美國再保險集團 (RGA) 2005 Q2 法說會逐字稿

Good day and welcome to the Reinsurance Group of America second quarter conference call.

Today's conference 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 sir.

Thank you.

Good morning to everyone and thanks for joining us on short notice this morning.

I will turn the call over to Greig, our CEO, in just a minute.

David Atkinson our Chief Operating Officer is here this morning as well for the call.

Greig will comment on our results that we released yesterday and then we will respond to any questions from our participants.

As a reminder this call or 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 or 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 results to differ materially are included in the earnings release issued yesterday.

In addition during the course of this call we will make comments about our results based upon 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 our various business segments.

With that I will turn it over to Greig for his comments on the second quarter.

Good morning.

We have just completed a difficult second quarter and have accelerated this conference call and we appreciate all of you adjusting your schedules to participate today.

As indicated in yesterday's release the second quarter results were significantly affected by high claims levels in the U.S. and in the U.K. and in addition we have increased our reserves on the Argentine AF J.P. business.

These are all separate independent issues and all affected the results in the quarter in a negative way.

So I will cover each of these issues in turn.

First in the U.S. as stated we experienced a high claims flow during the quarter.

While the number of claims was pretty much at expected levels the volume of large claims, that is claims on policies or lives insured for $1 million or more was high.

More than $30 million higher for example than in the comparable quarter last year.

The higher claims flow is not concentrated in any particular issue year or client spread on a representative basis between our auto and FAC business.

If we look at the small block of policies of one million and over and calculate a standard deviation on just those policies the actual claims in the first six months represented about 1.8 standard deviations away from expected.

Even with our large spread of risks this sort of claims volume will occur periodically.

The life mortality business is long-term in nature.

We have seen periods of claim development similar to this in the past.

For those of you who remember 2001 even absent 9/11 that was a year in which our claims were 106% of our expectations, for the whole year which is pretty much what they have been for the first six months of this year although we have a bigger book now.

You might also remember that in that case over the subsequent, about fifteen months, that is by about April of '03 we had essentially filled that in that hole.

So we do expect these fluctuations from time to time.

This is not an unprecedented event and we really haven't seen enough in the way of a pattern that would cause us to re-examine pricing levels in any particular cell.

It is basically the case that last year large policies never amounted to more than $60 million of claims in the quarter and this year the same business is producing $90 million a quarter plus.

So it's a little bit of a spike.

We have spent a great deal of time obviously and effort analyzing the claims flow from every perspective possible, that is by client, by product type, by automatic, by facultative.

We will continue to review developments and gain any further insights we possibly can but we have no plans to make any meaningful changes to our pricing philosophy based on what we saw in our analysis to date.

Regarding our U.K. mortality results, as we indicated in the press release several treaties in the U.K. have produced high claim levels in part due to fluctuations volatility and client reporting.

This is not unusual especially with business flow from new clients and in this case, part of this was from new clients.

Our past results demonstrate that volatility can occur.

The U.K. has had very strong quarters recently particularly in the first quarter of this year, so this quarter's experience even some of that out.

In fact, if you look at the treaties that exhibited bad mortality in this quarter on an inception to date basis they are pretty much right on expected.

So in this case this is more of just reporting volatility and evening out experience over last periods of time than anything else in our opinion.

Turning lastly to the AF J.P. reserves.

Results include a $24 million pretax increase to the reserves associated with the Argentine pension business.

The runoff on that business has accelerated as you know through the regulatory changes that speed up claims payment.

We have now commuted one of our largest treaties in the early part of this quarter.

That gives us the basis for making a good estimate we believe on what it would take to close off this business in terms of isolating it from future financial flows.

We are in discussions to commute the rest of the treaties that we have.

We would hope to push that through in the next short period of time.

We have increased our reserves based on claims flow information and we don't expect the remaining runoff or settlements to have any significant impact on future earnings in other future periods.

Just rounding out the slate here turning to Canada, Canada continued their string of strong quarters that span into this year and last year.

Asia-Pacific had very positive quarter rebounding strongly from the first quarter; again showing some of the volatility that you would expect of a new operation but this case the rebound was positive and premium flow was up significantly.

