美國再保險集團 (RGA) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Reinsurance Group of America's second quarter conference call.

One note -- that 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.

Gentlemen, please go ahead.

Okay.

Thank you.

Good morning to everyone.

Welcome to RGA's second quarter 2009 conference call.

Greig Woodring, our CEO, will briefly comment on the results we released yesterday and then we will respond to questions from the participants.

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

We'll make certain statements and discuss certain subjects during this call 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 actual results to differ materially from expected results is included in the earnings release issued yesterday.

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

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

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

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

With that, I'll turn the call over to Greig.

Good morning and thank you for taking the time to join us today.

My comments will be brief and then we will open the line for your questions.

To begin, we're quite pleased with the strong results for the second quarter.

Mortality experience recovered following a difficult first quarter and we are back on track heading into the second half of the year.

On a consolidated basis, operating income for the quarter increased 19% to $130.6 million from $109.7 million in the prior year.

On a per share basis, our reported operating income for the quarter was $1.79 per diluted share, up 5% from a very strong second quarter 2008.

Reported US GAAP net income for the quarter totaled $153.2 million or $2.10 per diluted share compared to $1.73 last year.

Consolidated net premium flow during the quarter increased 9% on an original currency basis, but when considering the strengthened US dollar, translated premiums increased just over 1%, $1.4 billion for the quarter.

For the first six months, net premiums have increased to $2.7 billion or 2.4% on a reported basis and 12% on an original currency basis compared with last year.

Net unrealized securities losses decreased dramatically from the first quarter and the quality of our fixed maturity portfolio remains conservative at 95% investment grade.

Gross impairment losses totaled $36.9 million.

$20.8 million of these losses were related to credit issues and recorded on the income statement, and $16.1 million were considered noncredit related and included in other comprehensive income on the balance sheet in accordance with the new GAAP guidance.

Net investment income totaled $284.6 million, up from the first quarter, total of $223 million.

A large part of that increase is associated with our funds withheld portfolios in the US asset intensive business.

Investment income in that segment is highly sensitive to movements in the fair value of equity options associated with large equity indexed annuity funds with held treaties.

You will see corresponding increase in income credited expense within the segment well.

Our general account portfolio yield increased from 5.6% in the first quarter to 5.8% in the current period, but remains below last year's levels.

Operating results benefited from a tax adjustment of $12 million during the quarter.

The repurchase of $80.2 million of the company's junior subordinated debentures resulted in a nonoperating gain of $0.35 per diluted share after tax.

Turning now to our operating segments, first in the US.

Pretax operating income totaled $119 million compared with $109 million last year, a 9% increase.

Mortality experience recovered from a difficult first quarter, was slightly better than expected.

Premiums increased 7% for the quarter and 8% year to date, both within our guidance range of 6% to 8%.

RGA experienced a significant level of premium refunds to companies cleaning up their seated administration in the second quarter.

We continue to find our prices acceptable to the market in the current environment.

Our US asset intensive business recovered from a difficult first quarter and contributed $16 million in pretax operating income, up from $9 million last year, primarily due to strong underlying fund performance associated with annuity coinsurance.

Credit spreads narrowed considerably during the second quarter, reducing the liability for the B36 embedded derivatives associated with treaties structured on a modified coinsurance and funds with held basis.

The result was a pretax increase to net income of $64 million during the quarter, offset by a DAC adjustment of $47 million.

Our variable annuity business also improved during the second quarter.

The fair value of liabilities associated with GMXB riders decreased from $241 million to $80 million during the quarter, a benefit of $161 million, which was mostly offset by hedging related losses of $140 million.

After DAC offsets, the impact to pretax income was a loss of $17 million.

On an operating basis, this business reported a pretax gain of $5.8 million for the quarter.

Turning now to Canada, our Canadian operation experienced slightly adverse mortality experience in this quarter, further hampered by a weaker Canadian dollar compared with last year.

Pretax operating income totaled $17.6 million, down from the prior year total of $23.8 million.

Premiums were up 11% in US dollars and 27% in Canadian dollars.

For the year, premiums have increased 5% in US dollars and 25% in Canadian dollars.

Our guidance called for an 11% to 13% in Canadian dollars, so we're well ahead of that pace due mostly to an increase in creditor business.

Regarding our international operations, Asia Pacific posted a very strong quarter, with pretax operating income of $24.7 million compared with an equally impressive $22.8 million last year.

