美國再保險集團 (RGA) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Reinsurance Group of America first-quarter earnings release 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.

Mr. Lay, please go ahead, sir.

Thank you.

Good morning to everyone and welcome to RGA's first-quarter 2006 conference call.

I'll turn the call over to Greig Woodring, our CEO, in just a minute.

David Atkinson, our Chief Operating Officer, is also with us this morning.

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

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 or earnings and future financial performance and growth potential of RGA and its subsidiaries.

You're cautioned that actual results could differ materially from the expected results.

A list of important factors that could cause actual results to differ materially from those 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 based upon operating income, both on a pretax and an 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 a reconciliation of operating income to net income for our various operating segments.

With that, I'll turn it over to Greig for his comments.

Good morning and thank you for joining us.

I'll make some brief comments on our results and then open the line for questions.

In total, results for the quarter were good.

On a consolidated basis, operating earnings per share increased 15% to $1.09 per diluted share from $0.95.

Operating earnings totaled $68.5 million, up 13%.

Reported net income for the quarter totaled 69.1 million or $1.10 per diluted share.

Consolidated premiums increased 10% over the prior year.

This is at the low end of our guidance range.

Foreign currency exchange rates dampened the rate of increase by about a point.

We would expect the rate of increase to move up a bit as we progress throughout the year very similar to what we experienced in '05.

Consolidated net investment income totaled $186.9 million.

That's an increase of about 17.5 million or 10% from the fourth quarter.

The majority that increase is associated with our funds withheld portfolio supporting the U.S. asset intensive business, where we saw somewhat better-than-expected results.

Yield on our remaining portfolios was roughly flat compared to fourth quarter on an average outset base that was up about $0.5 billion.

Turning to our operating segments, as indicated in our press release last night, we did change our capital allocation benefit from a regulatory risk-based approach to an internally developed economic-based approach.

This better correlates with the way we manage the Company's various businesses, analyze results and so forth.

The change primarily affects the level of investment income and capital charges allocated to each segment but does not materially change the underlying trends or fundamentals in our businesses.

The prior-quarter results indicated -- included in the press release were recast to conform to the new allocation process.

Turning to our segments, first the U.S. -- pretax operating income totaled $82.5 million, up 38% from last year's first quarter.

Last year's results reflected some adverse mortality experience.

Our mortality experience this year was within the expected range.

Premiums for the quarter were up 8%, a little less than what we would expect on a full-year basis but not unusual for the first quarter.

We saw a similar trend last year and expect the pace to pick up slightly, just as it did last year.

Business volume has been good according to the recently published SOA survey.

RGA's recurring individual business production was more than $50 billion ahead of the nearest competitor in '05.

Our asset intensive business contributed $8.2 million in pretax operating earnings, a strong quarter for that operation.

As I mentioned earlier, we saw better-than-expected spread performance on our in-force business.

No new treaties during the quarter but the average invested asset base is up over 11% from the prior-quarter.

Turning to Canada, the Canadian operation has some significant -- some negative mortality experience this quarter after having a long string of strong results.

Pretax operating income was down 43% to $8.6 million from $15 million.

The change to economic capital allocation significantly reduced the level of capital -- of allocated net investment income to Canada, since regulatory base reserved and capital requirements are extremely high.

As I indicated previously, both the current and prior-year quarters reflect the new capital allocation methodology.

Premiums flow was good -- in Canada, up 20% in Canadian dollars and 28% in U.S. reported dollars.

Regarding our international operations, total profits were good.

Results by operation were somewhat mixed.

That's usually the case.

Pretax operating income totaled $21.4 million versus 17.5 million last year, slightly better than anticipated with good experience in Europe and South Africa, somewhat offset by unfavorable mortality in Asia, particularly in South Korea.

Foreign currency translation adversely affected pretax operating earnings about $1.8 million.

Several of our operations are fairly new and don't have sufficient scale, so volatility can be expected going forward still.