We continue to be very optimistic about our international growth opportunities particularly in Korea and Japan over the intermediate to long-term.

In conclusion, while the results were disappointing it is a long-term business.

It is subject to periodic volatility.

We will continue to monitor claims trends and analyze development to-date however we do expect claims to return to normalized levels.

The actions we have taken this quarter lead us to believe that we have closed the AF J.P. business off in terms of future impact on future results.

Pricing conditions in our markets continue to remain as good as we have ever seen them.

We have continued to see strong demand and lessen the competition both in our U.S. and international markets.

And with that we hopefully have left a lot of time for questions.

And we will be happy to take any questions right now.

(OPERATOR INSTRUCTIONS).

Michael Levy (ph) of Lehman Brothers.

I was wondering in terms of the losses that you're seeing in the adverse mortality, are you seeing outsize losses from one or two different seating companies?

Or are you seeing the losses stemming from business with a whole bunch of different companies, primary companies?

No, it's coming from all companies.

Or a broad span of companies, put it that way.

It's coming from issue years going back as far -- we had a lot of claims in the 10 to 20 year since issue range.

Basically as I said it's the same book of business that produced substantially lower claims in each of the last many quarters before the first and second quarters of this year.

Just as a follow-up you would say that the business, the claims are really coming more from the RGA business and the experience from the Allianz business isn't really where it is happening you right now?

It's both RGA and Allianz although it's difficult for us at this point to separate some of those because many of the treaties we shared in common, we now get one statement from companies.

So it's not always identified to us which business originally originated with Allianz and which is ours.

So that gets a little difficult but the business on both books has just had a little bit of large claim activity.

Jimmy Bhullar with JP Morgan.

I have a couple of questions.

First along you had I think six quarters now out of the last eight that you have seen adverse mortality, and my question is whether any of these issues relate to business written in any specific year?

If you could just talk about how profitability is emerging on business that you wrote in the 1980s and maybe even in the '90s.

And then the second question is on premium growth in the US.

Earlier this year I think you mentioned that your target for '05 was close to 10%.

Do you still think you can hit 10% or what is your outlook for premium growth in the US?

That's it.

On the fixed premium growth first yes we're a little disappointed the premium growth is a little bit slow.

Production is actually very strong.

We do expect that there is some reporting reasons and things like that have dampened a little bit the growth rate.

We do expect to pick that up a little bit and get closer to 10% by the end of a year.

In terms of mortality, if you look over a period of time each of the last three years taken as a whole has been pretty good mortality.

As a matter-of-fact probably running a little bit better than expected if you were to put a fine point on it.

And if we look back over an extended period of time even say at the end of the first quarter when we were looking back over eight quarters we were under expected for our pricing levels or for our experience levels in the U.S. up to that point.

I think the second quarter has tipped us a little bit over expected but I think we're talking like 100 points something.

So we are really pretty much right on in terms of where we have been in aggregate mortality even with these bad quarters although they are swinging the numbers quite a bit this year.

And we do expect those things to even out.

And just to follow-up on that, could you just talk about how pricing is doing?

Are you still getting rate increases and whether they are higher or lower than what you have gotten over the last few years?

The pricing environment is pretty much the same as we have reported on for the last few quarters.

Generally prices have increased.

We are essentially able to get higher pricing in the marketplace.

And I think we view this as somewhat ironic that in the best pricing environment we have ever seen we're having a very difficult experience time in the U.S.

But are they increasing at a lower pace because that's what some of the primary companies have said.

Do you agree with that?

Oh, yes.

The levels of reinsurance rates have stepped up and they have pretty much stabilized at a higher level than they were before that.

They are not continuing to increase.

Nigel Dally with Morgan Stanley.

First one is Argentina.

You also took a charge last year and at that time you told us the issue is now behind you.

Now we're taking another charge.

So the question is what changed between last year and today?

And why should we be comfortable that there is not another charge coming down the line?

Nigel, this is Jack.

I will take that.

We did take in the fourth quarter of last year a $10 million increase to reserves.

Minor correction, we did not indicate at that time that that put the situation behind us.

What we indicated with that was to the best of our knowledge at that point the type of reserve increase that we needed.

