美國再保險集團 (RGA) 2009 Q1 法說會逐字稿

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

Today's call is being recorded.

At this time I'd 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.

Good morning and welcome to everyone joining us for RGA's first-quarter 2009 conference call.

We appreciate you joining us on short notice this morning.

We wanted to get the results out a little bit earlier than usual, since we experienced some unusually high claims volumes during the first quarter.

Greig Woodring, our CEO, will comment on the results and provide some insights regarding the current competitive environment and the reinsurance marketplace in just a second.

Following Greig's remarks, we will respond to any questions from our participants.

I'll turn the call over to Greig after a brief reminder related to forward-looking information and the use of non-GAAP financial measures.

We will make certain statements and discuss certain subjects during this call that will contain forward-looking information including, among other things, investment performance; statements relating to projections of revenue or earnings; the future financial performance and growth potential of RGA and its subsidiaries.

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

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

In addition, during the course of the call we will 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 for his comments.

Good morning and thank you for joining us.

I'll comment on our results and our business environment and then we can turn to questions.

We appreciate you adjusting your schedule to participate this morning on short notice.

As noted in yesterday's release, we had a difficult quarter with results significantly diminished by high claim levels, primarily in the US and in Asia-Pacific markets.

I think in taking a step back I would characterize our thoughts as follows.

While we're frustrated with the quarter's mortality fluctuations, we're very excited about the escalating opportunities for us in the current environment.

We're fortunate to have the resident skills to address a growing array of client needs in virtually every significant reinsurance market around the world.

And we see an increase in quoting opportunities, both organic and in-force block opportunities in many of those markets.

Now let me turn back to the quarter's results.

Operating income for the quarter decreased 5%, totaled $67.4 million.

On a per-share basis, operating income decreased 16% to $0.92 per diluted share for the quarter.

We are about 75% of the amount in our operating plan for the quarter.

Several items affected the comparative results.

First, adverse mortality of approximately $37 million pre-tax, or $0.33 per share after-tax, contributed to the sub-par results.

Claims in the US were approximately $20 million pre-tax higher than expected.

High claim levels in Australia and Japan led to poor results in Asia-Pacific, roughly $18 million pre-tax over.

Adverse claims in South Africa and, to a lesser extent, the UK, led to poor results in Europe and South Africa, approximately $4 million pre-tax there.

While we're frustrated by the mortality experience, volatility is fundamental to our business.

Over time these fluctuations even out.

When evaluated over the last two to three years, for example, US mortality is in line, with quarters of both good and bad mortality experienced during that period.

We have experienced similar periods in Canada recently with a string of four mortality quarters in 2006 which were followed by exceptionally favorable mortality in 2007 and 2008.

Relative to the prior year's first quarter, results for the year were also adversely affected by $0.10 per share due to a stronger US dollar relative to several major foreign currencies, most notably the Canadian dollar and the pound sterling.

Additionally, the difficult capital market environment resulted in an operating loss in our variable annuity business of approximately $6 million pre-tax, or $0.06 per share after tax.

We also experienced a decrease in portfolio yields as we held more cash in shorter duration investments.

This more conservative investment positioning cost us roughly $0.07 to $0.08 per share after tax.

On the other hand, results benefited from reduced expense levels and lower financing costs.

Turning to the investment portfolio, fair values remain under pressure.

In the current environment gross unrealized losses increased by approximately 10% from year end.

We recognized approximately $56 million in net income -- net investment losses on a pre-tax basis, including approximately $40 million of impairments.

Net investment-grade corporate bond structured securities represented a significant portion of these losses, but we've tried to aggressively identify expected losses and reduce select exposures.

We believe the situation is manageable with our current capital base and earnings power, particularly if the economy begins to stabilize over the next several quarters.

Our capital position remains strong.

Most of the capital we raised in November remains undeployed, as we closed no in-force block transactions during the quarter.

Opportunities for capital deployment continue to present themselves on a number of fronts and we expect these opportunities to persist for the foreseeable future.

All of our ratings are stable.

We expect our business model will hold up well, even in the somewhat volatile environment.

