美國再保險集團 (RGA) 2009 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Reinsurance Group of America third-quarter conference call.

Just a reminder; 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.

Mr.

Lay, you may begin.

Okay.

Thank you, good morning, and welcome to everyone to RGA's third-quarter 2009 conference call.

Greig Woodring, our Chief Executive Officer, will briefly comment on our results that we released yesterday and then will respond to questions from participants.

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

We 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 for 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 will make comments about our results based upon operating income both on a pretax and after-tax basis.

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

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

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

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

Good morning and thank you for joining us.

I will provide some brief comments on our third-quarter results and then we will open the line for your questions.

To begin, we are pleased to report a solid quarter, one in which we generated strong operating earnings and our investments and capital position continued to strengthen.

On a consolidated basis, operating income for the quarter was $114.6 million, down slightly from a remarkably strong $118.5 million in the prior year.

On a per-share basis, our reported operating income for the quarter was $1.56 per diluted share versus $1.86 in the third quarter of 2008.

Of course, our share count is higher this year as a result of our November 2008 equity offering.

On a year-to-date basis, compared to the prior year, operating income has been adversely affected by $0.20 per diluted share due to foreign currency fluctuations.

Reported US GAAP net income for the quarter totaled $118.2 million or $1.61 per diluted share compared to $0.40 last year, which due to very unstable capital markets reflected significant realized and unrealized losses from investments and derivatives.

Consolidated net premiums totaled $1.4 billion during the quarter, an increase of 11% on an original currency basis, and of 8% on a reported US dollar basis.

For the first nine months, net premiums increased to $4.1 billion or 4% on a reported basis, 12% on an original currency basis.

Our book value increased 22% from June 30, 2009, and our net unrealized position on investments improved from a loss of $332.7 million to a gain of $145.2 million after tax.

Over the last two quarters our book value has increased 53%.

Impairment losses totaled $25.7 million for the quarter.

Net investment income totaled $299.5 million, up from the second-quarter total of $284.6 million.

Similar to the second quarter, our funds withheld portfolios in the US Asset Intensive segment were responsible for a large part of the rise in investment income.

Our general account portfolio yield was 5.7% for the quarter as well as the first nine months of this year, trailing last year's yield by about 30 basis points, as we have held higher relative levels of cash and invested new money conservatively.

Operating results also included a refinement of an estimate of existing US tax accruals associated with certain foreign operations, resulting in an addition of $5.3 million to the Company's tax provision.

Turning to our operating segments, first in the US, pretax operating income totaled $107.1 million compared to $84.2 million last year, a 27% increase due primarily to improved mortality and strong results in our Asset Intensive segment relative to last year's third quarter.

Premiums were up 8% for the quarter, and mortality experience was off by about $15 million pretax and in significant deviation relative to total claims.

Quoting activity on traditional organic business remains strong, and we are seeing more capital and financially motivated inquiries as we approach year-end.

We're excited about our acquisition of ReliaStar's North American group reinsurance business, as it gives us a leading position in a new market for us in the US.

Approximately 5% of the block is Canadian business, and we hope to gain an additional footing in the Canadian group market, where we have built a small book in recent years.

We will take on a team of approximately 90 individuals with a solid track record and a strong reputation in the market.

We expect to deploy about $115 million of capital toward this transaction, which is expected to be effective on January 1.

The business is expected to add about $300 million in premium in 2010, spread roughly equally over the four quarters, with a return in the mid to high teens.

Our US Asset Intensive business contributed $19.7 million in pretax operating income, up from $8.3 million last year primarily due to stronger underlying fund performance associated with annuity coinsurance.

The liability for B36 embedded derivatives associated with treaties structured on a modified coinsurance of funds withheld basis was further reduced during the quarter, resulting in a pretax increase to net income of $51.4 million offset by a DAC adjustment of [$0.1] million.

VA business continued to improve during the third quarter as well.

The fair value of liabilities associated with the GMxB benefit riders decreased from $80 million to $70 million during the quarter, a benefit of $10 million which was mostly offset by derivative activity used to hedge the liabilities.

On an operating basis, this business reported a pretax gain of $8.1 million for the quarter.