Premium flow was a bit lighter than expected, up about 16% when you factor out adverse mortality -- adverse foreign currency exchange or about 10% US dollars.

We expect that pace to pick up but the UK market will continue to be a challenge given the slow primary market there.

In conclusion, we're off to a good start in '06.

The pricing environment can be characterized as stable.

Our new business volume is strong, given there are few competitors -- fewer competitors in a less aggressive pricing environment.

We're well positioned to capitalize on the many opportunities present in the global life reinsurance marketplace.

With that, we will be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS).

Jammy Bhullar, JPMorgan.

Thank you.

I have a couple of questions.

First, on investment income in your corporate and other segment, it was pretty high relative to the past.

I realize part of this might be because of the capital allocation.

Was there something unusual in that number or do you think that represents an ongoing trend?

Jammy, this is Jack.

I'll take that.

There was really nothing particularly unusual.

It is affected by the capital -- the new capital and more importantly the investment income allocation, just based upon the economic capital formula.

So there is some impact there.

We did have, you may recall, $400 million of investment proceeds come in during the December of the fourth quarter last year, so there was a higher investment base during the quarter as well.

Okay.

Then second, just on -- you mentioned pricing environments as stable.

Could you elaborate a little bit more on that?

Are you getting increases still in the U.S. and just on what your outlook is for premium growth?

Are you still confident in I think 8 to 10% is what you said last time.

Yes, Jammy, I think we're still are confident in that number.

We believe that the pricing environment, while we're not putting through large quantities of rate increases, we're not seeing decreases either.

As we look at the market, this is a very favorable, benign pricing environment for reinsurance right now.

It continues that way.

Are you seeing any more competition from some of the smaller companies that are moving up in market share or have you not seen that yet?

We've not really noticed an appreciable amount, but we see, occasionally, some activity from some of them, but we don't see any real what I would call price leaders or people that are trying to undercut the market with what we would reconsider prices that are too low.

Okay.

Then just a last one on your Europe business, the premiums were pretty weak there.

What do expect in terms of premiums for the remainder of the year in that business?

That European segment is dominated by the UK and the underlying life insurance market has seen a big drop-off in premiums on their side, which translates into a very difficult market in which to grow reinsurance premiums as well.

We would expect some increase in premiums in the UK, but it's going to be uphill sledding for the rest of the year.

We would expect sort of much lower growth rate than we've had in past years obviously.

We would hopefully try to see it go up from here in terms of the ratio.

Okay, thank you.

Jeff Hopson, A.G. Edwards.

A few questions -- one, you're now into I guess three, maybe four years of better premium rates.

Do you think that's having any impact on margins or is it still too soon?

Then can you give us maybe a rundown of Asia-Pacific as far as topline trends by market?

On the premium rates, it may not be as long as you think, Jeff on that score because of the lags in reporting.

But we are -- I think we are seeing the beginning of that environment start to make its impact felt.

I think we should see that sort of bleed in slowly into the overall picture over time.

I don't know that we've seen a whole lot of it yet still, but we've seen some of it, the leading edges perhaps.

In terms of Asia-Pacific topline, we were up about the same amount as we were I think in '05 over '04 this year, over '05, and saw that business expand during the course of the year.

In particular, a place like Korea has, second quarter, much higher premiums than the first quarter; the first quarter is the lightest.

We would expect Asia-Pacific growth rates to accelerate during the course of the year.

We are not looking for as big a growth as we've had in past years out of Australia because we are, frankly, pretty large in that market now and almost have to treat our position there as a mature position.

But we do expect some fairly strong increases in growth rates in Asia Pacific, especially in selected markets this year.

Okay.

In Japan, any particular comments there?

Japan steadily grows.

There's obviously a lot of market potential in Japan and we're happy with the way things are developing, although at times we wish they would go faster, but it goes at its own pace and we are making good progress in Japan.

Okay great.

Thank you.

Ken Zerbe, Morgan Stanley.