Due to the high cost of replacing capital in the current economic environment, we will remain selective, picking our spots when considering block transactions.

The life reinsurance market remains very attractive in terms of current opportunity and very attractive in terms of the current competitive landscape.

Many of our clients are facing significant challenges right now.

Capital positions in the industry are under pressure.

Traditional forms of new capital are largely unavailable or cost prohibitive.

Reinsurance continues to be an efficient and effective way to help stabilize and direct [a] company's financial position.

Pricing characteristics across most of our markets are favorable right now.

We believe we're well positioned to assist clients and believe our competitive position is strengthening in the current environment and the opportunities for recurring business and in-force block transactions are the most abundant we've seen in recent memory.

Looking ahead, it's a very compelling environment for RGA.

Our history has shown that mortality fluctuations even out over time and we expect that to be the case with our most recent experience.

We have built a very profitable book of business and a track record over the past 30-plus years, and remain confident in our pricing and long-term profit expectations going forward.

The periodic volatility is frustrating, but something we accept as part of our business.

It's also part of the value that life reinsurers provide their clients.

We expect yields out of the investment portfolio to stabilize and increase as we migrate to more normal cash levels and reinvestment strategies.

To wrap up, we're very excited about our place in the industry, about the dynamics of the current market, and RGA's ability to support those needs.

We appreciate your support and interest in RGA, and now we're ready to take your questions.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS.) Nigel Dally; Morgan Stanley.

Good morning.

First question is can you provide us an update of how much excess cash you still have at the holding company?

I think you said the majority of your capital raised is still unused.

And also an estimate as to where your RBC ratio lies at the operating company?

Okay, Nigel.

This is Jack.

I'll take that.

We have roughly $250 million to $300 million of call it cash and relatively liquid assets at the holding company level.

In terms of RBC, we don't manage that quarter to quarter.

We manage it more on from a year-to-year basis.

But it's around a 300 level.

Okay.

Second question is why is your annuity exposure, and particularly GMWB, increasing?

I know it's only small, but in my mind there's no doubt that your variable annuity exposure is one of the largest, if not the largest, concerns for investors.

So I think investors need to know why you're putting additional capital to work in a high-risk living benefit reinsurance, where you're losing money, while leaving other high-return, low-risk block transactions on the shelf.

Nigel, we cancelled almost all of our variable annuity flow at the beginning of the year, but we had a 90-day run-out on that business.

So the first quarter is the run-out.

Now, we have one very small watching line that's a trickle of business that you'll hardly notice going forward.

So should we expect those exposures to gradually trend down from here?

Is that what I should be implying from that?

Yes.

You should expect very little new business on the variable annuity side.

Okay.

(Inaudible.)

Last question is just getting a little specific on the numbers for variable annuities.

You noted in the press release that it cost your net income $15.9 million.

Can you run through it how much was in operating income and how we get to this number with the various below-the-line items, like the change in the fair value of the GMxB derivatives?

I guess we have the pre-DAC number, but if you can talk about the DAC offset, and also the hedge performance, both pre- and post-DAC?

Well, that, call it $16 million, that is solely associated with the GMxB performance.

That's all what we characterize as non-operating.

We actually sustained a gain on our hedging strategy, both the imbedded derivatives, as well as the freestanding derivatives.

But we netted to a loss because we accelerated the amortization because of that gain.

That's the way the mechanics of that calculation worked.

So net on a pre-tax basis we had non-operating GMxB-related loss.

And as I said, it's driven primarily by an acceleration of the DAC amortization of about $16 million.

Now, Nigel, you may also have noticed we had about $6 million as well pre-tax in operating results associated with the VA business.

And that relates primarily to DAC adjustments on the underlying base policies that we run through operating income.

Very good.

Thanks a lot.

Jimmy Bhullar; JP Morgan.

Good morning.

The first question I have is just on your adverse mortality.

You've had more of an occurrence of that over the past few quarters.

If you could just talk about what it is that makes you comfortable that it isn't something that relates to mis-pricing or anything else?