Turning now to Canada, pretax operating income totaled $21.8 million, down from the prior year total of $32 million, when mortality experience was exceptionally good.

Mortality experience this quarter was more or less in line with expectations.

Premiums were up 19% in US dollars, 25% in Canadian dollars, primarily due to an increase in creditor business.

Regarding our international operations, Asia Pacific recorded an excellent quarter, with pretax operating income of $28 million compared with $25 million in the third quarter of '08, which was also a strong quarter.

Earnings this quarter were driven by strong operating results in Hong Kong, Australia, and Japan.

Premium flows in original currencies were down slightly for the quarter, up 6% for the first nine months.

In reported US dollars, premiums were down 7% for the year, largely due to adverse foreign currency effects of about $103 million.

Client reporting patterns can cause volatility in the quarterly comparisons; but so far we're behind our expected premium growth in 2009.

Our Asia Pacific segment has performed very well over the past couple years, and we remain opportunistic optimistic about opportunities for continued growth.

RGA is a recognized leader in this region.

Europe and South Africa had a difficult quarter.

Claims experience was mixed this quarter, including adverse results in our largest markets here in the UK and South Africa.

Pretax operating income decreased from $25.5 million to $6.7 million this quarter.

Mortality experience was approximately $15 million worse than in last year's third quarter, when mortality experience was much better than expected.

Net premiums increased 16% on a US dollar basis and 30% on original currency basis.

Year-to-date premiums are up 23% on an original currency basis.

We continue our expansion into Continental Europe, having recently opened a representative office in The Netherlands.

We continue to see non-correlated results across our global book of business.

Shorter-term mortality volatility is an inherent part of our risk portfolio, one that we accept and will continue to expect going forward.

Our capital position continues to improve along with the strengthening credit markets, and our ratings remain strong with stable outlooks.

Our appetite for additional block transactions is also strong, but we will continue to be selective as we go forward.

In conclusion, we had a solid quarter overall.

We're excited about our entry into the North American group reinsurance market.

We believe the current life reinsurance environment is promising and are well positioned and in many respects better positioned than our competition to take advantage of current opportunities.

Pricing characteristics across most of our markets remain favorable.

We're well positioned to assist our clients in these markets.

Our expertise and proven track record of pricing mortality risk continues to be revealed over long periods of time.

We appreciate your support and interest in RGA, and now we are ready for any questions you have.

(Operator Instructions) John Nadel, Sterne, Agee.

A couple questions for you.

One, obviously Asset Intensive has been rebounding very nicely.

It was under a lot of pressure earlier in the year and maybe even late last year.

I was just wondering if you could give us a little bit of help on what a more normalized environment level of earnings from that segment might look like.

If we had a more typical sort of 2% S&P quarterly market appreciation, which I think is what we generally tend to model for most of the equities-sensitive businesses across the space, I was wondering if you could give us a little bit of help in that regard.

John, this is Jack.

I'll take that.

Yes, we obviously had a very strong result in Asset Intensive and in Financial Reinsurance in the third quarter.

If you combine the two, that is look at all of nontraditional US operations, the third-quarter result was roughly double a typical run rate.

And maybe another way to look at it is, if you look at it on a year-to-date basis, we are roughly at our annual expectations if you combine those two through three quarters.

So you can do the math; we're essentially running ahead by a third or so.

Okay, all right.

Then my next question for you is on the tax item.

I think we have been accustomed to a 35% or so tax rate, I guess on both operating income and on net income.

And this quarter's was only about 50 basis points higher than that.

But if I ex out the $5-million-plus little onetime item, the tax rate would have been more like 32.5%.

I'm just wondering; is the 32.5% a better expectation as we look forward?

Or is 35% still the right way to think about your overall consolidated tax rate?

Yes, John, this is Jack.

If you take a look, typically the third quarter we do have a reduced effective tax rate.

It relates to FIN 48 and the fact that we're filing returns and essentially canceling off a year in terms of uncertain tax positions.

So I would suggest that you probably should expect something 32% or 33% in terms of an effective rate in the third quarter.

I think if you look back historically, at least since FIN 48 has been part of the reporting landscape, you'll see something similar to that.