The current quarter result was primarily driven by favorable mortality results in Australia and in Japan.

We still expect some quarterly volatility in this segment as it continues to grow, but Asia Pacific has performed quite well in four of the last five quarters.

Premium flows and original currency were down slightly for the quarter and up 9% for the first six months, near the expectation of 10% to 15% we set at the beginning of the year.

Client reporting patterns continue to cause volatility in quarterly premium comparisons.

We remain optimistic about opportunities for continued growth in the Asia Pacific marketplace.

Europe and South Africa experienced slightly adverse mortality in its primary market, the UK, and was negatively affected by foreign currency exchange rates.

Pretax operating income decreased from $17 million to $12 million this quarter.

Our longer term results continue to be within our pricing expectations and we remain satisfied with our experience here.

Net premiums decreased slightly on a US dollar basis, but increased 19% on an original currency basis.

Year to date, premiums have increased 20% on an original currency basis, putting the pace at the upper end of the guidance range of 15% to 20%.

Our capital position remains strong as do our ratings, which have recently been reaffirmed.

There are numerous benchmarks and models available to measure capital adequacy and our internal model indicates significant redundancy.

It's difficult to provide a precise number on the redundancy given the various models.

However, we believe a reasonable range of redundancy to be $200 million to $400 million.

We did not close any block transactions this quarter.

However, we continue to evaluate many opportunities and expect such abundant opportunities to persist for some period of time.

Generally credit spreads have come in, reducing the cost of replacing capital, but we still intend to be selective when considering opportunities.

Although the capital markets and life insurers have indeed been busy raising capital, we believe companies will continue to pursue reinsurance solutions as a means to help manage current and future capital needs.

Further, it's our view that companies appear to be cautious about selling off parts of their business, and likewise insurers have been cautious about selling off big blocks of policies, perhaps an indicator of the relatively slow M&A environment in our industry.

We believe the current reinsurance competitive landscape bodes well for RGA and our growth potential.

Pricing characteristics across most of our markets remain favorable.

We are well positioned to assist our clients in these markets.

In conclusion, we had a very strong quarter.

Our experience and proven track record of pricing mortality risk continues to be revealed over long periods of time despite the shorter term quarterly volatility.

We believe the current life reinsurance environment as tracked within RGA is well positioned to take advantage of opportunities.

We appreciate your support and interest in RGA, and we will now take your questions.

(Operator Instructions).

We'll take our first question from John Nadel with Sterne, Agee.

I guess the first thing on my mind is just to try to get a sense from you guys on -- a lot of ins and outs this quarter, but it seems like mortality was reasonably in line with your expectations, at least on a consolidated basis.

So that and top line, reasonably in line.

So big beat on the quarter, the $12 million tax bennie, definitely something we shouldn't, right, expect to continue.

But thinking about the upside in asset intensive and thinking about the upside, at least relative to my expectations in corporate, was wondering if you can give us any feel on what we should expect from those two segments moving forward?

John, this is Jack.

In terms of, first of all, the annuity business, the asset intensive business, it probably outperformed slightly where we would expect in terms of a run rate this quarter.

So you can accommodate that in your model as you best see fit.

Obviously, the underlying capital markets performed very well, and as a result some of our spread-based products performed a little better than we would have anticipated in our plan.

In terms of taking a look at the corporate result, keep in mind that we did have a tax benefit in there, as you mentioned, and that was roughly $12 million or $0.16 a share.

Yes.

We also closed out a revolving credit arrangement in the UK and sustained an FX roughly of $5 million positive impact there.

So that's roughly $0.20 flowing through that particular segment that you wouldn't expect to be recurring.

So --

Okay.

I would certainly pull that out and then use the remainder as somewhat of a run rate.

Okay.

All right.

That's helpful.

And then -- and then just to talk a little bit about this -- the pipeline for transactions, I guess most notably block transactions.

Greig, last quarter, I think you had indicated that at least at that point in time back in late April, you had seen over the previous four to six weeks or so a real uptick in activity, especially in the United States.

And just wondered if you can give us maybe a little bit more color on what that pipeline looks like, maybe in some of your key geographies to get a sense for where we might expect to see activity to the extent that you close transactions, where that might come through?

John, let me talk about maybe new business all in.