And then secondly, just on your top-line growth, I think last quarter you mentioned you expected US premiums to be up 6% to 8% in 2009.

If there's any change to that?

And then finally, you haven't deployed any of the capital that you raised.

What it is that you're waiting for, if you could just discuss that?

Are you waiting for pricing to improve further or are you -- should we expect this capital to be deployed over the course of the year?

Or do you want to [wait and see] that the capital markets are stabilizing before really starting to use up some of the capital that you have raised?

Okay, Jimmy.

On mortality, first of all, if you take outside of the US of course they all had wonderful mortality last year and a little bit -- quite a bit better than expected in some cases.

The US has had some bad quarters in the most recent period.

Mortality in the US I think was high last year.

Let's put things in perspective for a second.

Mortality was about $20 million over in the US, pre-tax.

That's about out of $700 million of claims.

It's not like we're seeing a target that's being missed by a lot.

It's a reasonable fluctuation that happens.

The reason that we're concerned -- not concerned is that we continue to look at where the mortality comes from.

It's the same business that's produced over the past three years, if you look at two or three years combined, mortality that's on the favorable side of expected.

It's not new business; it's not old business.

It's a mixture of business scattered throughout the book.

It's not a particular client.

It's not a particular duration or age that is -- got a bad sell or producing mortality results that are spiking in the wrong direction.

It's spread out over that whole book.

And that whole book has produced good results over, like I say, over a two- or three-year period.

So we don't get overly concerned when we have quarters like this, although we wish they were otherwise.

In terms of top-line growth, yeah, I think that as I tried to indicate, our organic expectations are increasing quite a bit, actually.

And while we don't redo guidance -- we try to do that sort of once a year and let it sit -- we're probably thinking more in terms of the top ends of those ranges that we gave you in terms of growth rates.

We will add a little bit to our expectations based on the current environment and what's happening and the demand that we're seeing.

In terms of capital deployment we have not deployed any capital.

There's a couple things going on there.

First of all, the first quarter's very slow typically as companies are looking backward for the first two-plus months of the quarter more than they are looking forward at their capital needs, trying to finish off last year's reporting.

The number of opportunities that has come over the transom in the last four or five weeks is very strong and they're across the board.

So there's no shortage of opportunities to deploy capital.

The other thing that happened, of course, is that as we saw our own stock price fall down to a point in the 20s, we're reluctant to deploy capital when our stock price is at a point where we couldn't replace it and use more capital forward.

When we get up to the point --

I just --

I'm sorry?

I just have a couple of follow-ups on that.

If you do see a significant increase in top-line growth, is it reasonable to assume that you would consider an equity raise at some point again?

And then, finally, you had mentioned earnings guidance last quarter for 2009.

I think the range was $5.75 to $6.25.

Any comments on that?

Should we assume that that range is still applicable or should we take out the mortality, the poor mortality, this quarter and adjust it accordingly?

And that's all I had.

Well, we have certainly dug ourselves a hole here, sort of like last year.

If you remember last year we basically came out in the center of the range that we promulgated at the first part of the year, if you discount the capital raise that we did in November, which was to take advantage of opportunities.

So we pretty much hit exactly in the center of the range and we had a bad first quarter last year, too.

So hopefully we can see something like that.

But we try not to sort of adjust those numbers.

Those are an annual look at the beginning of the year and obviously we're into the year with a bit of a hole to climb out of.

In terms of capital raise, we really don't think that organic growth rates will pick up to the point where we need to raise capital for sustaining organic growth in the near future or anytime in the intermediate future even.

Yes, Jimmy, this is Jack.

Think in terms of organic growth rates resulting in business coming on over a period of time.

It doesn't all -- it isn't all reported at once and even if the rate of growth kicks up immediately it'll take time for that reporting to work its way into financials.

And we're not talking about going from an enterprise-wide call it a 10% or 11% growth rate up to 20% or something.

What we're saying is we are seeing upward pressure, which we had expected for some period of time.

Maybe it's a little bit of a surprise that it's taken this long for some of the primary companies to look more to the reinsurance market as opposed to other alternatives.