Okay.

But otherwise no meaningful change?

Okay.

Then the last question really for you and then I'll get back in the queue is -- as credit spreads have clearly improved pretty remarkably from the lows, of course, and your book value obviously reflects that, and AOCI has turned positive on both the foreign currency as well is on credit, I just wondered if you can give any thoughts to whether you're positioned now or thinking about some portfolio reallocation, where you really wouldn't take any meaningful hits to capital if you were to reduce exposures to things like commercial real estate or residential real estate.

And then I guess similarly, along the same path of thinking, whether there is any thoughts in regards to some hedging activity on foreign currency to lock in the now $186 million of foreign currency gains.

John, this is Jack again.

In terms of the investment portfolio, we have -- we spent the better part of this year going through I guess what I would characterize as a strategic analysis to determine whether we are appropriately positioned to handle any sort of -- any number of different economic outcomes in connection with the capital markets and what we've seen over the last 18 months or so.

And it's interesting -- and I'm not telling you anything that you didn't already know.

When we started this process back in the first quarter, there was depreciation built into pricing such that it was very difficult to reposition a portfolio and lock in a lot of losses that at that point one would suspect weren't real, at least in some respects.

And it's kind of turned out that way as the credit spreads have come in.

We're in a much better position now if we so decide to reposition the portfolio.

I will tell you we haven't made any dramatic decisions on that front.

Okay.

We're continuing to look at the opportunities to reposition it, whether it has merit to move in and out of certain asset classes.

But as I said, we haven't come to any conclusions in that respect.

In terms of foreign currency, from time to time we hedge positions where we have fairly significant exposure.

Historically that's been the Canadian dollar and the Aussie dollar.

For the most part we will continue that same process.

I don't think we will take a step back and try and lock in an entire position, a balance sheet position at this point.

But we do from time to time -- based upon our expected going-forward cash flows and that sort of thing -- do hedge certain positions.

Okay.

Thank you.

Nigel Dally, Morgan Stanley.

Great.

Thank you.

Good morning.

First one, having signed the ReliaStar transaction, are you still in the market for additional block transactions?

And if so, how much excess capital do you estimate that you have for additional potential transactions?

Yes, Nigel, we are still looking for additional in-force block transactions.

And I would guess we have say $200 million to $400 million of excess capital.

Okay, that's great.

Second, perhaps if you can also comment on swine flu and whether investors should be concerned about a higher mortality rate as a result of the pandemic.

I think we have now at this point worldwide had three claims from swine flu, which is not noteworthy in particular because there is always deaths from flu and that doesn't seem out of line with what we would normally get.

It doesn't seem to be anything to overly worry us about, Nigel.

We've been, obviously, watching it very closely since the first indications that there was a new strain of flu out there.

But it doesn't look like this is a deadly event or anything that is going to cause us any financial problems.

Okay.

Then last one.

Just an update on the overall competitive landscape.

You commented on extensive quoting activity.

Does that reflect a change in the competitive landscape at all, such as certain competitors coming back in the market?

Or is it just a reflection of the additional demand for capital relief solutions from the primary companies?

I think it's the latter, Nigel.

I think the companies are beginning to look toward their position at year-end and are beginning to think about where they want to be and what things that are in their control that they can do to put themselves into the right position.

And some of that may involve talking about reinsurance transactions, especially financial reinsurance transactions these days.

So we have a lot of those types of inquiries -- probably more than we can handle.

We'll see what happens with them.

In terms of the sort of in-force block transactions or real risk transfer, we don't see a lot of those popping up between now and the end of the year.

But you never know on that front as well.

In terms of the overall competitive landscape, it still remains very favorable for us.

We had been of the opinion that in the US market that companies would actually increase the amount of business they reinsured because of the fact that they don't want to hold risk in this environment, and that the markets -- their capital positions were relatively strained.

But you know, those are the result of a lot of individual decisions, and we've just seen a couple in this quarter where a couple companies have actually decided to actually retain more business; and that should take about 4% out of the market that -- as we see it going forward.

So we can't always predict what's going to happen.

Those numbers probably don't flow through on anybody's books for a while.