First of all, we are working like crazy on some of these deals, but we're -- without too much to show for it so far this year.

The level of activity is across the board, across geographies, pretty well spread.

I think the urgency that the ceding companies have or may have had to close these transactions has diminished considerably as the second quarter has gone on.

And we expect that there's a possibility it might rekindle by the end of the year, but we don't know that for a fact.

But outside of that, there's been a huge amount of interest in financial reinsurance and we've been very active in that.

As a matter of fact, we wish we had a couple of more people to throw at that at times, and a lot of that is coming from Asia, ironically.

But it's all across the board, Asia and America.

And we have done a lot of -- and closed a fair number of nice, financial reinsurance fee income type transactions and that business is going to make itself known in the future as well.

On the organic side, it's a rich environment right now.

There's a lot of increased use of reinsurance.

This is business we are currently pricing and winning, so you won't see it come through the pipeline for probably six months or so, but it's very gratifying to note the real uptick in just regular new business.

And there is all sorts of one off strange opportunities that companies are taking a look at shaping up their lines of business or divesting a line of business or doing other sorts of things.

There's a lot of that.

So we're in an environment where we're, as I said, just working like crazy.

We don't have any closed block risk transfer deals to show for it, but we've got a lot of financial reinsurance and a lot of organic business to show for it.

And we think our organic business flow is going to be towards the upper end of our range this year and will stay strong into next year.

So -- thanks.

That's really great feedback.

I guess to summarize that, can you give us a sense of -- if you raised last fall, I forget the exact number, $330 million or so of equity, how much of that would you estimate at this point has been actually deployed?

I would guess we've deployed no more than $25 million of it.

Okay.

All right.

And then the last one for you is just I know you made the comments on the $200 million to $400 million based on a -- I guess a range of estimates on capital redundancies.

For everybody who's thinking about risk-based capital as a key metric, can you give us an estimate on where RBC stands and how much cash still remains at the holding company if for some reason you needed to put it down into the life co?

John, this is Jack, I'll take that.

RBC's a little north of $300 million.

And we would -- quarter to quarter, we don't try to manage that.

We really try to manage it more for year-end reporting and you should expect to see it north of $300 million at year end.

We've been around $320 million the last couple of years, and that's probably a good estimate as to where we'll come in at the end of 2009.

We've got, relative to the holding company liquidity, a little over $300 million in cash and very liquid funds at the holding company.

So it's there to be used to the extent we have the appropriate opportunities.

Terrific.

Thanks very much.

And next from FPK, Mark Finkelstein.

Good morning.

Okay.

I've got a few questions.

I guess can you just talk about the US a little bit?

I mean I hear the comments, but you did have a slight decline in the in force in the US, first time in at least since 2007 -- probably before that, just don't have the numbers right in front of me.

New business obviously fell off a lot.

This is against a backdrop where some competitors, particularly some of the larger ones or one of the larger ones, have been pulling back in the life remarket in the US.

So I guess can you just maybe frame out what exactly is happening in the US in that context?

Mark, I think, first of all, it may be the first ever decline in in force in US, but I don't know that for a fact, but it's very possible.

A couple of things going on.

Yes, the new business had been declining and that was a reflection, I think, of sales in the marketplace.

A lot of big cases were not closed towards year end and sales in our opinion were down a bit in the life insurance industry in the early part of this year and late last year, which is reflected, of course, in our production numbers and our run rate of that.

In terms of our -- let me also say that the number of premium refunds that we gave out in the second quarter was very high and that would also be reflected in a lot of lapsed policies.

A couple of companies were catching up and that was a one-time negative.

It seemed like everything was negative on the administrative front in the second quarter.

Significant numbers there and a bit unusual.

I've never seen quite so many negatives on the premium refund side.

And that was just a matter of companies catching up with some administrative backlog.

In terms of the comments you made about the marketplace, we agree with that and, as I said, we are winning a lot of new business right now.

You just won't see it for a while.

And we expect our business flow organically to pick up.

As that begins to work its way through the processes of ceding companies, business being written process by ceding company onto us -- usually takes six months or so for new business to hit us.

And I think we'll see that towards the end of 2009.

Okay.

The premium refunds, will any of that go into the third quarter or is that pretty much done here in terms of the abnormality there?

It seemed to be an April and May phenomenon.

Okay.

And then just a quick question on Asia.

