美國再保險集團 (RGA) 2008 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 Senior Executive Vice President and Chief Financial officer, Mr.

Jack Lay.

Please go ahead, Mr.

Lay.

Okay, thank you and good morning to everyone joining us for RGA's fourth-quarter 2008 conference call.

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

Greig will comment on our results and provide guidance for 2009 and then we'll respond to any questions from our participants.

As a reminder, during the course of the call we plan to make certain statements and discuss certain subjects that will contain forward-looking information including, among other things -- investment performance, statements related 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 is included in the earnings release that we issued yesterday.

In addition, during the course of the call we'll make comments about our results based upon operating income both on a pre-tax 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'll turn the call over to Greig.

Good morning, thank you for joining us.

I'll make some brief comments on our results, provide guidance for 2009 and then we'll open the line for questions.

Overall operating results for the quarter met our expectations.

We experienced pore mortality in the US, but positive mortality results in almost all of our other markets.

The US dollar strengthened considerably compared with many of the currencies important to RGA's operations.

Excess capital from our November common stock offering, as expected, creates dilution in earnings per share until deployed.

On a consolidated basis operating income for the quarter increased 10% and totaled $100 million.

We estimate that foreign currency translation cost us approximately $11 million after-tax or $0.16 per share when compared with last year's fourth quarter.

These translation adjustments are unrealized and are a result of the translation process required for our US GAAP financial statements.

We typically do not hedge of these unrealized fluctuations since we are long-term investors in our foreign markets and expect these fluctuations to even out over time.

On a per share basis operating income increased 2% to $1.45 per share for the quarter; our November common stock offering was about $0.14 per share dilutive.

The quarter's results benefited from a reduction in incentive compensation and other (technical difficulty) accruals and the quarter also benefited from a slightly lower effective tax rate.

For the year our operating income per share increased 11% to $6.12 per share; this result is within the guidance range we established at the beginning of 2008.

That guidance of course did not contemplate the November common stock offering.

Reported net income for the quarter totaled $9.4 million or $0.14 per diluted share compared to $63.6 million or $0.99 per share.

Net income in the current quarter includes approximately $74.5 million in unrealized losses after DAC and after-tax due to the decline in value of embedded derivatives associated with certain funds withheld annuity treaties.

Credit spread widening since September is the primary driver for the additional decline in value.

This is a non-cash unrealized loss that does not affect current treaty cash flows or profit spread performance.

Any actual organized losses including impairments in the underlying funds without portfolios are reflected in investment income and they're included in our operating results.

Net income also includes approximately $16.1 million pretax in investment impairments during the quarter.

We added $9 million in pretax liabilities for the final runoff of our discontinued accident and health business; we don't expect any disputes or arbitrations in the future and the claims flow has slowed to an insignificant amount.

The additional reserves will allow us to essentially zero out the P&L impact of the operation during any final runoff.

Going forward we will no longer report a discontinued operation.

Our fixed maturity investment portfolio remains 97% investment grade but fair values are under pressure in the current spread environment.

We have posted a quarterly financial supplement to our website which contains detailed information on the portfolio as well as consolidated and segment results for the past five quarters.

Turning to the top line, consolidated net premiums increased 3%.

Excluding the effect of foreign currency translation the increase was 11%.

For the year net premiums increased 9% on a US dollar basis and 10% excluding foreign currency translation.

Turning in turn to our operating segments and first in the US -- poor mortality experience and weak results in the asset intensive segment hampered results.

Pretax operating income decreased to $77.5 million from $110.7 million last year which was a strong quarter.

A higher-than-expected number of large claims -- an amount of large claims during the quarter led to the weaker results.

These claims were well spread across our portfolio by issue ages, issue years and ceding companies.

We experienced good mortality results in 2006 and 2007 on this portfolio and fluctuations, both positive and negative, even out over time.

The results for this quarter and for the year do not change our long-term profit expectations on our book.

Net premiums increased 11% for the quarter and 8% for the full year, in line with our expectations.