But those things do happen, and companies are always making that decision whether to retain or reinsure.

We don't particularly participate in any great way with these particular companies, so we are not much affected by this one.

But we can see things go both ways.

And our general thought is that companies are going to be reinsuring more and retaining less.

But that may not be true in individual circumstances.

That's very helpful.

Thank you.

Steven Schwartz, Raymond James & Associates.

Hey, good morning, everybody.

I've got a few.

First, Greig or Jack, this is the fifth quarter in a row we've seen the trad mortality above expectations.

I don't know if you've ever seen it going on for that long or not.

Maybe you can comment on that.

And then I've got a couple of numbers questions for Jack.

Steve, I think the mortality is -- let's go back and look whether it's been five quarters.

At least a couple of those might be pretty good; reasonably close anyway.

Part of what we saw was extraordinarily good mortality in 2006 and 2007.

So you're comparing it to those sorts of numbers.

If you compare it to a more normalized expected I think that you'd probably find that we have some good quarters and some bad quarters.

We have seen that mortality on large cases is deteriorated a bit over, say, the past seven or eight years compared to where it was seven or eight years ago in our estimation.

And while these things happen slowly and gradually, that differential has kind of disappeared.

Okay.

I certainly don't want to be a jerk, but the numbers that I have got in my model are the numbers that you've basically quoted in the past.

Yes, well, and it could --

(multiple speakers) which would be your estimate of what would be normal versus what actually occurred.

Yes, and I'm sure you're correct.

What I'm saying, though, is that our estimation of what expected is, is tempered by the experience of the most recent past as well.

And '06 and '07 were probably better years than we reckoned at the time.

Okay.

Fair enough.

Jack, just a numbers question.

What was the amount of the interest expense reversal in corporate and other for the quarter?

Related to FIN 48?

Yes, exactly.

It was around $11 million.

Around $11 million.

Okay.

Then, so from the November 2008 offering, what's left?

Well, I think if you consider the fact that we will deploy some -- a little over $100 million of that offering in connection with the ING acquisition, it's roughly a little less than $200 million.

Less than $200 million?

Okay.

That's what I had.

Thank you very much, guys.

Mark Finkelstein, FPK.

Hey, good morning.

A couple questions.

Can we go back to the Asset Intensive segment?

I guess just to clarify, obviously $19.7 million this quarter, call it $16 million last quarter.

But if I heard you correctly, the thought is that the normalized was closer to the $10 million.

Did I hear that correctly, or did I mishear that?

No, pretax.

You did hear it correctly.

Okay.

Let me take a step back.

Normalized may not -- because we have put on some additional business.

I think I'm referring more to the beginning of the year expectations of about $10 million per quarter pretax.

Okay.

So if we just think about growth in AUM from beginning of the year, trend margins against that with a $10 million baseline, we can get to a number that makes sense going forward?

That's right.

It would be up a little, not a lot.

It would be up a little from that $10 million.

Okay.

I guess just a detailed question on the FIN 48.

I guess what surprised me a little bit is the interest expense reversal was $11 million; but what it sounds like is the tax expense reversal was closer to $5 million, if I use a 32%, 33% tax rate, ex the $5 million foreign ops adjustments.

Why would the interest expense reversal be so much higher than the actual tax amount that we're releasing?

Well, okay -- make sure I'm not confused on your question.

You're not talking about the $5 million tax adjustment, are you?

No.

No, I think it goes back to Nadel's question or somebody's question.

If you took the 35% normalized, you had the $5 million of kind of accrual related to the foreign ops, and then you adjust for that.

And you suggested that a normalized third-quarter number is in the 32%, 33% range.

What I'm trying to figure out is, why would the tax adjustment be so different than the interest expense reversal?

Well, the interest expense reversal relates to -- think of it as your balance sheet position, so to speak, and you're accruing interest on those positions until the returns are filed, until the position is settled.

So there isn't a direct -- you shouldn't expect a direct correlation between that particular interest rate or interest adjustment every year and the actual amount of the tax provision adjustment.

Okay.

It gets rather involved.

We'd probably almost have to take it off-line.

Fine.

Okay, I'll follow up on that.