I know that the block is smaller, but you -- I guess the decline in the premium on a currency adjusted basis in the second quarter, I mean compares to a fairly sizable premium growth in the first quarter.

Was there anything specific that occurred in the second quarter, or was it just normal volatility?

I think it's just normal.

I wouldn't get too hung up on individual quarterly premium numbers out of a place like Asia.

A lot of the reporting in Asia is fairly lumpy, where companies will report one quarter at a time or sometimes even true up once a year with estimates in the quarters -- or in the intervening periods.

So there is a little bit of lumpiness there.

Look at it over a longer period of time, I think we're still very happy with the way Asia is moving along.

Okay.

And then I guess I just want to follow up on Nadel's question.

The annuity line, I guess I'm confused by the comments.

You indicated there's probably a little bit higher.

I mean you did do $16 million of operating.

I mean were there DAC or other kind of fair value adjustments in there that aren't [trendable]?

It sounds like you're attributing a lot to excess spread.

I guess I'm a little bit confused on what were the abnormalities and how should we think about that line going forward?

This is Jack.

I'll take that.

There weren't a lot of abnormalities, but the -- the performance was such that we wouldn't expect that to necessarily be a run rate.

I'd call it 125% or 130% of a normal run rate.

There's always some adjustments in that line that will create a situation where you don't have a perfectly smooth sort of run rate.

So that was a source of that comment.

It wasn't like -- there weren't significant DAC adjustments upward or downward in terms of the normal operating income.

Certainly we -- for the VA business, we did have some DAC adjustments as you would expect.

That's all nonoperating.

That's broken out in the reconciliations.

Okay.

Thank you.

And next we'll hear from Jeff Schuman, KBW.

Good morning.

I was wondering if you could talk about the creditor business mechanic.

I haven't looked at that recently, but it's a pretty significant business for you up there.

Can you remind me -- is this basically credit life or is there also credit disability and other exposure there?

And is any part of that economically sensitive or does it pretty much just earn like regular [sub] mortality business?

Jeff, it's credit life written by the banks.

It's extremely profitable for the banks.

They choose to reinsure some of it and that helps them on their tax position.

It's not extremely profitable to us in the way it is to the banks who have a very large margin on that business.

But it's higher premium and safer business, less margin.

That's the way to look at it.

Okay.

So should we -- we shouldn't be concerned about -- ?

It is not economically sensitive.

Okay.

At all.

Okay.

That's helpful.

Secondly, in the US, in the term life market, we've seen, I think, probably all of the major term writers increase pricing in recent months, probably with some eye toward I guess their own capital capacity.

As they've done that, have they revisited retention levels as well and are you seeing notable changes there or not?

Yes, we are seeing here and there big changes.

It's -- in addition to that there's a lot of move towards requesting coinsurance instead of just risk premium or YRT, premiums from reinsurers.

So there's a big move towards trying to pass along, if they can, some of the triple X costs to the reinsurers.

Is it sufficient that it changes the outlook for reinsurance market growth, do you think?

It certainly does that.

Right now there's not a lot of Triple X capacity available, so there are limited funds and everybody has to marshall their resources and use them appropriately.

If the market doesn't open up for Triple X funding, products will have to change for reinsurance -- which could affect the reinsurance growth rates considerably in the reinsurance marketplace.

We tend to think that the market for Triple X capacity will free up a bit as we get into the later part of 2009.

Okay.

And then can you remind me, to the extent that you absorb Triple X exposure at this point, how -- what is your primary funding vehicle on your end?

Well, we have -- we have over the course of time, once we've gotten a sufficient confidence that we've got a year bedded down in data under control, we have managed to secure long-term funding for all of our Triple X needs on a yearly basis or on a basis that covers each issue year up to a point.

So we've got this long-term funded from a number of different sources and a number of different structures.

Great.

Thanks a lot.

Next from JPMorgan, Jimmy Bhullar.

Hi, thanks.

You mentioned just winning a lot of ongoing small business, but on the block side, there have been a few transactions and you haven't been involved in any of those.

So I wanted to see if you could give us an idea on what is it that's prevented you from winning a block transaction?

Is it price or terms and condition or just timing?

And then also on deploying the capital that you raised last year, if credit trends do begin to improve or continue to improve, is there a chance that primary companies will not be as eager to buy reinsurance or to do block transactions?