Was there any particular reason why mortality was so unfavorable in South Korea?

Was it more of a reporting issue or a spike in severity frequency?

In Korea, first of all, you expect these things to happen from time to time.

There was a bunch of claims on one group account.

I guess the good news is that we have a lot of adjustment capabilities on group business and we will be able to modify that.

We expect things to bounce around from time to time.

We don't expect that particular issue to pop up.

We do expect there will be fluctuations, both positive and negative, in these smaller businesses for us.

Okay.

Then in terms of the I guess the capital allocation, is it possible to break out the impact that the allocated -- relocation had in terms of investment income on each of your segments?

Ken, this is Jack.

One thing we will be doing is be filing an 8-K -- show for the follow-on quarters of '05 what the revision will look like.

But we had not planned to go back and recast the '06 results using the prior methodology.

We could do that.

It's not that dramatic, but there is some impact there.

We thought it would be more beneficial simply to recast the prior year, so you would have apples-to-apples comparability.

Yes, that would be fine.

Then the last question I had is with regard to the UK market, is it fair to assume that the slowdown is caused primarily by the slowdown in the housing market or is competition from other reinsurers becoming more of a significant factor to the slower premium growth?

Both of those factors are at play.

Clearly, the primary business is down considerably because of a slowdown in the housing market.

A lot of the risk insurance premium sales are tied to that market.

The competition in the UK, in terms of number of players, has heated up over the last couple of years though as well.

All, right great.

Thank you.

John Nadel, Fox-Pitt Kelton.

Good morning, guys.

I guess two questions for you -- if I look at the -- just following up on Canada, I look at the capital allocation by segment, could you just point out -- I mean, obviously Canada was pretty dramatically impacted, I mean, relative to the other segments.

Anything else was corporate.

I guess there's a lot of capital now sitting in corporate that was not there previously?

Any other segment significantly impacted though?

No.

You're right that Canada was the most affected of all the segments in terms of any reallocation.

After that, Asia-Pacific would be kind of a distant second.

Okay.

A follow-up on your buyback program too -- the accelerated I think should be fully completed at this point?

You guys had spent, you know, roughly 75 of the $100 million you allocated to the buyback on that accelerated.

Do we expect to spend the remainder during '06?

Yes.

First of all, you're right that we have completed the accelerated buyback.

We did so I think the third week of February is when we completed that process.

We are evaluating our opportunity, so to speak, the with respect to the ongoing stock price as to when and how and the extent to which we will continue to buy back up to potentially 100 million.

Okay, so no certainty, then, that the remaining 24, $25 million would be spent?

That's right.

We are evaluating that.

Okay.

Then the third is just was there anything in Argentina during the quarter?

Really not much, no, nothing of note.

Okay.

Then my last question would just be more of a compensation question and philosophy.

I understand, looking at your proxy, that compensation was significantly impacted for 2005.

I suppose that's due almost entirely or largely from the earnings miss, relative to your original guidance.

Can you give us a sense for how much of your compensation is tied to the earnings targets?

Well, certainly a lot of the variable compensation is tied that way.

Typically about anywhere from two-thirds to three-quarters of the variable compensation comes down to the earnings per share.

Okay.

The remaining makeup I suppose is just a number of things -- growth -- (multiple speakers)?

Typically growth.

Yes.

Thanks, guys.

Vanessa Wilson, Deutsche Bank.

Now, Geoff's question on the repricing -- I just wanted you to amplify a little bit on that.

It sounded like you said that the margin impacts from the repricing are not yet reflected.

Is that the case?

Think about this this way, Vanessa.

The market started to show more favorable characteristics really in '04.

That was for pricing that was going out in '04.

We actually raised rates more in late '04/'05.

Now, factor into that, for new products, it might take, from the time we (indiscernible) until the time the products hit the street three months and then another six months to actually report them to us, so there's sort of a nine-month lag built into that.