We have much better information now as Greig indicated; we have commuted one of the treaties.

There has been an acceleration of the claims flow so we think we're in a much better position now to take the type of charge that we actually do believe puts the situation behind us and creates the situation where we won't have any financial impact going forward.

There is certainly no guarantees but that is our strong belief at this point.

John Nadel, Fox-Pitt and Kelton.

Just a couple of quick questions.

The mortality results this quarter and I guess especially last in this quarter in the U.S. does it make you rethink some of your retention limits on some of these larger claims?

Or could you maybe give us a sense for -- I think last quarter you mentioned that the number of claims greater than one million was somewhere around 40 versus a more typical quarter that is in between 20 and 30.

Could you give us a sense for that was in the second quarter and then kind of your thoughts or philosophy around retention?

It was about 40 again.

We actually took a good look at that.

We raised our retention about two years ago exactly July 1st of '03 and since that time we have saved 27 million in premiums and incurred an extra $17 million of claims in that quarter from 4 to 6 where we raised our retention.

In other words it has been a good move.

It does introduce volatility and you have to say that the first six months of this year if you looked at those numbers it has been a little bit of a loser.

We have lost a couple $2, $3 million to having a bigger retention because of the large claims we have experienced.

But as we look at that in sort of the course of eight quarters of time now, we don't think that is a bad decision.

We have saved ourselves $10 million by raising our retention and even though it has cost us a little bit this first part of this year it looks like a good decision over time.

With respect to reporting issues and delays in reporting, you know I know you guys have characterized this and I guess many reinsurers have characterized this as typical in the business, but given the consolidation in the industry and some of the increased control and maybe power that you guys have at this point, is there any way for you guys to incorporate some any additional control or even to some degree maybe even penalties on the ceding companies for delays in reporting?

It seems like the ceding companies don't suffer from quarterly volatility due to delays in reporting yet the life reinsurers like you continue to take the hit from these types of things.

And I am just wondering if you're thinking about any types of changes in that respect?

Well we have suffered from reporting throughout our history as an industry.

We are at the mercy of clients reporting to us.

And while I would say in the U.S. that situation has gotten a lot better as companies have gotten used to reporting quota share business and things are more estimable now than they used to be.

The situation internationally is still at an early stage and so there is a lot more volatility internationally in reporting just due to the newness of the reinsurance business reporting on quota share basis that is occurring for the first times.

In addition when you get new clients and we are getting new treaties all the time but the book of business internationally, you get new clients very often, they don't have the ability to report to you or they report to you on an estimated basis or as many as six to 12 months before they actually get good numbers to you.

And sometimes those good numbers are a little bit off from where the rest of us were, and so there's all sorts of things that factor into this.

It's very difficult to charge for that because most of the time you're not talk about true economic differences, you are just talking about timing differences.

Yes, but your stock and the volatility and the results.

I understand; we wish it were differently.

Like I say, we have gotten the U.S. to the point where our ability to estimate and project puts us in a pretty good shape to mitigate differences in the U.S. but in other markets it's harder to do that yet.

Can you quantify what the impact was in the U.K.?

I don't think your press release gave the specific amount.

We had about $10 million excess claims in the U.K.

I wouldn't know exactly how many of those would be from sort of catch-up but a lot of them.

In the U.K. so far we have a limited number of large treaties, less than 20 say, and we track each of them very carefully on an inception to date basis which is the best measure for us in terms of how things are going compared to pricing.

And we don't really see any of those situations as being alarming.

There is a treaty or two that are above 100 % and some below it but mostly the overall book is right at where we expect it to be.

Just one final question.

I think your release talked about no significant changes to intermediate targets or goals.

Are you guys in a position at this point to maybe speak a little bit about over what time period, how quickly you would expect the results especially the U.S. mortality results to revert back toward a normalized level and maybe at least speak a little bit about '06 targets for earnings?

It's probably a little too early to talk about '06 targets.

Mortality in the U.S. could revert back tomorrow in terms of where the current levels are and it could experience bad fluctuations again next quarter.

So those are things we don't know and it's very difficult to predict when.

I use the example of '01 just as an example.

