.

Oh, so (multiple speakers) 10 million to our --

The claims reported to us so far have been UK, Hong Kong, Australia.

I see.

Would you be able to explain what happened in the policy acquisition costs and other insurance expense line, in Asia-Pacific, specifically why there was a big drop-off.

I assume that might have something to do with claims experience, but I'm not 100 percent -- just any type of clarification there would be really appreciated.

Yes, this is Jack.

Actually, that related much more to the refinement and cleanup efforts that were underway in connection with some of our Asian business that Greig referred to earlier.

As we got better data and refined our own systems, we adjusted several of the lines in the P&L and the balance sheet; and so you had what I would characterize as an unusually low level of policy acquisition costs that is certainly not a run rate for that subsegment.

But the reason that it looks particularly low relates primarily to this refinement of the various balance sheet and P&L amounts that was underway in Australia.

So going forward would we -- I would assume that we wouldn't expect it to be in the $14 million pretax range, but probably somewhere lower than that.

Yes.

Going forward, I think what you really ought to do in terms of any modeling is take a look at our annual book loss rates as well as policy acquisition cost rates.

And you can see a pattern there.

And that's what I would certainly suggest you use and not the fourth-quarter rate.

Yes, I mean, but if in the fourth quarter you brought that number down because -- unless I'm not understanding this correctly.

If there was cleanup needed in the fourth quarter that you took in the fourth quarter --

That's right --

Would it not be the case that going forward that number -- that ratio would be lower?

Because if in the fourth quarter there was a catch-up adjustment for all the previous quarters?

Or am I not thinking of it properly?

Well, I think in part you're thinking of it probably.

I think you should presume that going forward, that ratio -- when I talk about a ratio -- for instance, an acquisition cost ratio, I'm really talking about that line item compared to premiums.

Yes, yes.

And so it was inordinately low in the fourth quarter.

So you should look at it in terms of a much higher rate going forward.

Right.

It's usually in probably about the midteens.

That's right.

That's right.

So going forward, it would probably be somewhere in the low midteens or --

Mid to high teens is where I would characterize it.

Okay.

That's helpful.

Thanks a lot.

Jeff Hopson of A.G.

Edwards has our next question.

Hi, good morning.

Just to put an end on the cleanup -- the Australia -- is it that this will be a cleaner admin system going forward; that's my first question.

And then two, any updates on the U.S. operating environment?

And then finally, I think you've been a little more optimistic that Japan is coming around.

Can you comment on your thoughts for the outlook for Japan?

Jeff, yes, Australia has been growing very rapidly, especially in the last say 18 months or so.

And client reporting and our own administration has kind of fallen behind the front office marketing activities if you will.

So there was a lot of cleanup that had been taking place over the -- especially the third and fourth quarters.

That's what's reflected here.

That is now a situation we view as it's as clean as we can have it at this point in our development.

And so you shouldn't expect that sort of number changes all the time.

It should be fairly clean right now.

In terms of the U.S. operating environment, it continues to be a favorable climate.

RGA is well positioned and the number of competitors is down.

There's still a fair amount of quoting activity generated by the sale of ING and we're participating in that.

That seems to be going along very well for us.

And so we're very pleased with the state of the environment in the U.S. market.

Japan had a very good year actually.

And it's sort of buried in some of the Asia-Pacific results.

But if you looked at Japan by itself, they had a very good year in terms of experience.

Growth was not way out of bounds, but it was a solid sort of 40 percent type growth that we've been experiencing the last couple of years.

And indications are that we're slowly creeping upwards still in that growth rate.

So we are expecting that Japan will continue to be a fashion for RGA in years to come.

Okay.

And in terms of the U.S. market, any change in client behavior as far as retention I guess?

We've talked about that a couple times around here.

We can give you examples of companies increasing their retention and we can give you about an equal number of examples of companies that are going back to quota share.

There's a lot more talk about increasing retention.

There's not really a lot of noticeable action in that regard yet.

Thank you.

Andrew Kligerman of UBS Securities.

Thank you.

Good morning.

I couldn't hear the last two questions well, so excuse me if I repeat.

But on the revenue or premium line in general, you mentioned earlier -- and then I'll have a follow-up question -- you mentioned earlier that you're expecting 15 to 20 percent growth with U.S. sort of low teens, non U.S., north of 20 percent.

Why do you think the U.S. market can get lead teens growth?

And then maybe you can elaborate a little bit on what's going on internationally that's going to drive it north of 20 percent.

But I'm very curious as to the U.S. market -- what might drive premiums that much.