One thing that I noticed on the US business, the in-force is growing relatively moderately, whether it's a year-over-year, sequentially, etc.

The net premium is going up 8%.

Can you just help reconcile the change in the in-force relative to the change in the net premium?

Are you doing something different on the outwards reinsurance?

Or why is premium growing so much faster than my in-force?

There is no change on the outward reinsurance, Mark.

First of all, a lot of this business -- not the overwhelming majority of it -- is [wire-T] business.

And so we have premiums going up each year as policies cross their anniversary.

So there is some built-in increase from that, and that's the predominant effect, actually.

Okay.

Then just finally last question is -- can you maybe just talk about --?

I mean, Canada had pretty extraordinary growth in the quarter with the creditor business.

Can you maybe just walk through what is driving that growth in Canada?

And I guess how should we think about that?

Well, it's a bit opportunistic I suppose, and I wouldn't expect it to continue.

Creditor business in Canada is nicely stable and has large premiums associated with it.

Lower profit margins, because of the stability.

This is basically credit business that the banks have a good, firm grip on.

They reinsure out some of it for their own reasons; and we participate in that from time to time and have done a pretty good job of actually becoming the go-to source for the banks when they want to lay off some of this creditor business.

We like the business.

It does not produce the same long-term margins that the other business does, but it's a lot steadier.

Okay.

Thank you.

Mike Zaremski, Credit Suisse.

Thanks, guys.

Quick follow-up to Mark's question.

Can you guys be more granular on what percentage of premium growth in Canada has come from creditor, and what are your margin expectations, considering that the growth has been pretty robust?

That I don't know off the top of my head.

We'll have to get back to you on that.

In terms of the profit margin, expect something say 5% on the profit margin for that business.

Okay.

Regarding competitors, I've read that Swiss Re is, I guess, putting their Taiwanese unit into run-off.

I think -- I believe you guys are number one in Taiwan in terms of new business.

Do you guys expect to pick up more market share there?

Or are you guys already number one, so people are able to look to cede premiums to other competitors?

Yes, we are leaders in that market.

It's been a very nice market for us both in recent years from a growth perspective and for a long time on the profit side in terms of margin.

Our main competition there has been Gen Re-Cologne, and Swiss Re has been a little bit farther down the line.

They have -- they are not putting their business in -- well, they are closing their office.

I think they would still, as far as I know, entertain business out of Taiwan.

But they have no presence locally and so it's going to be difficult for them to become a major or change their position in anyway but downward in that market from this point.

So yes, that's generally beneficial to us because we do have a good position in that market.

Okay.

Lastly, I think last quarter you talked about working on some solutions for the AXXX and XXX markets, considered that they are kind of closed right now.

Any update on any progress in that arena, given that demand is probably still high?

No, we think we have turned up a couple good possibilities, but that's all that I can say at this point.

We have a string of quite a few of good possibilities of different types of organizations that might be funding this.

But it's going to take some while to work through.

And we expect to continue to push on that, and hopefully we'll get some capacity into the marketplace for XXX.

AXXX is a little more difficult on top of that, so we will start with the XXX side.

Okay.

Thank you, guys.

Jeff Schuman, KBW.

Morning.

A couple areas I wanted to ask about.

You mentioned three claims worldwide so far from the swine flu.

I was wondering were those recent claims?

Or did some of those date back to the first wave last winter?

And I'm wondering, just generally given client reporting challenges, do you have a pretty -- sort of real-time read on the situation?

Or is there likely to be a considerable lag in terms of the information flow as this develops?

Those claims are fairly recent.

I'd say certainly in the last quarter.

One of them is New Zealand.

I don't remember exactly where the other two are.

I think one of them -- at least one of them is US.

You're right.

We do in different parts of the world have different claim lags.

Certainly in the US we would hear about it within a week or so probably from the time the company was notified.

But we may not get cause of death right away.

We may or we may not.

And in other parts of the world the chain is a little bit slower than that.

So I'm not sure of the date of death of these cases, Jeff, but they are fairly recently reported to us.

Okay, thanks.

And following up on an earlier question, I think you said to Nigel that excess capital maybe was in the range of $200 million to $400 million.