I mean that basically filled back the hole in 15 or 16 months and that period of time was a smaller book by quite a bit but it is -- it was just about the same level of adverse claims stretching over a year as compared to the six months so far.

So we do expect things to level out in our business just as really the same book of business that has produced consistently stable results for the last 12 quarters or so, give or take a little bit of fluctuation, it is pretty much right on and it has just jumped up a little bit right now.

I know Maybe I am going into a little bit too much detail but any sense as to how those claims tracked in the U.S. on a monthly basis during the quarter?

Did they start to slow?

Were they consistent during that period?

No.

It was pretty much over -- when you get into months you do get into reporting.

Some companies will report all their claims for a month at one time.

So sometimes we will get even two months' worth in the beginning and the end of a particular month for a company.

It was pretty much spread though, it was not, there was no pattern.

Andrew Kligerman, UBS.

A couple of questions of clarification first.

Argentina, I read through the release of the quarter when you took the charge and I absolutely saw no comment that you were done with potentially future charges.

But what I don't, I want to make sure I understand here is that you feel like you are done now because you have commuted a number of the contracts and you have kind of cut the tail off?

Is that the right way to think of it?

Not exactly.

We have commuted one major contract during the second quarter and at the same time there has been an acceleration of claims flow.

And between the commutation and a better indication of what claims flow to expect and the time period in which we expect those claims to be presented we are more comfortable at this point trying to get our arms around a total reserve sort of number.

When you think of a time period meaning you think claims will be coming in over the next two three years and then we're finished?

Is that sort of the thinking?

Andrew we will see a lot of claims flow over the next 12 months.

And so yes, we think the existing reserves will diminish pretty quickly now.

Now another clarity point.

You said 100 point something in terms of mortality with respect to what you expected.

Could you just clarify for me what years, what is the time period?

Is it 3 1/2 years?

What is day one so I understand what --.

That kind of an eight quarter number.

So even now you are right in line with expected over the last two years; it's just that the last two quarters have swung you the other way?

Is that the right way to think of it?

Yes.

More or less.

As of the end of the first quarter we were a little bit under 100%; the second quarter has taken us over.

Now with respect to Allianz and RGA and the fact that you have melded the overlapping contract, were the RGA terms and conditions the same as the Allianz terms and conditions in all or if not all the extreme majority of contracts?

Sometimes they were but most often they weren't.

So is it possible that the Allianz business could have been the problematic element or you just don't think so?

Again what is your guesstimation, and then I know you have melded the contracts.

Our best estimate is that Allianz to this point from what when we acquired it is pretty much on track.

A little bit better than expected last year, a little bit worse than expected this year.

With respect to the number of insured lives, reinsured lives that you have, how many reinsured lives does RGA have?

That is a difficult question and I don't mean to evade it.

It's only because a lot of people have multiple policies with multiple companies.

We have about 20 million records now in the U.S.

When we talk about large claims, $1 million and over, we've got somewhere around 65,000 of those lives.

Large meaning over one million type.

Yes, 65,000 out of 20 million.

If you're isolating the problem into one sector most of them fall into that 65,000 large case group.

That makes a lot of -- I have policies with different companies so they could aggregate to one.

So I kind of see that point.

And so even with that many lives, I don't know -- I know it's a hard number to answer but, with that many lives you are still likely to see this type of volatility?

It's never going to go away, is that the right way to think?

If you had 40 million lives I would still see a potentially a quarter like this.

Is that the right way to think of it?

Yes, that is probably true.

Obviously as you get more lives you dampen the volatility.

I think the good news from our perspective is we have looked at this as the number of claims really haven't been too far from what we would have expected.

They are pretty much -- it is strictly a severity issue and not a frequency issue.

The last question and I think I know the answer to it but I would like to hear -- I mean what can I take away with regard to the life reinsurance industry as a whole when I look at your U.S. experience and your U.K. experience?

Is there any parallel to draw?

Is there a likelihood that you would see weakness in other companies as well?

We have never really been able to make that correlation.

You would think that we share policies in common but it really doesn't always seem to work that way.

So I would hesitate to comment on anything that affected anybody else.

Thanks very much and good luck next quarter.

Jeffrey Hopson, AG Edwards.

Two questions.