Our asset intensive business reported a pretax operating loss of $2.8 million compared to operating income of $7.4 million last year.

Realized losses totaling $13.8 million in the funds withheld portfolios which aren't reflected in operating income were the primary driver for the loss.

Additionally, reserve increases for living benefits on variable annuity business also put pressure on net income.

We have approximately $1.1 billion in annuity comp values with living benefit riders.

The fair value of the living benefit liability is $276 million, an increase of $230 million from September 30th.

We are hedging fund performance risk, delta in other words or interest and interest rate risk grow, which has been affected in offsetting 90% to 95% of the associated liability increases for those risks.

We do not hedge, however, implied volatility risk which in the current environment has increased significantly.

To date DAC unlocking this absorbed the current period losses.

However, we expect to see margin pressure on the in-force business going forward.

We have the ability to terminate new business (technical difficulty) three existing [VA(3)'s] if we feel pricing is no longer acceptable.

Turning to Canada, it was another strong quarter with good mortality experience, as has been the case all year.

Pretax operating income totaled $23.3 million, up from $19.5 million last year.

On a Canadian dollar basis the result was $6.2 million stronger as the Canadian dollar depreciated significantly this quarter.

But full-year pretax operating income totaled $107.2 million compared to $75 million last year.

Net premiums decreased 10% for the quarter on a US dollar basis and increased 11% on a Canadian dollar basis.

For the year reported net premiums increased 10%, in-line with our guidance.

Overall it was a great year for us in Canada.

We've added a significant amount of good business over the last several years in Canada and are positioned strongly.

Results were strong in our international operations; Asia-Pacific reported pretax operating income of $22.3 million compared to $17.5 million in the prior-year, a 27% increase.

The current quarter reflects favorable segment-wide claims levels.

Weaker foreign currencies in several markets negatively affected earnings by approximately $2 million.

Premiums increased 12% on an original currency basis for the quarter and 16% for the full year.

We exceeded $1 billion in premiums for the year, a nice milestone.

Our strength in the Asian markets continues to show in our results.

Our European and South African segment reported pretax operating income of $26.4 million versus $3.3 million a year ago when we had some adverse mortality in our UK operation.

Foreign currency weakness, notably the pound sterling, hurt the current quarter results by approximately $7.8 million.

Results have rebounded from a difficult first half such that we have achieved a solid full-year result.

Net premiums for the quarter decreased on a US dollar basis due to a significantly weaker pound sterling.

On an original currency basis premiums increased 14% for the quarter and 11% on a year-to-date basis.

We expect slightly stronger growth rates in 2009 as we take advantage of opportunities in the broader European market and the gradually improving competitive environment in the UK.

We are very pleased with the 2008 consolidated results despite the worldwide economic and financial market turmoil.

We posted a full-year operating result within the range of guidance we issued at the beginning of 2008.

We head into 2009 with capital flexibility from our November common stock offering and strong liquidity with nearly $900 million of cash equivalents on hand.

Although we believe our investment portfolio is well-positioned it is, of course, not immune from losses.

However, we believe losses will be manageable with our current capital base.

Our position in the life reinsurance market stays strong and, based on very various industry customer surveys, RGA continues to be a recognized market leader in quality and capability in the life reinsurance industry.

As we look to 2009 we have set an operating income target of $5.75 to $6.25 per share and consolidated premium growth of approximately 10%.

This guidance reflects normalized earnings and premium growth rates on an original currency basis of between 6% to 8% in the US, 11% to 13% in Canada, 10% to 15% in Asia Pacific and 15% to 20% in Europe and South Africa.

We estimate that the stronger US dollar and the dilution from our November stock offering will create headwind of approximately $0.85 per share.

We continue to look at a number of large -- a large number and a number of large block transactions.

Progress can be expected to be slow on opportunities like these.

Such potential transactions require a great deal of structuring and negotiation and as major transactions tend to move at their own pace.

Despite the broader market turmoil and the considerable level of uncertainty we believe we are well positioned, both operationally and financially, to have a successful 2009 and we appreciate your support and interest in RGA and are ready now to take any questions you may have.