So -- but the point I'm trying to make is that's kind of a subtle upward usage of capital.

So that would certainly not create in and of itself a capital requirement this year.

Okay.

Thank you.

John Nadel; Sterne, Agee.

Good morning.

That happens every call.

So a couple quick ones for you guys.

Greig, did I hear you correctly, indicate that the first-quarter reported operating earnings was at about 75% of your operating plan?

Yes, that's correct.

So on a reported basis -- so if I adjusted for that, then your operating plan was somewhere around $1.25 for the first quarter.

Now, I certainly recognize that there's some seasonality in your earnings stream, but $1.25 would have still been shy of my numbers and consensus by a reasonable percentage.

And even run rating it with some seasonality adjustments would be pretty difficult to get to the low end of your guidance.

Can you sort of help us in that regard?

Yes, John.

This is Jack.

I can help a little bit.

I will say that our plan and the way we spread our plan was a little bit conservative with respect to the ramp-up.

So there's some seasonality and there's also some conservatism in the plan early on.

So while -- and my suspicion is some of the capital deployment -- we certainly didn't have any in the first quarter.

I think we commented last quarter that we really have used kind of an average of later in the year, roughly the third quarter, for full capital deployment.

So that may account for some of it as well.

So pretty much there you have it.

Yes.

We would expect a little bit bigger ramp-up this year than normal.

And just because of the capital deployment?

Yes, because of the capital deployment.

But it is true that we have a lot of our earnings in the fourth quarter, maybe 40% or something.

Yes.

I'm sorry.

Maybe -- not 40%, maybe 30%.

Yes.

Okay.

And then it's interesting, because I feel like, Greig, your commentary on the conference call has definitely been a bit more positive than I read your commentary to be, at least in the press release, as it relates to organic growth opportunities and sort of atypical block transaction opportunities.

Maybe for all of us you could maybe compare where you think the -- where you view the opportunities today, how encouraged you are, how optimistic you are relative to your outlook and view back in the October/November timeframe when you guys raised the capital?

Is it sort of --

We raised the capital --

Is it sort of similar to then?

Is it better?

Is it worse?

Yes.

In the October/November timeframe, we actually had a list of opportunities that was stronger, or more numerous I should say, in the international arena than it was in the US.

And that's kind of flip-flopped now.

The opportunity list in the US is more than half of the total.

And the list of opportunities has, if anything, grown a bit.

Even though some of them we've passed on, others have evaporated, the list is still strong because of just new additions to the list coming in all the time.

And a lot has happened in the last, I would say, six weeks, even the last three weeks, that suggests that the momentum of that is not slowing down at all.

It's actually quite strong.

And I was interested in that point, too.

When you say the number of opportunities that has grown over the past several weeks, is there any consistency to what is driving that?

Is there a way to characterize sort of what that's related to, even though it's probably multiple companies?

No.

I would say, just generally speaking, John, that it's simply the fact that companies are under stress.

They realize reinsurance is a good way to manage their balance sheet around the edges.

And they're trying to take advantage of that.

In the first couple months of the year I don't think a lot of people in the primary companies were paying attention to that.

They were trying to put to bed their results from 2008.

But when they started turning to planning for 2009, I think they begin to send out feelers, trying to see what is possible and what could happen.

And one more, if I might.

Just thinking about a couple of transactions that have at least been out there that we have, especially those of us who cover the life sector, have seen.

Lincoln did one with a division out of Goldman Sachs.

And Genworth did one a little bit earlier on than that.

Is it fair for us to assume that you were at the table as well and just didn't get the price that you were looking for, or is there something else?

No.

I don't think we were involved in either of those situations.

I don't think that they came to the reinsurance market with those opportunities.

Okay.

All right.

Thanks very much, guys.

(OPERATOR INSTRUCTIONS.) Steven Schwartz; Raymond James & Associates.

Good morning.

I want to follow up first on a couple of John's questions.

Operating results were $0.92.

You suggested they were about $0.33 of adverse mortality, maybe another $0.06 in excess DAC amortization resulting from the markets, which I guess would put you at $1.31 kind of.