And then on top of that, factor in the fact that our profit margins are low in the first year and widening as we go and you really don't -- because of the nature or way GAAP works, you really don't expect to have a whole lot of impact, even '04 business, until later this year and '07 probably.

So you're just beginning to see the first edges of it -- of the pricing environment today hitting us this year and next year.

Okay.

Then, it's not like property/casualty where the pricing affects the business for a year.

It seeds in over time, so -- (multiple speakers) -- layers and layers and layers?

So how long could that go?

That's right.

Well, 20 years will have an impact, but I think, in terms of four or five years out, this environment that we are in today will probably be as big a driver as anything of our results at that point because the weighted premium is probably dominated by (indiscernible) by then.

Okay.

Then just to switch gears back on the capital, you did your economic reshuffling of the capital and because you have so much in corporate, it sounds like your view of the capital needs in the U.S. and Canada and other segments may differ from the rating agencies.

Is not the rating agencies as much as the regulators.

Especially take Canada as a case study if you will.

Canada requires a lot of capital that we would consider redundant to be posted.

It's a very capital intensive business in Canada and you see that reflected in the issue.

Pull the excess capital out and say that's really corporate capital, and that is the way we manage the business; it's the way we have managed the business for quite some time -- not really on the regulatory basis, but on economic capital basis.

Okay, so do you just agree to disagree or is there some conversation you can have with the regulators that the require amounts of capital or some securitization or some event that could actually bring the two conversations closer together?

Well, we always like to have those conversations but the regulators have their view and their perspective is to be safe rather than to be appropriately balanced.

Their concern is to protect individual policy holders and so their bias is to always have more capital than you need.

Okay, thank you.

Jeff Schuman, KBW.

Good morning.

I guess maybe first to follow on to Vanessa's question there, can you give us a sense of what the capital allocations and ROEs look like at this point?

Then secondly, if the regulators have a certain capital requirement in Canada and it doesn't seem to economically based, I mean, that would still seem to be sort of I guess the critical variable that you have to manage to.

So I guess I'm not sure I understand the philosophy of managing to a capital requirement that is at odds with what you really have to live with.

You're absolute right, Jeff.

We do have to manage to and take an account of the capital that's required.

We charge the Canadian operation for any excess capital above economic capital that they have to hold because of the government of Canada.

So they get the full charge of that and they have to manage that into their overall projected earnings and so forth.

Okay.

So what do Roes sort of look like by segment at this point?

Well, it's all over the board and some of the -- it depends on the details of how much capital we really think we need to hold.

In places like in some of the Asian markets where we have high premiums and experience refunds, the capital is less.

We have very high ROEs in other places like the UK where you have fairly strong capital requirements and a rapidly growing and still very young business -- we have lower ROEs.

They're always evolving, but I don't think we have ever published or really intend to publish our ROEs by line of business because they use capital that you can't really calculate anyway, so it's better to look at the overall GAAP ROE of the Company in our opinion.

Well, I guess part of what I'm getting at is that it's helpful in understanding the maturation of the international operations.

I guess we can sort of think of the U.S. and Canada ROE as being sort of a target that those operations could build to and -- (multiple speakers) -- some upside as those operations continue to develop.

But I guess I've lost my sense of how much upside there is from that at this point.

Well, you're right.

We do watch that so sort of a metric ourselves just to seeing -- to see how closely they're approaching a mature point.

I would say, generally speaking, in Asia, the ROEs are generally very positive right now and are very high.

That's not to say they've fully matured though.

Europe in South Africa is a little less so, but again, you have some very high ROEs in some of the smaller markets where the capital requirements are not so high.

Okay.

Then coming back to the investment income question, I think the way Jammy asked it was specific to the corporate segment.

I guess I am more curious on a consolidated basis.

If you look sequentially, I think consolidated net investment income went up by about $17 million from the fourth quarter to the first quarter.

The asset base I think only increased by about 250 million, so it looks like a very good quarter for investment income.

On a consolidated basis, (indiscernible) some prepay income or alternative investment income or something that enhances that or --?