(Operator Instructions).

Nigel Dally, Morgan Stanley.

Great, thank you, and good morning, everyone.

First question, premium growth in the US.

Last year you guided toward 7% to 9% growth, this year you're guarding to 6% to 8%, which is a deceleration.

Given the increasing need for capital-related solutions I would have expected an acceleration.

I was hoping you could comment on that?

Second, with pricing trends, perhaps if you can comment on whether we're beginning to see some firming in the marketplace on the growing demand?

And lastly, if you can provide an estimate on where you ended the year with respect to your risk-based capital ratio?

Thanks.

Nigel, on the US premium account, you notice it has been trending downward over the last several years and we see a slow continuation of that trend.

It's true that there is, if anything, a bias towards more reinsurance rather than less reinsurance in the marketplace now -- at least we've seen the penetration rates bottom out, we believe.

However, there are always lags in reporting and we're not likely to see that immediately in the numbers.

In addition, the overall sales level in the market looks like it's down to us a lot in the last couple of months of last year and the first month of this year.

So putting all that together we're more comfortable dropping to about a 6% to 8% level in the US.

We hope to do better than that of course, but that's our best guess at where we think it's going to be.

In terms of pricing trends, the US market has been a pretty good environment for the last several years for us and we don't see that changing much.

There is a little bit more competition, I suppose, around the edges from time to time, but it really doesn't look to us like it's fundamentally changed in any way.

In terms of risk --.

Yes, Nigel, this is Jack.

In terms of the RBC ratio, we would expect it -- we're developing the statutory reporting as we speak here, but we'd expect something between 320 and 330 in terms of a ratio year end.

Okay, that's great.

Perhaps if I can just follow up on the first question.

The 6% to 8%, does that incorporate any closure of large block sales in the year or would that be in addition to the -- or is 6% to 8% more organic growth?

That's more organic growth.

We don't really know where the block deals will come from because as we look at the 50 or so opportunities or 50 plus opportunities we have in the house, they're from all over the world, some US and some, of course, outside the US.

We will take them however they fall.

Very good, thanks a lot.

Jimmy Bhullar, JPMorgan.

Thank you.

I had a question on your verbal annuity living benefits business, especially the exposure to guaranteed minimum draw benefits has been rising.

If you could just talk about your view on this business and outlook for growth here.

Obviously it's a new element of risk that it introduces and you have had losses the past few quarters.

But if you could just talk about if you intend to grow that business, if not have you canceled any treaties, and what the outlook is for that business in '09?

Jimmy, we haven't canceled any treaties at this point, we've renegotiated the terms of all of the treaties and we're taking a very close look at them obviously in this environment.

We really expect it's going to be a lot of decrease in the overall business flow on these treaties just because there's going to be a big drop in the market for this business.

So there's really -- we don't have a lot of growth expectations, as a matter of fact quite the opposite for this business at the moment.

Okay, thank you.

John Nadel, Sterne Agee.

Good morning, everybody.

A couple of quick questions for you.

Just following real quick comment, Jack, on the 320 to 330 RBC estimate.

Is all of the capital that you guys raised in November -- has all of that been down streamed?

Is that in the numerator of that ratio?

No, the predominant share of the capital is still at the holding company.

Terrific.

And then I do have a question for you.

I wanted to talk a little bit more about these embedded derivatives and the moves in the quarter.

Can you -- I guess I'd ask it this way, can you walk us through how you think we should think about that?

Does this have -- I think as I understand it this has no impact on a statutory basis; this is simply GAAP accounting noise.

But do you view the moves, especially if it's driven by credit spread widening, as economic?

Is that something that we should expect to reverse?

Will it depend exclusively on credit spreads tightening back in?

Let's take it in pieces.

The change in the embedded derivative is primarily driven by what -- our be B36 derivative.

And that, I'll kind of remind everyone, relates to treaty structure in terms of any modco annuity reinsurance treaties that we have.