Were there any other large non-trendables that we should be aware of?

Steven, this is Jack.

Those are the major ones.

We did have a lower investment yield that across the board probably cost us $0.06 or $0.07.

That's right.

Greig mentioned that.

Yes.

That was driven primarily by a little higher liquidity position.

Now we did -- you start adding that up and there are some offsets.

And the offsets are fairly typical.

For instance, our run rate on expenses was lower than we had in the plan.

We're a little reluctant to add headcount and that sort of thing until the markets settle down.

So that was almost an expected variation from the plan.

But we picked up several cents just in having a lower expense level than we initially would have forecasted.

Okay.

Great.

Now realizing that, generally speaking, you don't want to be constantly updating earnings, could you give a sense in that original estimate, the $5.75 to $6.25, maybe how much was there from capital deployment that we probably won't be getting?

Steven, we had roughly a $0.25 a share or so in terms of contribution from capital deployment.

You may recall, though, we indicated that we, in the plan and in our guidance, we suggested that on average the capital deployment would be roughly two-thirds of the way through the year or so.

Right.

Yes, I remember that.

So that was the total amount of deployment.

Now, we're not suggesting we're not going to deploy any of that capital.

Whether we get to that level, whether we deploy at the same level that was in the guidance, it remains to be seen, because these were call them lumpy opportunities and the timing is always difficult to predict and that sort of thing.

Okay.

And then one more, Jack, and then I'll get back in line.

The suggestion that -- I mean I've -- let me look at some numbers here.

You suggested that there was $20 million of adverse mortality in the quarter in the US.

And I keep track of this stuff and I've got the numbers ex the adverse mortality for the prior quarters.

2Q '08 there was none if I remember correctly and the loss ratio was 82.9% in US traditional.

For the third quarter ex adverse mortality was 82.5%.

In the fourth quarter it was 83.5%.

In this quarter, maybe there's some seasonality that I'm not getting, but in this quarter, ex the adverse mortality, that loss ratio would have been 85.9%.

Is there anything to make of that?

Are you maybe changing what you think is normal?

No.

One caution I'd give you is there's often interplay between the DAC amortization and the reserve -- not so much the claims levels, but the reserve levels.

So you may want to look.

And we typically guide to use both the level of policy acquisition costs as a percent of premium, as well just the claims and policy benefits, which you're doing there.

So I think if you included both you'd see a little smoother pattern.

Okay.

All right.

Good.

I'll get back in line.

Eric Burg; Barclays Capital.

Good morning.

I have a couple of questions.

My first question is sort of a follow-on also to one that was asked by John.

If insurance companies do not record meaningful other-than-temporary impairments, something that many of them quite frankly have not done, or if the stock market reverses itself, which to a certain extent it has -- in other words the stock market has come back smartly from its bottom.

Let's say it were to continue to go up, and let's say companies were to not take meaningful other-than-temporary impairments because they feel that somehow they're going to recover principal and interest on their corporate bonds and hybrid securities and so forth.

My question relates to just sort of how sustainable is this demand for block transactions?

And, in particular, would these accounting decisions and/or a continued surge in the stock market mean that the opportunities would go away or is the opportunity there and solid and it's going to be there for sure?

Eric, you know, if conditions improve, obviously the demand for reinsurance capital would lessen and we would see that reflected in either slow movement on any transaction or just transactions not appearing, be an environment like we've had in the last four or five years before this.

But it's not only the stock market improving.

It's whether the default rate on some of the securities that are out there starts to pick up, putting downward pressure on capital.

And your guess is as good as ours as to how long and how severe that downward pressure will be.

I mean, we're expecting more defaults in asset portfolios across the industry.

Second and final question relates to the ongoing traditional life reinsurance business away from financially-oriented transactions that we have been discussing.

Did I hear you right that just general demand for life reinsurance, mortality reinsurance, in the United States is picking up?

And if I did hear that right, why is -- what's your best sense of why that's happening?

It's always hard for us to get a read on whether overall demand is picking up, but, certainly the amount of business that's coming our way is picking up.