Yes, Jeff, this is Jack.

There was a little of that.

I would advise you to take a look at the asset intensive business, because it -- we are up $17.5 million as you stated in investment income, 14 million of which relates to funds withheld business. (multiple speakers).

(multiple speakers) -- interest credit is up 7 million too, so you've got to net that, first of all.

But it was a very good quarter for that business; spreads did widen in that business.

Is it an environment where the asset intensive business is likely to continue to grow?

Yes.

I think, first of all, we haven't done any new transactions recently.

We're still picking up assets, though, from some open treaties, but the environment is getting close to the point where we do expect some new transactions to occur during this year.

The pricing is getting to the point where the macroconditions will allow us to operate in that market again.

Okay.

Lastly, you may have addressed this.

I guess it didn't quite follow it.

In terms of Asian growth, Australia is ensuring, but the Asian growth is still pretty good.

Where is -- which markets are really going to produce the growth in '06 do you think?

Well, we see good growth continuing in Korea and in Japan, as well as Hong Kong.

Those will be the drivers of new growth, not as we so much from Australia this year but those markets should show considerable growth and we expect, overall, the growth rates to approach the 15% mark in Asia.

Terrific, thank you.

(OPERATOR INSTRUCTIONS).

Eric Berg, Lehman Brothers.

Thanks very much and good morning.

I have a few questions.

I'm still sort of stuck too on this capital allocation matter.

I guess my question is if the amount of capital -- homing in on Canada for a minute -- if the amount of capital that you must keep there is not really up to you or up to negotiation, it's decided by regulators, not the rating agencies, not RGA management, but by the regulators in Canada, what is the significance of the economic capital?

Relatedly, let's say we could see the ROE on a GAAP basis in Canada.

What would be the meaningfulness of that if in fact the actual capital being held there is really significantly in excess of the what you think is necessary?

The way we look at is, Eric, is that the economic capital is what we have to earn a risk return on -- a true pricing risk return on and the excess or redundant capital is that we have to hold in Canada is something we have to charge ourselves for as a cost.

That's baked into the pricing that goes on in Canada.

The way we best monitor whether we are hitting the pricing returns that we expect on risk business is to monitor it in that fashion.

That's the way we've been operating for many years and you're just seeing it.

We think it gives a better picture of how those businesses are doing in terms of -- (technical difficulty).

Last year, for example, when Canada had -- you saw their ROEs -- (technical difficulty) -- capital basis being well north of 15%.

But that is very volatile in that market or in any market, based on the -- on a mortality basis in that market.

But that's the way we look at it.

We basically try to get a good return on risk -- (technical difficulty) -- on economic capital -- (technical difficulty) -- any extra financing of -- of redundant capital we have to incur.

Okay.

Let me turn to Asia Pacific and indeed to the international business in general.

These businesses, Asia Pacific on the one hand and Europe and South Africa on the other, are, in terms of premium size, I believe as large as if not larger than your Canadian business at this point.

Should -- why, therefore, if they are larger than the Canadian business, both singularly and collectively, why should we expect ongoing volatility?

Is it a matter of the age of the business or --?

Yes, it's a matter of the age of the business.

It is getting more stable, but it's -- first of all, because it is so new, reporting hasn't settled down; our ability to make estimates for accruals and incurreds is improving all the time as we get a better handle on the reporting of client companies.

All of those things factor into that, but it is still maturing in those markets and will be more volatile.

In addition, there are, in some of these markets, very different reporting standards and so forth.

In some cases, they may report quarterly as opposed to monthly and things of that sort.

So we just -- we're just seeing these things improve all of the time, but they are still at an early stage.

The last question relates to be -- what would seem to be a growing life settlements marketplace.

If business of buying and selling life insurance continues to increase, whether it's investor initiated policies that are fairly new being sold into the secondary market or policies that have been on the books for many years being sold into the secondary market, what impact do you see this having on the life reinsurers in general and on RGA in particular?