Well, first of all, Andrew, in the U.S. market, there's a certain embedded growth rate in that that a lot of our businesses on a WRT (ph) basis and just by keeping a certain amount of in-force, we will see premium levels actually increase a little bit from that.

Building on that base, we see the fact that there are fewer competitors in the marketplace.

The fact of the matter is RGA probably will pick up some market share simply because of the consolidation in the industry over the coming year.

That's -- new business doesn't really affect our growth rates as much as you might think.

But over time, that accumulation of what's happened in terms of writing net business over the last couple of years will have its impact.

And we believe that somewhere around a 10 percent-ish growth rate in the U.S. is very doable.

And actually, we're expecting maybe at least that much in Canada, which has been on a pretty good streak of winning contracts and business (ph) coming up (ph).

In international markets, remember, we're starting from a fairly low base in many of these markets.

First of all, the insurance industry in many of the Asian markets is growing more rapidly than 20 percent.

So just participating in the natural growth there, you would get growth rates of that sort.

But in addition, we're penetrating markets still and have not gotten to the point where we have reached a saturation point with our own market share.

And just back on the U.S., do you have any sense that the industry and life reinsurance is going to grow, or has it reached kind of a stabilization state where it's going to track with the primary market?

Well, I think it's probably reached a stable point in terms of the amount of reinsurance expressed as a percentage of new business written.

It's been somewhere around 65 percent of business has been reinsured the last several years -- 60 percent, say, give or take.

And that's not going to grow.

As a matter fact, it might back off a little bit.

But in terms of the amount of in-force business that's reinsured, that number is still going to grow.

And we expect that the overall level of reinsurance to in-force insurance is still going to grow for quite some time.

Got you.

Okay, now shifting over to the Asian ops, I believe there was pretax adverse mortality of 4 mil.

And it's the third quarter in a row in that division where there was adverse mortality.

Should I start to be thinking this is a trend or has it just been 3 (ph) blips?

Maybe you could give a little color there.

Well, unfortunately, the tsunami affected the Asian business more than others.

We allocated more of our reserve to Australia and to Hong Kong than we did to other markets.

That's based on some information and some guesses, admittedly.

But that's our best take on it right now.

In addition to that though, it has been a rough year for Australia.

The rest of the Asian markets -- that is Japan, Taiwan, Hong Kong, Korea have all performed very well for us this year.

And really pretty much front to back.

So it's really kind of isolated in that one market.

We are expecting that that's -- a lot of this is catch-up.

A lot of it is the fact that we are rebalancing accruals based on better information we're getting from clients and better information we have in our own books.

And so there's a lot of adjustments this year in the Australian, New Zealand business that we're now at the end of.

Okay.

So you feel pretty good going forward?

We do.

We do.

Great.

Now shifting back, and this is where I'm just not sure if the prior question is touching on it because it was fading in and out, or the two questions ago.

But on Europe and South Africa, there was some discussion in the press release on somewhat adverse mortality.

And we didn't see that in the numbers, but what we did see is the ratio of policy acquisition costs and insurance expenses to net premiums increased to 27.9 percent in the fourth quarter from 23.7 percent.

So what was mentioned is adverse mortality appeared to be some type of adjustments -- maybe I got this totally wrong -- in the policy acquisition costs.

So I was hoping to get a little clarity from you on that.

Andrew, this is Jack.

Let me take that.

In a lot of respects, you almost have to look at both that policy acquisition costs as well as the claims line because there's some interplay between the two as we set our reserves.

So my best advice would be to take a look at a combination of those two in terms of what was the percentage.

I think it was about 93 percent or so for the quarter.

And that's higher than we would expect.

We'd expect something closer to 90 -- actually a little less than 90.

Okay.

So there was definitely some interplay there, and that would explain the bad mortality.

Okay.

Fair enough.

Thank you very much.

Vanessa Wilson of Deutsche Bank.

Thank you.

On the U.S. premium growth, could you just back up and maybe try to give us a sense of what was the premium growth in the U.S. in the fourth quarter and then in 2004 if you could normalize for the Allianz?

You didn't have Allianz in for the full year in '03.

This is Jack.

I'll take that.

That is very difficult to do.

And I think we've kind of discussed this previously that as we novate a lot of the Allianz treaties, really starting with the first quarter, we made an announcement.

But it's become very difficult to disaggregate Allianz from the rest of our U.S. business.

So I couldn't give you a very refined answer in that respect.

I mean you can take a look at what we've indicated previously as our estimates of how much Allianz was going to add in terms of premium.