Now, some of those situations are recent wins in the marketplace and they reflect weakness of competitors at times.

And so that makes it difficult sometimes for us to get a clear reading on how much overall demand is picking up.

But we do see an increased trend to reinsure more simply to conserve capital occurring as well.

And so it's our suspicion that overall business is picking up.

And it's certainly evident in things that have happened recently from our perspective.

And last question, understanding that there has been really enormous in the last, call it, 10 years consolidation in your little corner of the world, how do primary companies manage their credit risk?

In other words it's a great thing that you're getting more business because of the consolidation and others struggling, but I imagine in the back of [Siemens'] mind they're saying, well, we'd like to deal with RGA more, but that exposes us to it more as a counterparty.

How do -- is my sense of the dynamic correct and, if so, how do primary companies manage that?

Well that's true, Eric.

There's more focus on that, in addition to the fact that there's more concentration in the industry, so that companies will have limitations.

Now, a lot of reinsurance doesn't have a lot of counterparty exposure to it, does YRT kind of reinsurance on an organic basis.

Even coinsurance of term business doesn't have a whole lot of counterparty exposure unless you're talking about very large volumes.

Companies do spread their reinsurance around in order to mitigate that concentration risk and are aware of the counterparty limitations that present themselves more than ever.

But it's not been a constraining factor for us in the last couple of years.

There have been one or two instances over the last five or six years where companies have told us, we're kind of full up with our exposure to RGA, and we had to work at either restructuring or let time pass to bring those exposures down.

Thank you.

Mark Finkelstein; FPK.

I have a few questions.

I guess just a clarification -- I apologize if you said this.

But what was the actual DAC acceleration on the GMxB that helps me get to the $16 million loss?

It was in the neighborhood of $37 million.

All right.

I calculated $33 million so we're close.

All right.

I guess just a clarification -- I understand and tend to agree, actually, with the comments around capital and cautionary language in the environment, but I guess I'm thinking about the growth in the flow business being very strong, particularly internationally on a currency-adjusted basis.

But obviously the returns on that, I believe, are considerably lower than the returns that you were targeting on the deals which, if that's still correct, are in the 20%-plus range.

And so, I guess the question is, why not slow down particularly some of the international growth and allocate that capital towards some of the deals?

What is the thought on that?

I think the international currency-adjusted growth was 20%-plus.

Mark, we're always managing to build long-term value and that's our main focus.

And developing strong relationships with clients and supporting client needs, having a good reputation as the company to work with in the market is very important.

It's much more -- the returns on that long term are soft, but they're important and they're considerable.

So we're balancing that against deals which tend to be a little bit more opportunistic.

They come and they go.

And you're right, we could probably optimize short-term income by switching all of our -- shutting off organic growth and switching to deals, but that's not optimal if you look over a longer period of time.

It's sub-optimal.

Okay.

And just another clarification -- I think you mentioned in the press release a difficult environment for annuity reinsurance.

Was that just a comment on VAs or is there anything else, whether it's the indexed annuities or the fixed-rate annuities that were part of the reason for that comment?

Well, the fixed annuities and the indexed annuities didn't have a great quarter, but they didn't do terribly either, and so sort of on track.

It's more the variable annuities that are under pressure than anything.

Okay, great.

Thank you.

Sam Hoffman; Lincoln Square.

Good morning.

Can you comment on the list of deals in terms of the ones that actually went away?

What happened to them?

Did they go to competitors or did the client choose not to purchase reinsurance?

It's more the latter.

There were a couple of the original transactions that, frankly, were support of companies who wanted to take a look at AIG properties and those have kind of disappeared.

But more of them have been with companies that wanted to reinsure a particular block of business out because it was something that they would have liked to do anyway.

But we couldn't come to the price, so that nothing was done, or they wanted to move some assets and then they got cold feet when they realized the price of taking the marks on asset and crystallizing losses in a portfolio.

So some types of business are hard to reinsure right now because of all the assets being under water.

And so there's this interplay of what kind of block and what kind of business can we use to achieve the goal we want to do.

And there's a little bit of that back and forth.

It takes a long time sometimes.