Well, we took a very careful look at our premium scales at the old ages based on all be available data and feel that we are in good shape at this point.

If policies are bought with the intention of keeping them in force and using them as settlement policies -- and so there's no lapses occur incurred -- but the underwriting is well done at the beginning.

We're probably not hurt at all.

On the other hand -- as a matter of fact, we're benefited at this point.

On the other hand, in the case where it's selective buying of people who are in ill health in order to keep policies enforced, there could be some unknown (indiscernible) selection.

At this stage, we haven't seen any of that, but that is something that could affect us and the whole industry. (multiple speakers) -- reinsurance.

Yes, I'm just thinking that -- I was just thinking more simplistically that if more and more policies that would have lapsed -- i.e. would have been turned in for their cash surrender value -- are instead purchased by life settlements companies, doesn't that mean that there are going to be greater debt -- apart from the selection issues, which is a whole separate matter, who is selling their policies and who is not, who is helping and who is not, isn't it is the case that if the life settlements business grows, it means that the whole industry -- the whole primary industry and therefore the whole reinsurance industry will be facing more death claims than anticipated?

Yes, very likely.

But on the other hand, we will get a lot more premiums too.

The real question is are our premiums each year adequate for the claims that we're expecting that year.

From a reinsurance perspective, I think we have protected ourselves, especially with the reviews we've undertaken in the last year or so.

I would say that the direct companies would be more exposed in that vein than we are actually, because they have more things to consider than strict immortality but we are pretty well protected in that sort of an environment.

Thank you, Greig.

[Sam Hoffman], [Adar].

I was reading an industry news report that indicated that industry session rates declined from 60% in 2003 to 47% in 2005.

I was wondering what impact you thought that would have on your growth in the U.S.

Yes, we have noticed as well.

Actually, we were a little bit surprised at the extent of the fall-off, but it's clearly been a trend that we've seen over the last little while and expect maybe a little bit more to occur this year.

Our business from our clients has been rolling in fairly strongly over the last little while.

We suspect that some of the really hot pricing companies have actually seen a drop-off in their business because of lack of reinsurance support and other things that affect the amounts of business ceded.

So we will have to wait until everything all settles down, but we kind of expected this to happen and have been sort of preparing for it for sometime.

It means that it's certainly tougher to grow in this environment, but it is -- it's not something that has a dramatic impact on this year's numbers.

My other question is can you talk about your strategy to protect the Company against the avian flu?

We don't really have too much in the way of purchased protections or anything of that sort to protect us against avian flew.

If it becomes a pandemic that affects a lot of people in the population at large, we do believe that the insured population will be better off, but nevertheless, we will be impacted.

We believe that we have sufficient capital to withstand that sort of an epidemic.

It would also probably mean that premium rates or premiums for life insurance would increase substantially going forward as more people buy insurance and that as we saw after 1918, the population mortality actually improved considerably compared to trend lines in the years after that.

So maybe we'd get some beneficial effect afterwards, but it's clearly a negative event for us.

We don't have a whole lot of protection if there is a widescale avian flu epidemic.

As an investor, how should we size that issue for you?

Because I recall that, in the second quarter of last year, mortality was (inaudible) for the sector as a whole and both you and Scott have had a different quarter and that was due to only maybe 10 or 20 extra people dying in that quarter.

So if you talk about kind of the pandemic type of scenario, how do we size that in terms of the implications on your capital?

Do you have any reinsurance that you purchase for -- (multiple speakers)?

Yes, no, that is what I'm saying.

We do have any reinsurance that we purchased on our overall book.

It's prohibitively expensive to buy too much protection of that sort.

In order -- I guess, in order to help you size it, first of all, we would say it's a highly severe event with a very low probability and it's not something you can really price for in a direct way.

It's almost, in that sense, like terrorism.

But you do expect to have peaks and valleys.

In that overall longer course of time these things even out, even if you do get a severe epidemic -- that you will even out over a longer period of time.