I was wondering, is that kind of relative to your own economic capital modeling?

Or is that relative to rating agency expectations, or how should we view that?

Yes, Jeff, this is Jack.

It's really -- kind of interestingly, it's kind of a combination of all those things.

We can give you a definite in terms of how it relates to our capital model.

It would be a little bit more than the stated $200 million to $400 million.

But that estimate really kind of takes into account the fact that we've got at least -- well, we've got three agencies that rate the Company, and all of them have a different capital model.

So I think you should take that as kind of our best impression of almost -- I wouldn't call it a mean estimate, but kind of an average based upon all the various models floating around and expectation of what kind of redundant capital we have.

So that's the average, which is a good perspective to have.

Is there an outlier on the down side?

I mean, is the least common denominator a number that would be considerably less than that, that we should be concerned about?

Or is it not that much different?

Yes, well the way the math works, yes; there would be a number that would be less than that.

But not dramatically less than that.

I could give you a guess as to which agency has the tightest model now, but it would be nothing more than a guess right now.

Okay, but is it safe to say that even relative to the highest hurdle, that you still have $100 million or $200 million to deploy even relative to that expectation?

Yes, it is safe to say that.

Okay.

That's good.

Then lastly, Greig, you talked a little bit about growth in Asia Pacific.

You made a comment about maybe reporting lags or something being a factor in the growth there.

But you also said something about being a little bit behind in 2009.

Can you just give us a little more color?

Is there a slowdown in certain markets?

Is this kind of reflecting primary company activity?

Or how should we think about the Asian growth going forward?

Yes, I guess I was trying to say more of the fact that while it does vary from quarter to quarter, that is not what we are pinning this on.

We actually have a slowdown predominantly in Korea and Japan as a couple big treaties have essentially wound their way to conclusion.

So there is no growth coming from them at all.

So the pipeline looks -- the pipeline will replenish and will get back on track.

So we have just sort of hit a plateau in those markets, and we expect to get back on.

It may take a little while.

We would not be surprised to see Asian premiums be a little bit less than they have been historically through the remainder of this year and next year, before they really start back up again.

Other parts of Asia, of course, are doing quite well.

That part of the world is experiencing pretty good economics and good growth in the insurance businesses.

On the overall international picture, though, we are seeing a substantial increase in the premium activity in Europe in particular, both the UK and Continental Europe, from the basis we were at, at this point.

So some markets ebb and flow; and in balance we are sort of holding in that low double-digit range.

That's great.

Just one last follow-up.

You mentioned the strength in Europe.

Is that kind of a market share gain, or is there also demand being driven by capital and some of the other factors you are seeing in the US?

It's more market share gain; but there is a little bit of both in that.

Okay, great.

Thanks a lot, guys.

Barclays Capital, Eric Berg.

Thanks very much.

Good morning to everyone.

I wanted to return to the Asset Intensive business.

It would seem like the -- not seem; it is the case that the fixed related annuity business is no larger than it was a year ago.

The stock market clearly hasn't doubled from a year ago.

I think it's pretty much about the same on average or roughly the same, approximately.

Why would net investment income compared to a year ago -- a line item that I normally associated with coupon income on fixed income investments in the fixed annuity business -- why would that be triple what it was a year ago, $116 million versus $44 million in the year-ago quarter in your Asset Intensive business?

Eric, this is Jack.

I think you need to be a little bit careful there because included in investment income in that business are income fluctuations associated with derivative positions that we take to offset risk and the equity indexed annuity portfolio.

That can move by tens of millions of dollars per quarter.

So that's not a good metric simply to look at total investment income in that subsegment.

But that's going to be offset elsewhere in the income statement.

I guess I still -- the foundation to my question, what's underlying my question, is that I don't really understand what's driving this doubling of earnings compared to a year ago.

I mean, you are not a major player in the variable annuity business.

The stock market is not double what it was a year ago.

When we talk about the capital markets driving the earnings, what exactly are we talking about here?

And why would the capital markets lead to a -- I mean, I'm not expecting a doubling of variable annuity companies' earnings compared to a year ago.

I guess I just don't understand the accounting in this business as well as I thought I did.