Because of the structure of the treaty there is an embedded derivative.

The change in the value of that embedded derivative is driven primarily by credit spreads.

And as the spreads have widened considerably over the last four quarters, you've seen unrealized losses in our P&L.

To the extent that those, and I guess we would certainly expect at some point the spreads to come in to the extent that they do, then you will see unrealized income going through the P&L.

So we view that B36 derivative revaluation to be non-economic in the sense that it's driven primarily by credit spreads.

Now to the extent going forward if we have realized losses within the modco portfolios, then that would be economic obviously.

So much of that revaluation is driven by credit spreads that we don't anticipate will result in actual realized losses that we would characterize the lion's share, virtually all of it, is non-economic at this point.

It's strictly GAAP, it's not statutory.

Yes, that's right; it doesn't affect our statutory reporting at all.

There's also some GMxB embedded derivatives to a lesser extent going through that line as well and we would characterize that as primarily non-economic.

We do have an embedded derivative that we value.

As Greig had mentioned, we do try to hedge those risks to the extent we can other than the so-called Vega risk.

So that embedded derivative we would argue is for the most part non-economic.

To the extent there is an economic impact so far we have offset any of those impacts to a large part against DAC.

Now to the extent that you do offset some of that against DAC, it does have implications on the overall margins going forward.

So, we would expect to see depressed margins on that business going forward.

It's not a big part of our business so it shouldn't, in our estimation, have a big impact on our overall earnings flow.

But really that's where we are now.

Okay.

And then maybe to just be specific on a couple of numbers here.

I think from the supplement it looks like you had from the embedded derivatives, the B36 and the GMxB, about $392 million in pretax losses in the quarter.

Is that the number that relates to that $74.5 million after-tax after DAC in the press release and that Greig mentioned?

Or does that $74.5 million also include the benefit of the $160 million gains from the freestanding derivatives?

Yes, the $74.5 million is solely the impact the B36 derivative.

Oh, that's only the B36, okay.

Okay, so then the GMxB is not part of the $74.5 million that was mentioned?

That's right; that's correct.

Okay.

How much is it the GMxB after-tax and DAC?

It was fairly insignificant.

We didn't (multiple speakers).

Okay, so that's where you (multiple speakers).

Okay, I'm sorry.

That's where you made the comment that most of it was offset in DAC?

Yes.

Okay.

And then last one -- sorry to take so much time.

So in the press release I think you mentioned that you deployed a small portion of the capital that you raised.

Greig, you just give us a little bit of info on the pipeline, 50 plus opportunities, range of potential transactions.

If you think about the small portion that you did already deploy, can you give us a sense for the type of transaction or transactions that it was deployed into and the margin that was implied in the pricing?

I just want to -- is there any way we can gain some additional confidence on just how the pricing environment is looking as you deploy some of this capital?

Yes, we did three small transactions that used up in total somewhere around $20 million to $25 million of capital.

They were all priced at a 20 plus percent return.

20 plus percent ROE?

20% -- yes, 20% minimum return.

Okay, okay.

All right, terrific.

And then just any comments on Hannover Re taking over the old ING business from Scottish Re?

I'd assume that you guys probably took a little at that.

Is there anything we should take away from that transaction in so far as changing competitive dynamics?

I don't know that it's going to change competitive dynamics in the real short term, but it could introduce another competitor into the marketplace, which has consolidated quite a bit over the last several years, as you know.

I think they've been working hard on that transaction for some time is my understanding.

So, I wish them luck.

And we'll see what happens.

Okay, thank you very much.

Steven Schwartz, Raymond James.

Good morning, everybody.

I went to follow up a little on what John was asking on the asset intensive.

But before I do can you -- the loss in the funds withheld portfolio, I think it was $13.8 billion or something like that pre-DAC.

Do you know what that would be after DAC?

And maybe you could touch on why you consider those operating or why they should be considered operating?

Okay, Steve, first of all that was about $14 million, not billion (multiple speakers).

Oh, sorry.

Yes, okay.