Okay.

My second question is can you comment on the adverse mortality in the quarter in terms of your own view of whether this quarter was kind of a one-in-two or one-in-four or a one-in-ten type of event?

Like I said, this was -- just picking the US, where big block of business and a lot more stability.

We're $20 million over out of an almost $700 million of claims.

So you're really talking about something that is not that big of a fluctuation.

It's under standard deviation.

You're talking about one in five or -- I'm sorry -- you're talking about, yes, something like one in five to one in ten maybe?

But I'm guessing a bit there.

But it's not a huge miss in the mortality scheme of things.

Okay.

And there's nothing that happened in the quarter that would indicate to you that your assumptions would be anything different, even including the fact that we're in a difficult economic environment and there might be more claims for multiple reasons because of that?

We believe that actually claims in the US were high last year.

That is, mortality was high.

Whether or not that has anything to do with the stress related to economic and other conditions in the markets, who knows?

We'll probably never know the answer to that question.

But I've talked to enough other companies, both direct writers, reinsurers and retrocessionaires, to believe that insurance mortality was elevated last year.

I don't know about the first quarter.

We know what our results are but we don't know everybody else's.

And you really don't know how these things play out over time except that they do tend to even out, that periods of higher mortality are followed typically by periods of lower mortality.

Have you experienced any increase in suicide claims?

We did last year.

We don't have cause of death for the first quarter.

That typically comes a little bit later when we get death certificates in.

Okay.

And finally, can you update us on your latest discussions with the rating agencies in terms of their view of the capital ratios, the RBC requirements and other balance sheet and earnings aspects that they're going to need to maintain your current ratings?

Yes.

This is Jack.

We had our annual review, so to speak, with two of the agencies, that is Moody's and A.M.

Best, in the fourth quarter and we've got one coming up with S&P.

That's, likewise, an annual review.

I guess I'd characterize the discussions as going well.

We've had -- we're not on negative outlook from any of those agencies.

Some have gone through stress testing of our investment portfolio, as they have for the entire industry, and the result has been we still have maintained ratings.

So I guess I'd characterize it as pretty much status quo with respect to all three of the agencies.

Okay.

Thank you.

Jeff Schuman; KBW.

Good morning.

Greig, I was wondering if we could come back to one of John's questions.

He had asked about kind of the Lincoln and Genworth situations.

And I thought you had said that you really hadn't had a look at those.

And if that's correct I'm wondering if you can kind of help us understand that a little bit.

Once again, I understand you maybe don't want to talk specifically to those companies, but just, I don't know, just the general prospect of kind of major life companies, major clients, coming to market with their reinsurance transaction and you kind of maybe not having a look at it would seem kind of strange.

Are there some alternative approaches or facilities in the market that are kind of likely candidates to take some of this business?

Or is there something going on in the market that we should understand that's kind of an alternative?

Or why would you not have a look at what would sort of seem like obvious type opportunities.

Well, Jeff, I don't really want to comment much on individual companies or opportunities.

But I will say that both of those companies are clients of ours with whom we have a good relation and an ongoing dialogue, have talked about numerous things over the years with them.

In the particular situation of what Lincoln did, for example, they did not discuss that, as far as I know, with anybody in the reinsurance market.

That transaction was done in a different way.

But we don't see ourselves losing many opportunities to other competitors in our space and we have plenty of opportunities on the fly.

I don't know what to add more than that, although those particular companies, those particular situations where we may have not done something it's gone to an investment banking solution or an investment banking enterprise.

That certainly has happened but it's not deflecting our interest in the overall market.

Okay.

Well that's what I just wanted to clarify.

So we should not be concerned that there is sort of this -- a major source of investment banking capacity that's emerging?

We should view these more of kind of one-off situations?

That's the way we're reading it at this point.

Okay.

Thanks a lot.

Eric Berg; Barclays Capital.

Just one final follow-up on the mortality question.

I'm sure you know that a lot of the life insurance that has been written in recent years, a higher percentage than in the past, has involved older people, in many cases involving policies that are destined to, or have been, sold into the secondary market.