First of all, the variable annuity business has rebounded to a healthy state, I suppose is the best way to put it.

But spreads on the fixed business are very nice for us right now, and that is what really drives the performance of that business in the longer term, is the spreads you earned on the portfolio of assets you have.

And the net interest (multiple speakers)?

We're just in a very favorable position right now.

The difference between earned rates and credited rates is really pretty positive.

Okay.

Last question, on page 8 of your supplement where you're reporting out the fair value of the living benefit riders, is that just that by itself -- namely the fair value of the rider?

Or is that the fair value of the rider net of the value of the associated hedge?

It's the former.

That's simply the fair value of that embedded derivative.

Very good.

Thank you very much.

Andrew Kligerman, UBS.

Morning.

Just quickly on net premium growth.

I think the question prior to Eric, you were saying overall we should see growth in the double-digit range.

So are you talking about across all businesses you're looking at double-digit?

No, I'm talking about international, Andrew.

International?

Okay, I wanted to make sure I was clear on that.

Shifting over to net premium growth on Canada and the US, you saw terrific 25% growth in Canada largely due to the creditor reinsurance.

If I take a step back -- and it's my understanding that Canadian regulators may now allow life insurers to factor future mortality improvements into reserve requirements; and as a result they may not cede as much reinsurance as they've done in the past.

So looking at that terrific 25% net premium growth in Canada, what are your thoughts looking out one and two years on what kind of net premium growth we can expect there?

Yes, Andrew, there is not only the movement that you describe, but there's a couple other things too that might lead companies to retain more business rather than reinsure as much.

Of course, the Canadian companies reinsure a lot of business into the marketplace.

We've been saying for some time that we don't expect these cession rates to hold forever, that the Canadian market will start to migrate down toward levels approaching where the US market is.

And that has not really happened yet; it could start sometime in the future as early as next year, I suppose, beginning to see companies retaining more and reinsuring less.

There's been minor movements in that direction, but nothing major.

We expect that next year we will write about the same amount of business that we did this year.

And this year was pretty close to the same amount as we did last year give or take a bit.

After that, though, all bets are off as to what happens, in the sense that companies negotiate new contracts on new products and change their reinsurance practices.

But you are absolutely right that it's been a good run in Canada, but we don't know how long it's going to last.

US cession rates are currently what, and Canadian rates are in what range?

Canadian rates are between 70% and 80%; and US rates are between 30% and 40%.

Okay.

Then shifting over to the US, you've got NAIC recently adopting changes to Model Reg 380; and that likely will reduce the XXX reserve requirement (technical difficulty) lower the demand for new XXX coinsurance treaties.

Again in the US, net premiums were up 8%, a very respectable number.

Where do you think that goes a few years out?

Well, it's always hard to predict a few years, but we have a certain amount of growth built into that.

And it can be expected to wind down slowly to something smaller, but it might be very gradual.

Okay, so you still think --

(multiple speakers) built in increases.

So you still think that there is growth out there for you.

Would it be just share or --?

Yes, well, if we wrote no new business we would probably see some growth in premium.

Right.

Just due -- in the overall in-force block, just because premium increases exceed the lapses.

But we are certainly not going to zero new business, and so we would expect a gradual fall in that rate as time goes on.

Just in terms of market share actually, do you think that there are some opportunities to gain share?

Or are you at a pretty established level in the United States?

It's hard to see us increasing market share much from where we are.

We've been a little over 20% the last several years, and it's hard to get more than that.

It's hard to see wanting to get more than that, because of the price you would have to pay to get more than that.

So we're very comfortable with that market share.

Perfect.

Thanks a lot.

John Nadel.

Hey, just wanted to go back to the US traditional and this higher level of -- or this little of higher face amount death claims.

I know when we met a little over a month, month and a half ago, we talked about some pricing changes that you guys had implemented, I guess back to the beginning of 2009, to deal with some of this.

Maybe you could just refresh me on how to think about how quickly some of those pricing actions that you've taken on a forward basis would have some positive impact in offsetting this sort of trend -- modest trend, but trend up in higher face amount death claims.

Well, first of all, John, we are always tweaking our pricing based on the results of the latest data that come out; and mortality is always evolving, generally improving.