Typically roughly 75% of that would be offset via DAC adjustments, so that should give you some feel there.

In terms of why we report it the way we do, it really relates -- and I can understand why it becomes confusing -- it really relates to the treaty structure and the way the income flows through the treaty under US GAAP.

We made a determination that that has to flow-through investment income and as a result we don't try to pull that out and call it a non-operating item.

Okay.

All right, fair enough.

Going back to -- staying on asset intensive and looking at the claims and other policy benefits, that picked up.

I'm assuming from the dialogue that the increase from $2 million in the third quarter to $8.2 million in the fourth quarter was reflective of the variable annuity issue?

Yes, well there are a lot of things affecting that line, in particular any kind of DAC offsets from a variety of origins, particularly in the embedded derivatives.

So really to flesh that out it would almost take an off-line discussion because there are a lot of influences there.

Okay.

I am more than willing to do that.

I think that's what I had.

I wanted to talk about Hannover Re, but that's been asked and answered.

Thank you.

Andrew Kligerman, UBS.

Hey, good morning.

A couple of questions.

First, on that $0.50 of dilution this year, what does that assume in terms of capital deployment with respect to transactions?

How much of the capital would be put to work under that $0.50 scenario of dilution?

Andrew, I think you can think of it as that presumes on average we would have less than half of the capital deployed.

Or maybe an easier way to express it is that we would deploy all of the capital roughly two thirds of the way through the year.

So you can kind of think of that however you want in terms of the buildup of deployment, but I think maybe that's the easiest way to express it, that we would deploy it all at some point, roughly two thirds of the way through the year.

That's perfect.

And Greig, you think that these 20 plus percent returns that you generated on these smaller deals that you've initially done, you think that's feasible going forward on the many deals that you're seeing right now?

Well, we think so, Andrew.

That's what we're going to hold to until we're proven wrong.

But we believe that's the case.

We believe that the cost of capital is up all over the place and our capital still for the effect, the bang for the buck for what it has, is still pretty cheap at a 20% pricing level to us.

That's excellent.

And then just during your commentary, I think it was in the Q&A, on the sales growth in the US, you mentioned a little bit of pressure on sales -- underlying sales.

Could you give a little color on what you're seeing in the primary markets in the United States in terms of life sales?

And if you could actually in the other regions where you operate as well?

Well, just looking at the MIB hits, the Medical Information Bureau hits, on new policy applications in November and December you saw a market drop-off in that rate.

Our facultative book -- remember, we're very large on the facultative scene and it basically is a proxy for how the industry is it doing -- has been kind of slow in the last three months or so.

In putting those things together we think that overall there's probably a drop-off in the primary level of sales.

We're not the ones who roll up those numbers and you should look for LIMRA to do that in retrospect.

But we're expecting or we're looking at a situation that looks a lot like a slowdown in growth in the primary business.

In other markets I think it you can probably expect the economies to have the same effect all around the world, that is to say that there will be a drop-off to some extent in the economic activity and the issuance of new policies.

In places like Asia that might be masked by just the underlying growth is still traveling at a pretty good speed and it might just slow down a bit.

It sounds like in the US that double-digit might be a way to think about the declines then (multiple speakers)?

Yes, I don't remember actually the number of -- the decrease in MIB, but I think it was double digit in November and December, Andrew.

Excellent, thanks a lot.

Eric Berg, Barclays Capital.

Thanks very much and good morning.

Greig, I think like other analysts on the call, I'm intrigued by -- I can't help noticing the very significant difference between your pretax book income as reported under GAAP and your operating income.

So I have just a couple of questions as to the others on all of these reconciling items.

My first one is you report out on page 5 of the supplement pretax nearly $150 million of derivative gains that are just don't seem -- and they are just free standing derivatives, I think that's what page 25 calls them.

What is the purpose of all these derivatives, for example, the interest rate swaps which seem to be dominating?

Eric, this is Jack; perhaps I can take that.

If you think of our reinsurance of GMxBs, the riders, there's an embedded derivative there that would relate to changes in the overall perceived value of those guarantees.