In terms of the automatic versus facultative I think more often than not volatility has come from facultative.

Is that true or not?

So is there any difference now that you have seen more automatic volatility?

And then two, could give us an update on what is happening with the Australian business?

With the dominance of large claims in the first half of the year we would have expected that a lot of that would have been just FAC business.

In fact as we look at it FAC may be performing better than automatic.

It is certainly not out of line and both of them have -- both back FAC and automatic have had their share of problems especially in the second quarter.

But FAC might be actually a little better than the automatic in terms of where it is compared to expected, which surprises us a little bit.

Australia has actually had very good first six months and we're happy with that because we had a lot of adjustments during the course of last year.

A lot of that was better information and data and that seemed to affect us negatively in at least three of four quarters.

So Australia had a very tough time but a lot of it was getting records in shape and actually getting data that was better and they have been on a smooth and thankfully profitable course through the first six months of this year.

Vanessa Wilson, Deutsche Bank.

Back on the U.S. your prior comment was that you saw more in the automatic business and because these are large claims what I am wondering is when you look at the claims or go in and audit the client, are you're finding that there is any kind of movement between classes where you might have more claims because some people have been rated preferred classes or rated super preferred when really they didn't warrant it?

That is always a focus of our audits.

And yes, if you break down cell by cell, we can tell you cells where by issue year or by company you always have some that are over 100% and some that are under 100% and the ones that are over 100% very often do correlate with bad audits and lead us to bad audits which is why our audit activity is very active.

In the first half of this year though Vanessa I would say that you can ascribe the bulk of the overage in mortality not to those phenomenon, but rather to just large claims.

And it is really spread over all issue years, all companies in a pretty even way.

And then on Argentina you said you commuted one treaty and you have a few left.

Can you give us the number you have left?

The one we commuted was a little over 20% of the business.

We're talking to most of the others now.

We have I think reason to believe that we will settle these or commute these in a way that is pretty much in line with our expectations or we won't commute them.

We will not settle.

So we will see how it goes but our impression is that with this experience we are able to get a handle on what this is going to play out to be.

Are these treaties with the actual pension entities?

With government entities?

With European insurance companies?

Who is your client here?

The client is a life subsidiary of on AFJP.

Those AFJPs are typically owned by private holders, not government.

They are large European and American interests in many of them.

In the U.K. if you take the very bad experience in the second quarter and the fairly good experience in the first quarter and you normalize and smooth it out over this very short life of this book of business would you say that the profitability is in line with your expectations?

If you look the first quarter and the second quarter we are behind a little bit.

But if you look at say the first quarter, second quarter and then say the fourth and the third quarter of last year or something like that, you're probably going to get pretty smooth.

Like I said we're running right at expected inception to date.

Jack, can give us an update on the A&H business?

You had another 3.3 million which is $0.05 per share off the book value.

Where are we in this process?

That's a good question.

We did have some additional A&H claims flow.

We didn't have any significant arbitration settlements.

We do try to disclose the extent to which any potential arbitrations, the amount that is under dispute in our filings.

But really it wasn't a lot of activity other than a little bit higher claims than we would have expected but that kind of comes in bits and spurts.

So in some respects that's not altogether unexpected.

Any way to get our arms around when there is an end in sight on this one?

We have got some arbitration scheduled for later this year so certainly we would expect those situations to resolve themselves.

The reality is we will probably see at least a trickle of claims flow for two to three more years.

I don't know Greig if you have a thought on that.

We would like to be at the point where we could do what we have done with Argentina on the A&H side.

I don't think we're too far away from that as Jack says, when we get to the other side of one or two arbitrations that is about all there is that is sort of clouding that picture in a way.

And the flow should dampen quite a bit as we go forward still.

So I would hope that say within a year's time we could tell you how close we are to either setting that up or forever to kill it or not.

And then just to sort of step back and look at the overall risk profile of the company, because international is an important growth engine for your franchise, as I think about it we have had this volatility in the U.S. from time to time and even in Canada from time to time.

But when I think of things like Argentina and now the U.K. and then there have been blips in Asia, as the international business becomes a larger and larger percentage of your company, how do you see the risk profile of that business in terms of providing volatility to your overall story relative to your domestic business?