I think, Jack, you had said before that Allianz -- I guess when they were added -- would have added about 120 million of premium per quarter.

That's right.

And because you had six months of premium in the fourth quarter of '03, we just took 120 million out of the fourth quarter of '03 and then kind of did a year-over-year comparison and came up with an 8 percent premium growth rate.

And that seemed a little bit low to me given all the positives going in the marketplace today, you know, the additional new business and pricing.

And so thinking -- if I did the math right, how do we think about the acceleration in premium growth in 2005?

Or the fourth quarter, is it just lumpy and we can't really get caught up in what one quarter says?

Well, it's two things.

One is the latter point that you just made.

The quarter to quarter, you do have some of that lumpiness so to speak.

The other issue is the one to which I referred earlier and that is, you're using some assumptions there that are in the ballpark, but they're not particularly refined.

Okay.

So I think you almost have to revert back to the commentary that -- Greig's commentary earlier in terms of our expected growth rates in North American markets.

Okay.

And then Greig, you talked about the growth -- the low teens U.S., then you said 10 percent.

And I wasn't quite sure which one you wanted us to focus on at this point.

If I were picking a single point, I would say 10 percent for the U.S.

But I would say it's a little higher in Canada.

So I think when we refer to North American growth rates, I think we're talking in the low teens. 11, 12 percent maybe for North America.

Okay.

And in your list of drivers, you have the embedded growth of the in-force and then you had RGA taking on share in the marketplace.

Is there any sense that you have that you would reprice in-force business, or there be some kind of price or rate impact?

We continually monitor our experience to see how it's tracking compared to expected.

We have found that our experience through some very difficult competitive years is tracking exactly at our expected.

We are making some refinements and some mortality assumptions as we periodically do and quite frequently do, actually, that may have effect on certain policy classes, certain ages, certain risks profiles and so forth.

But generally speaking, I suspect that means a little bit of an upward movement in some rates, but not a wholesale repricing.

And we hear from the primary companies that the cost of reinsurance is going up.

If you thought about new business, maybe relative to in-force business, would there be an increase in rate there?

Yes, I think that there probably is a general increase in rates.

Some of that is just the impact of taking some of the low bidders out of the marketplace.

Okay.

And then Jack, you did a lot of refining and cleaning up in Argentina and then -- I'm sorry, in Australia -- and then also you've refined the reserves in Argentina.

As we think about complying with Sarbanes-Oxley, which I think you have to do along with everybody else, right?

I think we do, that's right.

How are you feeling about that?

Is some of this cleanup activity coming out of that compliance?

Do you feel like you're comfortable that you're going to make it?

It just feels to me like your business is very complicated.

There's a lot of estimates that are done.

There's a lot of late reporting.

Do we have anything to worry about there?

Well, that's a good question.

In part, some of the cleanup activities in the Australia operation relate to Sarbanes-Oxley and certainly a greater focus on financial reporting controls and data administration and that sort of thing.

So I can't say that Sarbanes-Oxley should be looked at completely apart from this.

We don't anticipate we're going to have Sarbanes-Oxley reporting issues.

I think that was part of the question or part of the issue that you were relating to.

Now relative to Argentina, that's not really a Sarbanes-Oxley issue.

That's a runoff business and it really relates primarily to we continually reassess the reserve levels and the underlying assumptions.

And the fourth quarter was a point in time where we felt more comfortable adding $10 million.

So my last question, Jack, is given that you did so much refining and cleaning and looking and checking during 2004, could we expect a little less noise in 2005?

Well, yes.

I think the answer is yes.

We would expect less noise.

But noise by its very nature is hard to predict.

But I would say yes.

This was a year for Sarbanes-Oxley and a lot of other reasons that I think we and a lot of organizations took a hard look at how things were being administered.

So yes, we wouldn't expect repetition of that sort of thing.

Okay thanks very much.

Jeff Schuman of KBW.

Good morning.

I was wondering if we could talk a little more about the tsunami provision.

At this point, there have been very few deaths actually confirmed with recoveries of bodies.

And in reading some of the statements, I guess the British government and others -- sort of a problem in the sense that there are hundreds of people who are missing but there's varying degrees of confidence whether these people were actually there.

Do you think at some point there's just going to be sort of a government effort to declare a lot of these people dead?

Or do you think it's going to take quite a while to play out?

Or how do you kind of approach this?

Jeff, that's a good question.

There will be a long play-out on this I suspect because we will be trying to get evidence that there really was a claim.