Yes, we would expect that the problem wouldn't be severity as it was in our second quarter, but rather the frequency; the number of claims would increase substantially.

So you might say that claims in a quarter might be a multiple of where they are today in a given quarter.

David Merkle, Huffy Capital.

We're shareholders as well.

Let me ask about -- some companies like SwissRe it's reported ScottishRe is going to try this doing a mortality cap-on to see if they can flatten out perhaps in a cheaper way than the retrocession market, some of their mortality risk from avian flu.

Are you thinking about this?

We have looked that it.

First of all, we are almost past the flu season for this year, but we would be -- it would be something we would look at.

Again, it's a question of how much you would pay for how much protection.

It's not clear to us that there's enough value for the dollars in that equation at this point.

Okay.

Second quarter of last year, I believe you characterized the mortality experience as being something like a little less than two standard deviations negative compared to what you would expect.

It this pretty close to a what-you-expected quarter or is it slightly better, slightly worse?

No, this is an expected quarter.

Very good.

I guess my last question is what do you see as your greatest opportunity at present in this environment?

How do you see the competitive landscape and how do you think you're going to benefit from it the best?

Well, I think we already have been benefiting.

As we alluded to earlier, we had a very strong year in production last year.

All of that business piled onto our books will pay out, in our opinion, in very profitable ways over future years.

We expect that we have -- while growth is slowing down, we have a lot of room to expand still.

International business continues to grow and develop.

We see markets in Asia that are growing rapidly on the primary side, beginning to use reinsurance more and that provides us with an additional compounding effect in terms of our growth abilities in those markets.

The pricing in all of our markets is very favorable. (technical difficulty).

There are times, for example, where we do see competition heat up a little bit as in the UK over the last six months or so, but we are used to dealing with that and at times, we will sit out the extreme edges of the market and wait for rationality to resume and we see a lot of opportunity right now.

Very good.

Great quarter, thanks.

Sorry for the goof with my phone.

Richard [Batchnik], Oppenheimer.

I had a question on your mortality experience for the quarter.

I was wondering if you could give any more color on your mortality experience with regard to maybe a facultative versus treaty or large versus small policy amounts.

Well, are you talking about the U.S. predominately, which would be -- (multiple speakers).

Just the U.S., yes.

-- (multiple speakers) of those numbers.

The factultative was a little bit higher this quarter than the automatic rates, I believe.

Both of them were fairly close to where we would expect things.

Large claims were not either a surprise on the negative or positive side.

It was not a good quarter or a bad quarter for large claims.

We can isolate certain areas where we thought things went very well and others where things didn't know so well, but that's getting -- that's always the case that when you look at -- we analyze our business in a number of directions from enforce blocks to automatic to facultative to issue your cohorts to different types of companies.

The finer you break that down, the more variations you'll see from expected, but those typically bounce around and stabilize if you look at them over a longer period.

So there's really not much unusual in the first quarter.

Like I said, you could say it was a little bit worse facultatively than automatically, but that's not really indicating one was a problem with the other.

It was really good.

(OPERATOR INSTRUCTIONS).

Jeff Schuman, KBW.

Can you hear me now?

Greig, I was wondering if we could come back a little bit more to just the issue of U.S. growth.

As you noted, (indiscernible) did come down a lot last year, so market growth wasn't that great, yet your production was very strong, so it was a strong market share performance.

I am guessing part of that may have been driven by the ING dislocation.

You clearly had a chance to pick up some business.

I would guess the strong '05 production impacts '06 growth as well.

But if the [success rate' continues to come down and some of the markets -- your recent market share gains sort of play out, where does that leave you in terms of (indiscernible) '07 growth outlook?

Is there a chance that growth slips a good bit in '07 or how do you feel about '07 at this point?

It's a little early to really get too refined on '07 at this stage, but yes, we would feel okay about '07.