And what do you expect if that is the case and what do you expect to do with the capital that you've raised?

And finally, if you could just give us an idea on whether you're still accepting new business in the annuity division, the variabilities?

Okay.

On -- well, first of all, on the last question, we are taking -- we have a very small trickle of variable annuity business still coming in.

We have much more fixed annuity and equity indexed annuity flow coming in, but just a bare trickle of variable annuity business.

I can size it.

It's roughly $40 million in the second quarter.

Okay.

On -- in terms of the blocks, Jimmy, I'm a little puzzled by your comment.

We have not, as far as I know, lost a block situation to any other reinsurers.

So there's none that we've been active on that we've lost out on price --

My point was just that there have been a few that have closed in the market and you haven't been involved in those.

There's really not that many that have closed in the market, either, that I would call these true block real risk transferment.

There's been a lot more financial reinsurance done and we've been players in that game, too.

There -- I know there was a group -- one large group quote that we didn't participate in and we chose not to and there's some that have gone to sort of nontraditional sources, but not the traditional reinsurance market.

But there really haven't been too many instances where we've -- and maybe none that I'm aware of that we're really competing against other reinsurers for in force blocks like this.

And you're right that if everybody gets feeling better about their capital positions and so forth, some of these blocks may never occur, in which case we will decide what to do with the capital that we've got.

That's a nice problem to have.

With the overall business uptick that we're seeing, though, we expect that we'll have good sources to apply the capital to over the next couple of years and are not too concerned about that whole subject.

That's all I have.

Thank you.

Next we'll hear from Eric Berg, Barclays Capital.

Yeah, thanks.

Just following up on Jimmy's question, what is the real difference in your mind, Greig, between a financial reinsurance transaction that [uses a lot] and a block transaction?

My question is sort of driven by the idea that block transactions can be financially motivated, too, so what's the difference between the categories of business as you think about that question?

Thank you.

Well, block transactions are definitely motivated by capital.

They're both similar in that regard.

Financial reinsurance transactions or what I would categorize as financial reinsurance are ones where there is not a significant enough risk transfer under GAAP, so that we're really taking fee income.

We collapse the premiums.

We don't consider them real risk transactions, but rather financing type balance sheet transactions that achieve a capital effect.

Block transactions are real risk transfer of essentially selling a piece of business and the reinsurer buys it at a price and is completely on the risk from that point on.

And so just to clarify, are you, in fact -- it's clear from your financial statement, your news release and your comment today that you've not closed on any block transactions, but just to clarify, there are many out there and you are working on some of them?

Yes.

There are quite a few out there that we are working on.

Now, when you say just -- my last question, when you say you're working on them, could that mean that they will close or that they will likely close or that you are studying them to see whether you would like to bid?

No, it's -- it's not the latter.

It's -- we don't know whether they will close, Eric.

They may not close because the companies are using them to achieve a capital effect.

Typically -- sometimes a restructuring effect, but they may not pull the trigger.

And so there's always a bit of uncertainty whether a company will -- a ceding company will decide to reinsure something like this in this fashion or not.

All right.

Thank you.

And next we'll go to a follow-up question from John Nadel.

I didn't expect necessarily to get back in that quick.

So I was thinking a little bit longer term.

And I know there's been at least some group of investors, maybe market -- folks who are looking at the market and looking at inflation risk.

And I just thought maybe we -- you maybe could give us a little bit of color on what investors should think about in terms of the potential impact of inflation longer term on your business and on your returns?

John, inflation is a somewhat better scenario than deflation for us.

In spite of unrealized losses that may occur in the invested portfolio, it -- any extra yield that we make on investments flows right to the bottom line.

And so on our mortality -- on our book of assets supporting our mortality business, we don't have cash calls on our assets in a way that would force us to be unable to hold those assets to maturity.

So the inflation scenario, as long as it's not too bad, is generally beneficial.

Some moderate inflation would probably be good for us.

Okay.

And then -- and then, Jack, not to -- I would like to go back to the annuity or asset intensive business just one more time.

Realizing clearly that the business demonstrates some quarterly volatility, I'm interested in your comment that with the $16 million pretax operating earnings this quarter out of that business, that that's maybe 125% to 130% above what the -- what may be a more typical quarter would look like.