Well, first of all, I really like to separate Argentina from the rest of the international, because Argentina has really been real losses and it's been sort of a one-off unique kind of operation.

So unfortunate -- a terrible business, but the rest of the business what we have experienced more is the volatility that you would expect from young operations that don't have a big block of renewal premium base and so forth.

You would expect that volatility to decrease over time, the results to become more stable.

In many places you would expect the results to stabilize, say, to a better position than say the U.S. is because they don't have the large policies.

And so you can expect that results will be even more stable than the U.S. on a quarter-to-quarter basis.

But we are a ways away from that.

As we build those operations, though, we begin to build that diversity and stability in the book.

Alex Cappas (ph) Oppenheimer and Company.

My questions have been answered.

Thanks a lot.

Joan Zief, Goldman Sachs.

Good morning.

I guess my questions are if the U.S. mortality doesn't revert quickly, are you going to reconsider your domestic pricing?

And also if your mortality doesn't revert quickly back to expected, are you going to find that your retrocessionaires are going to come to you with higher pricing?

And so what does that mean for your plans, not only for your own pricing to your customers but what you are going to do about your own retention and absorbing higher prices from your reinsurers?

Well, Joan, our retrocessionaires have historically made a lot of money off of us.

Business has been very good, and I frankly don't know what their experience on our book is this year, although I can't believe it is terribly good.

But they have even broader fluctuations than we would have on businesses they take.

It's really difficult to adjust pricing based on what we have seen so far.

As a matter-of-fact I have said that the claims were kind of spread over all issue years and so forth but I would also add that we haven't seen very many contestable claims.

That is, it's not business over the last couple of years that falls into that big case category where we have seen death.

People are dying of natural causes at later ages and so it's difficult to adjust pricing for new business because that really hasn't been where the claims have come from.

I guess my last question is on just on the retention of the carriers, you said that the reinsurance rates in the marketplace have moved up and now stabilized.

Is it fair for me to assume that any move by your clients to increase retention or not, has probably been done?

Or do you still expect companies, your clients to reconsider their retention levels?

I expect there will be continued movement and evaluation of that.

We have actually seen more talking than moving of retention so some of these things take a little while to get through the decision mill at direct insurance companies.

And some of them are probably going to have moved recently and will move in the future a little bit.

But like I said we really don't expect to see session rates dramatically changed.

Brian Hegler (ph), Kennedy Capital Management.

My questions have already been answered.

Thank you.

(OPERATOR INSTRUCTIONS).

Stephen Gavios (ph) with Genesis.

I have I guess two questions.

First if I could just step back it sounds like as you look particularly and discuss the U.S. increase in losses and claims that you have had, it kind of seems like you are looking at them and you feel they are serious, but you are kind of discounting them in terms of any probative value.

And given that you have obviously scrubbed your books carefully before you came onto this conference call, I'm just trying to -- I don't feel like any of us listening to this conference call share your enthusiasm that it is over.

So I wonder if you could help us understand where you are getting your confidence from that this is more a blip and not a trend.

Second question, on the U.K. it surprises me that you are having all these late reporting claim problems when you only have less than 20 treaties there.

I would think that your audits would have uncovered claims problems earlier.

Can you help us understand better what is happening there?

First of all, we don't really propose that we know that everything is over as of today that things are changing back.

We just have been around this business a long time.

I have been around for unfortunately a couple of decades at this point and have seen that mortality does go through periods like this.

When we look at the data if we had found that we had a mispriced contract that was the source of the problem or we had particularly bad issue years or type of business or companies, it would cause us to change maybe the way we look at this.

When we haven't really found any of those things yet although we continue to slice and dice in every possible way.

At this point it is very difficult to draw any conclusions based on what we have seen about particular cells because in one period they are up, in one period they are down.

We are not seeing anything that looks like a sustained trend.

So while we don't know exactly when this mortality fluctuation will subside back to normal or better than normal, we just have confidence that the nature of mortality is that it does even out over periods of time and it has always been our history.

And over long periods of time we do expect this one to level out again as well.

We can't say when exactly but we hope it is soon.

In terms of the U.K. business, yes, even though there is a small number of clients, the business is fairly new.