We don't expect to write as much new businesses this year as we did last year and a lot of that has to do with reporting and so forth.

There was a little bit of catch-up last year in a of couple of treaties and things that we don't expect to recur and -- but around the edges, we would expect similar numbers to last year, absent those things.

There's really -- it's really hard to read whether that will change significantly in '07 at this point or not.

We don't know of any pending changes of companies moving treaties away from us in any big amount or retaining more on any of the existing business that we've got.

So it could well be that we sort of stabilize at this level.

As you work with your clients and as they consider their retention levels, are you seeing companies continue on a quota share basis but come down off of 90%, or are some of them going to excessive loss?

Kind of what are you seeing?

Well, they are doing both of those things.

It depends on the product to some extent.

There's more tendency on permanent products to reinsure excess and (indiscernible) products to quote a share even at a reduced level, but everything is variable.

It depends on the company and their situation, the facultative support that they needed and how it all works together.

Obviously if you retain too much and don't reinsure much, it gets very difficult to get the pricing that you need for the piece that you do reinsure.

So, companies have to weigh all of these things.

Really, I really can't give a very general answer to that that's satisfactory I guess.

It's both of those.

Okay.

Then one other area -- in the UK, you talked about challenges for competition and changes in the housing market.

I guess there's also some optimism though that there's going to be more demand associated with life insurance out of some of these pension plans, new pension schemes (indiscernible) tax advantages.

Are you optimistic at all that it's going to stimulate any primary demand or not?

Yes.

I think that whenever there's change, it benefits reinsurers who are quick to respond and come up with solutions to help companies address those changing marketplaces.

We've always been very at good that and we would expect that.

There are opportunities of a traditional and a nontraditional sort of in the UK market today and we're fully able to take advantage of all of them and well positioned to do so.

Thank you.

Eric Berg, Lehman Brothers.

Thanks very much.

Is it possible that, at a very high-level, the decline in the rate of growth that you'll experience owing to lower cession rates by your customers will be offset by the price increases that are going to start flowing through from 2004?

Well, on a unit basis, we may make more money per unit.

We probably -- and we continue to see our enforce grow.

We don't expect our enforce to back off.

We expect our enforce to continue to grow.

It's new business rates -- new business session amounts that they fall backwards.

In the U.S. market last year, we saw $180 billion.

We expected 150 or there abouts.

We would expect more like 150 to be our sort of baseline right now.

That's kind of a best guess, but it will be pretty variable.

We don't -- Eric, we don't really expect that we can tie those together in quite that way, but we probably will make more per unit, we think, going forward in this environment.

So, just again, just sort of taking a step back and understanding that your margins will move around from quarter to quarter because of the inherent volatility in the business, what should we think of as you look at the all the difference sort of cross-currents right now -- rising prices, declining cession rates, growth in Asia, growth in Europe, slowdown in the UK, lots of sort of currents moving in different directions from one another.

When you put it all together, Greig, what is the growth?

How do you think about the overall growth rate for the next two years of your company in terms of the topline and therefore the bottom line?

We think of the topline in terms of excess of 10%.

We would like to see it somewhere between 10 and 15%.

We think that's doable.

We expect that this year will be no exception.

We will see that march up over the course of this year.

The bottom line may well expand a little bit as -- not so much from pricing as maturing of businesses internationally, bringing more down to the bottom line as they mature.

That should be a trend that we've seen in the past few years and that should continue and accelerate.

So we would expect probably greater bottom-line increases than topline increases are possible.

If growth rates are at the low-end on the revenue side, then they will probably be exceeded by growth rates on the bottom line.

Thank you.

It appears there are no further questions at this time.

Mr. Lay, I would like to turn the call back over to you for any additional or closing remarks.

Okay thanks to everyone who joined us this morning for our first-quarter conference call.

To the extent any other questions come up, feel free to call us here in St. Louis.

With that, we will end our call.

Thank you.

This will conclude today's conference call.

We would like to thank you all again for your participation and wish you a great day.