Even if I make that adjustment, the results would still be demonstrably better than, I don't know, the average of, let's say, the past eight or even 12 quarters and just -- I just want to make sure that we're not missing something there because I suspect that I -- if that is indeed a -- the way to think about the level of earnings from that division, then it certainly has shifted.

John, I think we're putting a fairly fine point on a portion of our business that does tend to have some volatility.

Yes.

So when we talk about long-term run rates, we are talking about over a longer period of time.

And your comment that you're comparing to the last several quarters, those have been, as you know, fairly tumultuous.

So it's hard to use that as much of a benchmark.

So with that as a backdrop, I'm just trying to give you a feel for what may be a good run rate.

But I think I probably should have said you have to assign a fairly big bracket around that because there's a lot of influences -- including what's happening with respect to interest rates and underlying capital market performance and business flows and that sort of thing.

So you have to put a fairly big bracket around that.

Okay.

I just -- in my model just literally did the average of the quarters all the way back to 1Q 2005 and it's about $5.5 million a quarter, so I guess that's your point.

Your point is just that there's a wide range given the volatility.

That's right.

Okay.

Thank you very much.

Next we'll hear from Steven Schwartz, Raymond James & Associates.

Hey, good morning, guys.

I'm going to kick that dead horse one more time.

Were there -- outside of the options on the index annuities, were there any gains or losses from the funds withheld portfolio in asset intensive?

Really very little this quarter.

Okay.

That's good to know.

And then going back on the premium refund issue in the United States, did that affect earnings at all?

I mean is there a one-time effect from that or -- ?

Oh, yes, there's a one-time effect.

There's a bit of a reserve release as well, but a negative effect from that.

Greig, could you tell us, maybe, how much?

The premium refunds themselves were probably in the $10 million, maybe a little bit more range.

There was a reserve offset as well going the other direction.

Net, maybe $7 million.

Okay.

Thanks.

And then to keep going with the US, given -- first -- well, okay, this is a stupid question.

We got any Michael Jackson exposure?

No, we don't think we have any.

Okay.

And then going back to a more logical question, would we -- you said that there were a bunch of cases which didn't close.

Given -- I guess we're almost done with this month, have we seen those close in the third quarter?

No, nothing's happened since the end of the quarter to now on those large transactions and frankly, John -- Steve, I don't expect it to happen for a while.

Maybe the rollup towards year end you're going to see some activity or something might just happen out of the blue, but --

I don't mean on the closed blocks.

I thought you were intimating that there were maybe some normal -- there were some normal cases that were large that just didn't close.

Did I hear you wrong?

No, no, I think -- I'm talking about the closed blocks.

Okay.

All right.

Okay.

I then did not understand.

And then finally, just on Asia, we saw new assumed business go down.

You talked about the net premium written and how that gets a little bit wacky with companies reporting, but the new assumed business was down even in a functional currency basis.

I was wondering if you could talk about that.

Again, I'm not really sure -- I haven't really looked at that new business itself.

My sense is that new business activity is pretty high in Asia, so it's a little bit of a surprise to me.

So nothing that I would worry about on a quarterly basis.

A lot depends on reporting.

Yes, the quarter-to-quarter reporting can really influence that considerably.

And it's hard to get too concerned about one quarter's numbers in that respect.

Okay.

All right.

Thanks, guys.

(Operator Instructions).

Andrew Nussey with Mackenzie Financial, please go ahead.

Nice results, gentlemen.

Just wondering on policy acquisition costs at a consolidated level.

They seem fairly volatile and were off significantly and especially with that percentage of premiums.

Can you give some color on that?

Andrew, this is Jack.

I think you'll see that volatility almost every quarter if you look at, for instance, percent of premium of that line on an enterprise wide basis.

I would advise you to take a look at each of the operating segments and in particular cull out the impact of the asset intensive segment, because we've got some embedded derivatives in there that would influence those ratios considerably from quarter to quarter.

So if you look at it enterprise wide, as I said, you end up with puzzling sort of results sometimes.

So I would direct you to take a look at each individual operating segment.

I think you'll see a fairly clear pattern if you look at it that way.

Okay.

Much appreciated.

And, gentlemen, there are no further questions at this time.

Okay.

Well, thanks to everyone who joined us this morning.

To the extent there are any other questions that come up, feel free to give us a call here in St.

Louis.

With that, we'll end the second quarter conference call.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

We thank you for your participation.

You may now disconnect.