We suspect there will unfortunately be cases that are fraudulent that are presented as claims; and we'll have to be very careful in watching for those.

And so while we're making an estimate based on reported claims, we're certainly not going to be paying out money until we are confident that that's the right thing to do.

Whether governments intervene and begin to pressure, we haven't seen a lot of that yet.

But we certainly are admitting that that's something that can happen.

We did see some of that happen after the 9/11 incident.

And --

I guess a difference -- it was fairly easy to determine whether someone was probably there if they work there every day (multiple speakers) that they were there.

That's right.

I guess I'd like to make a request that you kind of keep us updated over the next few quarters on exactly how that provision develops, given that it is probably fairly fluid.

That would be helpful, I think.

Right.

Jeff, this is Jack.

We will certainly do that.

As early as our 10-K filing, we plan to indicate the level of claims presented at that point.

Okay.

And then in Argentina, can you indicate what was the catalyst that kind of drove the reserve change at this point?

Was it currency?

Interest rates, mortality?

What was it that sort of went the wrong direction?

This is Jack.

It really wasn't currency related.

It's more the interaction of these AFJP fund values and the interplay between the fund value and the ultimate claim liability that we have to pay.

We just continually monitor that, take a hard look at the amounts that we are paying out and then try to run out the reserves and see if they're inadequate.

And I don't remember you talking about commutation before.

How would that work?

Is this something that you would have to negotiate sort of plan by plan?

Or this is something you would negotiate with the government?

Or how would that be negotiated?

We negotiate it contract by contract.

And there's a discrete number of these, probably ten, of which five or noticeably bigger than the five small ones.

And we would negotiate with them case-by-case.

The reason that it's coming up now is because they've changed the rules in terms of when the payouts on lump-sum disability are so we're getting to the end point.

And so now people are beginning to get a clearer idea of what the liabilities might be if you paid out lump sums today.

So we're in a better point to negotiate something, we feel.

And do you have a sense if they would be receptive to these negotiations or not?

We hope so.

It's kind of hard to say.

Nothing is happening in Argentina right now.

They're all on holidays, summer vacation for them.

So it's a little slow right now, but we expect it to pick up in March.

Okay.

Thank you very much.

(Operator Instructions).

Eric Berg of Lehman Brothers.

Thanks and good morning.

A few questions.

First, back to Argentina.

I guess my thinking is that sort of as a preface, you did a ton of work leading up to the old reserve.

So it's not as if you haven't been thinking about this long and hard.

What are you doing differently?

Going back -- hopping back to I guess it was Nigel's question -- what have you done and what will you be doing differently from how you thought about this reserve issue in the past to prevent another reserve increase?

Because after all, prior to this reserve increase, you thought your old reserve was adequate, or else you wouldn't have posted it.

So I'd like to know what you're going to be doing differently to prevent a recurrence?

Okay, this is Jack.

I'll take that, Eric.

In terms of what we're doing differently, I probably wouldn't characterize it like that that we're doing anything differently.

It's really the same methodology in process, but the assumptions tend to change over time.

And the primary assumption change in coming up with the current reserve versus the prior reserve -- which you may recall was, about three years ago, was in 2001 -- relates to the item that we mentioned earlier.

And that is, you have to make an assumption related to the fund values.

The unit values associated with these funds, I should say.

And that's a dynamic that moves over time.

And it moved in a way as you would expect -- it's not completely in correlation with the assumptions that we made three years ago.

So we needed -- felt a need -- to recognize that in our reserve calculation.

Okay.

Switching gears, a couple more questions.

With respect to Australia, I just want to sharpen my understanding. (technical difficulty) issue (technical difficulty) administrative and bookkeeping related -- your ability to get in-process information from the cedents (ph)?

Or is there a mortality issue emerging?

It's a combination of both.

I'd say mortality issue.

It's bad mortality experience over the course of a couple of quarters this year.

And we'll be looking into that.

At this point, we're not sending off huge alarm bells, but we will be taking a fairly deeper dive into the mortality structure there and seeing if it's a onetime event or what's going on.

But it's sort of wrapped up in the fact that we just have grown so rapidly in that country.

And the reporting tends to follow that companies negotiate a reinsurance deal, and it takes them awhile to get their administrations systems up to speed to send the right data.

And then it takes us a while to basically incorporate that data into our own systems and platforms.

And we've kind of gotten behind there.

Final question -- much more straightforward -- wanted to ask just about the mechanics.

With respect to this change or commutation of the -- I guess it would be the -- from funds withheld to coinsurance.