Now we know that that, of course, affects the so-called SOLI transactions, or stranger-owned transactions, affects lapse rates.

But to the extent that old-age mortality is not nearly as well understood as mortality in the heart of the population, so the people in their 40s, 50s, 30s and so forth, have you thought about the possibility, has it occurred to you that maybe you're getting higher-than-expected mortality because a larger percentage of your book than in the past involves older people?

I'm sure you've given thought to that.

Oh, yes.

We certainly have looked at mortality by age.

You know, there's always a worst sell, so don't take this to mean anything in particular.

But the fact of the matter is that last year -- I'm not talking about the first quarter -- but the mortality in the last 2008 in the US was higher in the 50-year-olds and the 40-year-olds than it had been.

That sort of thing happens.

But we haven't noticed any particular spike or any problem that concerns us in the older ages.

Thank you.

And we do have one more question in the queue.

Steven Schawartz; Raymond James & Associates.

Two questions and the follow-up.

This is probably a dead horse, or it has been in the past, but asset-intensive business and the modeling thereof -- Jack, can you help us out here?

I tend to -- my understanding had historically been indexed annuities played a large role in that you would see a big increase in net investment income.

You would see a big increase in -- offset in interest credit and that was basically the options offsetting each other, what you were crediting and what your interest income was.

Spread income was in asset-intensive very, very high in the quarter.

I think it was about $16 million.

So that would be interest income less interest credited.

And I think those differences were minimal.

Can you just help a little maybe with the modeling of this?

Yes, although, Steve, I'm not quite clear on exactly what the question is.

Is the question to what extent was investment income affected by, for instance, any derivatives associated with the equity indexed annuities?

Yes.

I mean, that gets to it, but just the very big difference this quarter compared to the last few quarters.

You had -- for example, I think between the fourth quarter and the first quarter you had a very, very significant increase, if I remember correctly, in interest income in that operation and interest credited went up as well, but not nearly as much.

Yes.

I can tell you -- well, for instance this quarter versus the first quarter of last year the impact, the relative impact, of any derivatives associated with our hedging of the equity index position, there was about a $27 million difference on the positive side, actually.

I think we may have to take that discussion off line, because it gets rather involved in terms of trying to dis-aggregate the P&L stream for all of asset-intensive.

Okay, that's fine.

We can certainly do that.

And then just quarterly update -- anything new with the Japanese?

Well, there's a lot of activity in Japan, but no big breakthrough that we keep waiting for.

We're doing fine in Japan.

Business is growing nicely.

It's well over $100 million of annual premium now and we deal with just about everybody in Japan and have had some nice wins on organic business over the last six months.

I feel pretty good about the Japanese operation.

Okay.

No sense over there -- I mean, they're having their own capital problems I've got to imagine.

No sense over there that what you -- you know, maybe that will be the breakthrough?

It could be.

There's -- they've been having capital problems for a long time, though.

That's true.

And there are some opportunities that are emerging in Japan and we'll see how they play out.

Okay.

Thanks.

And it looks like we do have one more question from Ben [Alpert] with PIMCO.

Yes.

You mentioned that you had gotten rid of all of your VA contracts, with the exception of one, early this year.

And my question is, are you talking about the mortality risk under the VAs or are you talking about the secondary living benefit guarantees, or both?

Yes.

Really both.

We're talking about the fact that we are not reinsuring any variable annuities except one very small trickle right at the current moment.

And so going forward from April 1st or so you'll see no flow of new business.

Of course we have an in-force block that we will be maintaining.

Well, is there something inherently unattractive about the mortality risks of the VA line of business?

No.

We would reinsure the mortality risk alone out of that business very happily if it wasn't market dependent and introduced a lot of volatility of that sort.

And we have done transactions of that sort in the past.

Okay.

Thank you.

I do show there are no further questions at this time and I'll turn the call back over to Mr.

Lay for any additional comments or closing statements.

Okay.

Well, thanks to everyone who joined us today.

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

Louis.

And with that we'll end the call.

Thank you very much.

That concludes today's conference.

Thank you for participating and have a great day.