And we do audit actively on our client base but still we can't help the situation where they are not really geared up to administer business after the inception of a contract and send us estimates for a period of six or nine months before they give us final numbers.

Things like that happen.

Other things that are just found in terms of their own procedures and reporting and things get lumpy.

That's the only way to put it until they get the procedures down and everything smoothes out.

This is David Atkinson.

I would add that in the U.K. a recent audit did uncover a particular treaty with some unreported claims and that was the source of a lot of our results in the second quarter.

There was actually two instances where that has happened where actually claims have sped up and we have got a block of them because we did an audit and found some claims that were unreported.

So in your experience of ramping up with new clients would you say this behavior in the U.K. is unusual?

No.

It's typical as expected actually.

If I can go back to your first point on the U.S. business, obviously slicing and dicing is an evolutionary and iterative process so you are never done.

But how much of the slicing and dicing that you really like to do, do you feel like you have done at this point?

We have done a lot.

The thing that we haven't done yet that we actually postponed because the same people were working on it is the full-blown, long-term detailed mortality study that goes through files and does very actuarially oriented does actual exposures and calculates to expectance and so forth for all of our business.

That is done annually and it would've been done about now.

What we have done is basically looked at actual to expected ratios themselves just every way you can imagine and as you said you can imagine we have done a lot of this.

Simply because the first quarter was high when we started seeing high returns in the second quarter we jumped on it pretty quickly.

We have been working at it for three months now.

And when do you think you'll be able to get the full-blown study now that since you have to delay it.

Probably this month or next month.

Is that something you expect to release to the market when you're finished or is that going to be part of your third quarter earnings conference call?

No we probably wouldn't comment on it one way or the other.

It's kind of proprietary information.

I would add that the nature of our business is such that things don't change dramatically in a span of a year or six months.

Our premium flow, our claims flow are pretty steady.

Deaths can accelerate, some events can happen, randomness can happen.

But we are not aware of any fundamental shift in mortality in the United States that would account for us to raise our mortality expectation going forward.

And it would take something like that at this point in time in such a short time for us to recalibrate.

What makes you confident that you're not missing something, I guess is my question?

Well we continue to look all the time.

I mean you don't know what you don't know I suppose, but I would say that we have looked as hard as we possibly can.

A lot of people have devoted a lot of time to mortality analysis as you can imagine.

Jeffrey Schuman, KBW.

I guess I'm going to beat to death a few of the prior issues if I may.

Going back to this issue of volatility, I guess I would be curious on David's perspective and this is just speculative but if you went back five or six years when your U.S. in force was four or five times smaller, and we also thought about what the company might look like down the road when it grew.

I wonder David did you expect that you would still have this much volatility when you got to the point where you had one trillion two of in force in the U.S.

Very much so.

We were able to take our in force book of business and calculate variance for those of you who are mathematically inclined and then figure out a standard deviation from that.

Now that is more theoretical than real but when we do that we can also match it with actual monthly and quarterly and annual variations in mortality and they come out with about the same answer.

And that is we have got a U.S. book of business with something like a 2 to 2.5% standard deviation of claims.

So on an annual basis, yes.

So on a quarterly basis if you can do the math that would be a double say 4 to 5%, would be a standard deviation of claims for a quarter.

And that is just based on the ground up analysis as well as looking at a history of claims.

And if we go back to the early discussion about how the higher retentions of I guess contribute to some of the volatility, I mean it sounds like up to this point you kind of thought about the fact that you believe that that incremental business over the span of time is profitable, and you would like to capture that additional profit.

But is it time to maybe start thinking about what that volatility contributes to the cost of capital?

I mean if it results in a different discount rate for all your other cash flows, isn't there an incremental cost there that maybe needs to be reckoned with at some point.

You are absolutely right, but if you wanted to button that down so there is very little volatility and keep say one million dollar retention, the profit base for RJ would be substantially lower.

I would say if we were to lower retention to $1 million it's just a wild estimate, but we would probably be talking about reducing earnings by 30%.

Well I don't know if you (indiscernible) the right number and obviously your capital commitment would change as well.

On another issue the U.K. and I think we all understand that it is a young business, that there will be some volatility.