Is the idea that you have an existing contract whose format was converted so that assets that had resided with the cedent were remitted to you during the quarter.

And is that essentially what happened?

Yes, Eric; that's exactly what happened.

The transfer of assets actually took place in the third quarter.

But we didn't get all the reporting information in a format to refine the reporting until the fourth quarter.

But that's exactly what happened.

So that what trigger, from a GAAP accounting perspective, that would trigger what, the recognition on the P&L of additional investment income but also, as I think you referenced, additional amortization of DAC?

That's correct.

Thanks very much.

That's it.

Joan Zief of Goldman Sachs.

Thank you.

Good morning.

I just have two questions.

The first is as you're thinking about maybe a little bit of the tightening of the U.S. reinsurance market, are you requesting from your customers more audits?

Are you changing underwriting standards and requiring them to put in a different systems and processes, doing things like that that may cause their administrative costs to increase a bit?

That's my first question.

And the second question is just what you guys are thinking about the AXXX (ph) reserves and whether you would see that as a market or not at all?

Joan this is Greig.

I'll take that.

In terms of audits, we actually have been increasing our audits over the last couple of years from the time before that.

And that's a reflection of the fact that so much of the risk is being transferred.

And generally speaking, we want to keep those audits up just to make sure that people are complying.

In terms of underwriting requirements and things that might add expense to direct companies, we do expect companies to adhere to their underwriting guidelines as much as possible or to adhere to the agreements that we have with them on underwriting and processes like that.

We don't expect that's going to increase their administrative costs to any great extent.

We do intend to review all of our treaty languages.

It's just sort of a reflection of the times, I suppose.

There is increasing scrutiny of treaty compliance, auditing of (technical difficulty) underwriting assessments and all of those things that have come to be commonplace in the market today.

And that's increased.

But our new treaties -- treaty language -- will ultimately reflect that a little bit better than the old treaty language did.

And that's a project that's underway right now.

In terms of AXXX, we still are not comfortable with taking the AXXX risk.

And that stems from that we're not comfortable with viewing that reserve as totally redundant.

It's such a long-term risk in nature, there are enough uncertainties in terms of future investment climate and future lapse rate that we've just not gotten comfortable with taking on that business.

Okay.

Thank you.

Our next question comes from Michelle Giordano (ph) of Nueberger Berman.

Good morning.

I am just wondering what level of interest rates you're assuming in your 2005 guidance and what you're assuming for your portfolio yield in your 2005 guidance.

In our pricing, we continually update that.

And as we look forward, we'll be of course dropping our interest rates assumptions as our portfolio yields drop.

Actually, we've kind of hit a fairly stable point right now.

But we are expecting our portfolio yield to drop further.

We're investing new money at slightly below our portfolio yield rate right now.

And so that will continue to put some downward pressure on overall profits.

But we price for that.

And it has less impact on most regular reinsurance that you might think.

And what are the new money yields today?

We're in the 5's.

Okay.

Low 5's?

Mid 5's.

Mid 5's.

Okay.

Okay, great.

Thanks very much.

We have a follow up from Jeff Schuman.

Sorry about that.

Given the attention on the Australia business, I was wondering if you could just remind us of the approximate size there I guess in terms of premiums and earnings.

Jeff, it's about -- I want to say about 200 million.

I'm trying to remember (technical difficulty) versus U.S. dollars.

But I think it's about a $200 million book.

200 million Australian dollars premium?

U.S.

Of U.S. dollars.

$200 million U.S. in terms of premium and that would generate I guess on sort of a normalized basis what kind of earnings?

This is Jack.

Probably 10 to 12 or so.

10 to 12.

Okay.

Alright, thanks a lot.

We have a follow-up from Vanessa Wilson.

Jack, on the Argentine business, you gave us 65 million of reserves.

Could you talk about what the assets are or some other metric that we can track with you?

Vanessa, that's really the best metric.

We don't have a portfolio of Argentine assets.

We got out of the Argentine assets 3.5 years ago.

So that's really the best metric I can give you.

Okay.

But are there premiums?

Is there anything?

There's really very little premium flow.

Okay.

Thank you.

And Mr. Lay, it appears there are no further questions at this time.

I'll turn the call back over to you for any additional or closing comments.

Okay.

Just thanks, everyone, for joining us today.

And we'll be filing our 10-K early in March.

And to the extent any questions come up in between, feel free to give us a call.

With that, we'll end the call.

That does conclude today's teleconference.

Thank you all for your participation.

You may now disconnect.