And what we do is we go into the market then and try to hedge those risks.

And so you can think of it as there's a reserve increase or decrease associated with the embedded derivative.

And then we also have investment income or negative income associated with the actual hedging instruments that we go out and buy.

And what you're referring to relates to the hedging instruments that we went out --.

Hedging gains right now.

Exactly.

So you've in fact anticipated my second question, which is, the GMxB derivative hit to earnings, $231 million pretax is offset by the derivatives gains that you just referenced?

Offset in part as well as from the DAC adjustments, that's right.

Great.

And my second and final question just really returns us to the point that John was discussing.

I mean, if these investments that are -- I guess they're still sitting because they're modified co-insurance related on your cedents' balance sheets.

If they were owned by say a bank or a broker the decline in value would absolutely be considered economic, it would be considered a mark, it would go right through net income.

The widening of credit spreads presumably reflects the market's expectation or the market's view, whether correct or incorrect, that credit on these assets has deteriorated.

Help me understand why you characterize this as non-economic?

Eric, this is Jack.

Maybe to take it closer to home in terms of our industry, if they were on our balance sheet, if we wrote those treaties on a pure coinsurance bases instead of a modco basis those asset portfolios would be on our balance sheet.

And we would mark those to market through AOCI.

So I think that's probably the best way to think of it.

And you can I guess draw your own determination in terms of when spreads go out and impact on capital through AOCI, whether you consider that economic or non-economic or something in between.

That helps me very much.

Thank you.

I'm all set.

Jeff Schuman, KBW.

Good morning.

A few questions, maybe first off a few questions on the variable annuity business.

Looking at the disclosures on page 9, I was interested to see that a lot of your variable annuity disclosure does not have any riders associated with it.

And I guess I'd appreciate a refresher on exactly what reinsurance you're providing in some of these situations.

I would have thought basically the demand was for protection against some of the rider exposure.

Can you remind us maybe of the types of capacity you're actually providing?

Yes, we started off when we entered that line first just reinsuring the base.

And so we were essentially reinsuring the expense recovery of the upfront fees.

Okay, so it was more financial?

Just the base -- there were riders on that, but they were retained by the ceding company.

And ultimately, about a year later actually, we started reinsuring some of the riders.

Okay, so the initial base exercise was more of a capital exercise than a risk exercise, okay.

And then just to make sure I'm connecting the dots between the numbers here, so if I look once again on that page 9, the fair value of living benefit riders over the course of the year increased from nine to 276, so that's a delta of 267.

So it looks like that maps to page 8 where for the full year we see the GMxB embedded derivatives results of 267.

Is that a correct mapping?

No, that's right, Jeff.

Okay.

And so once again the two offsets against that would be your hedging offset which I assume runs through the investment and derivative losses and gains line that's a couple lines above, is that correct?

And then also the DAC offset line?

That's right.

Okay.

So for the year the spread between the increase in the benefit liability is 267 and the hedge of 171 was about, rough numbers I guess 100 -- sort of a $100 million spread, is that correct?

Yes, roughly.

Okay.

And I guess I'm curious sort of philosophically.

I would think that the changes in those benefits and your hedges against that, that would seem to be sort of central to what that coverage is about.

So I'm curious as to the classification of that as being non-operating, first of all.

And then secondly, I guess I'm wondering as we roll forward -- if markets continue to be challenging, is there an inexhaustible supply of DAC offsets or at some point do you get maxed out on how much you can take DAC up there?

That's a good point.

The DAC offset is not inexhaustible.

We have a little remaining but not a great deal.

So if we had continued horrendous capital market performance at some point you would see -- we'd be at a point where we'd have no DAC offset.

So you'd see much more of it going through straight to the bottom line.

And in terms of the philosophical classification of all this as being non-operating?

Well, I guess -- I think we're following, for the most part, how the industry reports this.

And I guess people can draw their own conclusion in terms of how much of the embedded derivative will come back and that sort of think over time.