I am wondering if there's a way though to maybe get the reported volatility maybe at least a little closer to so the actual volatility.

If you look at the last couple of quarters and you go plus 15 and minus 7, and part of it is driven by reporting issues and you're indicating now that inception to date the profits are in line which I guess would suggest as of the first quarter profits were ahead of expected.

So in the first quarter we were in a situation where profits were ahead of expected.

We had some large clients with immature reporting processes.

I mean going forward is their some way maybe prudently to not -- (indiscernible) you should drop all that to the bottom line when you're in that situation or is there any thoughts about handling that differently?

Well we are always refining that Jeff.

That's a good point.

We are always refining that so our accrual estimates are better, but that is an ongoing process.

They should get better as we get experience with customers and they get experience with us; they get experience with reporting.

We really don't set up our reserves to smooth out earnings and that is really kind of what you are implying in a way.

But we do try to get our accruals as good as we can and that is an ongoing process.

We do get them better all the time.

And just so we understand how the business works; obviously full-blown audits are pretty big undertaking, you can't do that every day.

But is it possible to -- particularly in the U.K. where you have a small number of large clients do you have sort of regular informal conversations that would give you a sense of maybe that there is a backlog, even if nobody knows exactly what the dollar amount of that is?

Yes, we do that.

Exactly right.

The problem with these audits though is that our clients don't even know they have a problem.

That's probably what I'm getting at, so if they don't know then obviously you can't know.

(indiscernible) Murchison (ph), RES (ph) Capital Asset Management.

I would an update on the tsunami that there was in past December in Asia.

I would know until now how many claims you had and how much in terms of dollars, millions you already paid for the claims that you had there.

Thanks.

I will take that.

I think we set up about 7.5 million of reserve at the end of the first quarter of last year so say with the tsunami events.

That is down too.

I don't have the exact number handy but it's right around 2 million, $2 to $2.5 million of reserve remaining and I think we have had maybe 12 to 15 claims altogether.

So we don't see that as much of an issue going forward.

Like I said there is about 2 to 2.5 million of reserve remaining.

So the weakness in the first quarter and the second quarter weren't due to any misunderestimating of the losses because of the tsunami?

That's right.

We have added nothing for the tsunami events; we have added nothing to the reserves during the first or second quarters.

Mike Mork, Mork Capital Management.

Hello, this is Michael Mork.

Actually I went to your IPO road show in San Francisco, been a stockholder ever since.

But anyway, got a longer-term question for you.

Your book value right now is around $40 and your earning power looks like around $4.

You have about a 10% return on equity.

Over a three to five-year timeframe, do you plan on letting that get up to maybe 13, 14%, or are you a 10% company?

In terms of returns?

Yes, return on equity.

You're earning about 4 bucks and your book value is around $40, so you've got about a 10% return on equity.

Are you planning on getting that up there higher?

Yes.

That equity include some FAS 115, probably $6 a share or so.

But I guess I would characterize it long-term as 14% would be a pretty optimistic amount.

We have kind of characterized it between 12 and 14%, and a lot depends on what's happening to interest rates.

So maybe that's the best way to put it.

I think 14% would be fairly aggressive for us.

But you do have plans to get it up higher than its current level.

That's correct.

David Myrtle (ph) of Deep (ph) Capital.

I just wanted to confirm one thing.

You said earlier in the call -- and I got cut off because my cell phone got messed up.

You said that your actual expected ratio is at about 100% over the last eight quarters.

Did I get that right?

It's a little bit over 100% over the last eight quarters.

One other question.

So the events that we're seeing right now, at least for the year-to-date, you said that's a 1.8 sigma event?

Yes, but that's if you look at those only those 65,000 or so policies that are one million and over (multiple speakers) -- not on the whole book.

The whole book, as Dave mentioned, if say a standard deviation is 4 or 5% for six months, we are at about 6% over.

There are no further questions.

Mr. Lay, do you have any additional or closing comments?

No.

Thanks everyone who joined us here this morning.

To the extent any other questions come up, please give us a call and we will go from there.

Thank you.

That does conclude today's conference call.

We thank you for your participation.

You may now disconnect at this time.