Keep in mind, on this sort of product we're not -- we don't anticipate paying out any cash on any of these guarantees for at least nine or 10 years.

So a lot can happen between now and 2018 in terms of investment performance and so on.

What is the current DAC balance specific to variable annuities?

I don't have that handy.

But if what you're getting at is how much additional DAC offset could we take, it's not a great deal.

That's why we made the comment that the margins on that business have been diminished at this point.

Okay.

And then lastly just a clarification.

You talked about looking at '09 consolidated premium growth of 10%.

Is that assuming currencies are constant, in other words just rolling up your constant currency premium guidance that you gave by market?

Or is that net of the effect of some of the negative currency comparisons you're likely to have?

It's our estimate of US dollar performance, so it would include an estimate -- our own estimate on what the foreign currencies on average will be trading at, so to speak.

Okay, so in other words on a constant currency basis you would expect consolidated premium growth to be well above 10%?

Certainly above it, that's right.

Okay, great.

Thanks a lot, guys.

Mark Finkelstein, Fox-Pitt, Kelton.

Hi, good morning.

Actually just a couple of follow-ups to I guess prior questions.

I guess what was the DAC offset on the GMxB that you recorded in the quarter?

A little over $200 million for the quarter.

Okay.

That was the DAC offset against the --?

That's right, that's right, against the embedded derivative.

Okay.

And then just within the asset intensive segment, what was the actual -- which I believe does flow through operating -- the impact on death benefits, GMDB?

What was the impact to earnings of that?

It was very minimal.

That was very minimal?

Yes.

Okay.

And then just on deployment of the offering proceeds.

I guess I'm just trying to understand the points.

Is it fair to say that the deals you are seeing are as robust as what you've always thought and that the returns are there, it's just taking longer to deploy that capital?

Or how should we think about that?

Yes, I think that's a good way to think about it.

We don't have any idea when some of these deals are going to land, although we do know that they take a long time to structure and to put in place.

As companies have gotten through the year-end crush they have breathed a sigh of relief and I think that things will go at their own pace.

I think we have adjusted our thinking a little bit in light of reality of seeing how slowly some of these are moving, but the truth of the matter is we really don't know how fast they'll go and whether we will do something significant in the next quarter or the quarter after that or the quarter after that.

Okay.

And then I guess just in terms of thinking about the credit environment and where the rating agencies are, do you still believe that you can use the full deal proceeds of 330 on these types of deals or do you need to hold a little bit back in terms of other factors?

No, we think we'll use these proceeds for these deals.

Okay.

And then just I guess a follow-up, back to capital.

I mean, RBC 320 to 330 I understand, but I guess what is your margin above rating agency minimums?

And I know you're split rated, but what do you characterize as the margin over rating agency minimums right now?

Mark, this is Jack.

I'd say it's several hundred million dollars right now.

I'll kind of remind everyone that before the capital raise our best estimate was that we had somewhere in the vicinity of $200 million to $300 million of excess capital.

Obviously we have a little bit more than that given the capital raise.

But as Greig said, we plan to deploy that.

So we don't think we're capital pinched right now.

Even after deployment we think we have some level of cushion.

And we'll just continue any discussions with rating agencies to the extent they think otherwise, but we certainly don't anticipate that.

OK, thank you.

James Lloyd, Wachovia Securities.

Hi, gentlemen.

You said hedge effectiveness on the GMxB was running 90% to 95%.

How do you measure hedge effectiveness?

Well, it's really the extent to which the instruments that we purchase offset any change in value of the embedded derivative.

Is it model based?

Yes.

And the credit derivative marks, were those calibrated against CVS?

Yes.

That's the end of the questions, thank you.

Eric Berg, Barclays Capital.

Thank you very much.

A couple of quick follow-ups.

Greig, you mentioned that -- either Greig or Jack mentioned that you anticipate deploying this capital, if I understand your point, less than ongoing flow business and more in say block type transactions.

In addition to co-insurance of existing blocks of business what forms in theory might these transactions take?

Are we talking divestitures business to facilitate M&A?

How should we think of this business -- these big tickets that you're looking at?

Some of it is to support M&A, some of it is -- a lot of it is blocks that companies wish to essentially monetize in order to improve their balance sheets.

But all of this capital is not -- we're looking at this as capital not for organic growth but capital for these opportunities.

So they're almost all in a block form one way or another.

Second, and I don't think you mentioned this, if you did I'll apologize.

Why -- can you explain the decision not to hedge Vega, and what is your thought prospectively about hedging Vega?

Well, I think our thought process is that volatility, it costs money to hedge it; it tends to even out pretty well and it seemed like just extra drag on it.

We do look at it all the time whether we should or not.

And at this point have decided so far not to and have lived with that.

Thank you.

John Nadel, Sterne Agee.

Thanks, just two quick follow-ups.

One, when we think about the currency assumptions that are embedded in your guidance, I assume you guys are not making a call on currency.

Is it based on year-end foreign exchange rates or something more recent, something that we can pay closer attention to?

John, this is Jack.

Essentially we have to make some sort of a call in order to come up with a plan (multiple speakers).

Well, I guess so -- right.

Maybe I think (multiple speakers).

Whether it's using current foreign exchange rates or something more or something different.

Yes.

Well, we take a look at what most of the economists are predicting in terms of what the potential exchange rates will be.

So we don't view it as we're making any kind of a call that's not resident in the economic community right now.

We're not making a bet on those calls either.

Right, right, not turning into Buffett over there, I guess.

So we should just essentially think about consensus -- some consensus view on dollar versus British pound or dollar versus Yen?

Yes.

John, in that QFS we've kind of laid out our expected premium levels by the major currencies too.

Yes, I know, but we don't have your '08 levels.

Yes, that's true, that's true.

Maybe that would be simple enough if you guys could provide that in an update to the supplement or something that would be helpful.

Okay.

And then just thinking about the risk-based capital ratio again.

What's your estimated statutory capital that goes along with that 320 to 330?

Maybe just better put -- total adjusted capital?

Oh, it's between $1.2 billion and $1.3 billion right now.

Okay.

Thank you very much.

Steven Schwartz, Raymond James.

One follow-up on -- going back to the GMxB and the hedging.

If I understood the discussion with Jeff Schuman correctly, the fair value of the living benefit riders from nine to 276, that was reflected on page 8 in the 267.

For the fourth quarter we saw that go up by 230 million and we see that reflected as well on page 8.

Meanwhile you said, I believe, that the DAC offset for the quarter -- maybe I misheard -- but for the quarter was 200 million.

How does that fit because wouldn't that necessarily imply then that the hedge asset rose only 30 some odd million?

And how does that fit in with the statement that hedging has been 95% effective?

And also, on the fair value of the living benefit riders I assume that you're hedging to some economic target; you're not hedging to some GAAP estimate or even the statutory reserving requirements?

Yes, there's also -- and this gets rather involved.

There's also -- I mentioned over 200 million, it's about 225 million with the offset, the GMxB DAC offset associated with the roughly 231 million of change in the embedded derivative.

There's also a DAC offset associated with the actual GMxB hedging instrument performance.

Okay.

I think that may be what you're missing as you try to run through the numbers in your head.

Okay, Jack, do you know what that was off the top of your head?

For the quarter it was about 145 million.

Okay, that would make a big difference.

What are you hedging to, what's your target?

I mean is it (multiple speakers).

I'm not sure I understand your question.

Are you targeting statutory reserving?

Are you targeting GAAP?

Or are you targeting some economic estimate?

Well, it's the latter.

We're actually targeting an economic performance.

Okay, that's what I wanted to know.

Thanks.

It appears at this point that we have no further questions.

Okay, I guess then I think we're an hour in, so it's time to end the call.

We thank everybody for their interest.

And to the extent other questions come up, feel free to give us a call here in St.

Louis.

With that we'll end the call.

Thank you.

Once again, that does conclude today's conference.

Thank you for your participation, have a wonderful day.