So we're always evolving our pricing.

So you would really count these as minor tweaks and regular tweaks in the pricing that just reflected the more recent information.

We're not saying that mortality on large cases is bad or inappropriate.

We are just saying it's changed a bit compared to, say, policies that are, say, $250,000 to $1 million, exhibiting a little bit better mortality than the cases over $1 million.

$1 million to $2 million to $3 million has been a little bit worse recently.

So those changes always happen.

Now, current pricing that we do when the new quotes are placed into the market, you probably don't see the reported business from new quotes for anywhere from six months to 18 months, depending on how long it takes the company to get a product on the street and where we are when they actually go out to the reinsurance market for pricing.

But six months, say a little bit plus, is typical.

And then the early claims you don't expect too much in the way of that.

So the meaningful changes occur three, four, five years out.

Okay, okay.

(multiple speakers) really notice them.

So as we look out let's say the next year or two, if this trend were to hold, is it fair to assume that if we looked back over the last, I don't know, three to five years of mortality -- just claims as a percentage of premiums in the US traditional business -- we might expect that that's going to be a little bit higher?

That ratio?

No, I wouldn't say that necessarily.

It's hard to predict where those kind of things are going to be.

Yes, I know on a quarterly basis that's impossible, but I'm just wondering over a little bit longer period of time.

Yes, even say a five-year period, you drop off an old year and pick up a new year, you can make a change.

If you take a running five months or five years, something like that, you are probably a lot smoother.

As you drop off discrete years and add years you're probably going to pick up a discontinuity a bit one way or the other.

But nothing really changes very fast in mortality when you look at it over those kinds of periods.

It changes very slowly.

Okay.

Then one last, just clarification on the ReliaStar transaction.

You mentioned mid to high teens return.

Is that immediate and 2010 should see that sort of return?

Or is there a gradual build to it?

Then I guess the second part of that question is, is that mid to high teens, is that a pretax or an after-tax return?

John, this is Jack.

That is an after-tax return and we will see that relatively quickly, although my guess would be in 2010 it may be just slightly below that, just because of some transfer costs and administration costs and that sort of thing.

Okay.

But that's not a transaction where it takes years and years to build to that sort of return.

It will happen relatively quickly.

Is there any expectation around that deal for any sort of one-time cost?

Lease buyouts, or some sort of severance or restructuring or anything like that?

Minor.

Yes, okay.

Thank you.

Eric Berg.

Thanks.

Just one.

You had an extremely strong, as you cited, premium growth in Europe and South Africa, including the UK.

But you also cited adverse mortality in those markets -- in the UK and I think South Africa.

What has been the experience, can you remind us?

What has been the experience in recent quarters and recent years in Europe and South Africa?

In particular, how are you feeling about how mortality is trending in those markets relative to your expectations?

Eric, let's take them separately.

South Africa has bounced around quite a bit.

It's a market where there is a lot of violent deaths.

And we do some group business there, so there is just some tendency for those numbers to be a little bit more volatile than elsewhere.

Overall I would say South Africa has behaved reasonably well for us.

We have had a reasonably good return on the small amounts of capital that we have put into that country over time.

We have been working hard to improve our operation.

We've been a little dissatisfied with our penetration, market position, and maturity.

We think we've got the right notes hit now and are looking forward to a pretty good future in that marketplace as far as the parts we can control.

In the UK, we do not only mortality business but we do various shades of critical illness businesses, and we have to look at all of those individually.

But we are generally okay on the long-term trendline with mortality.

It's had some ups and downs.

As you may remember, last year was an awfully good year for the mortality in that market.

In the past in other years we've had difficult quarters here and there.

But it is the sort of market we see some volatility as well as some good overall long-term results.

Of course, the premium growth is nice because we expect that to produce good results in the future.

We are always looking to improve our returns, but we're happy with the returns on a long-term basis we have been getting out of the UK.

And Continental Europe so far it is too early to get a firm read on it, but returns have been good there and we're happy with that too.

Thank you.

Steven Schwartz.

Hey again, everybody.

I'd like to follow up on Eric's question earlier about Asset Intensive.

You have -- I'm just trying to figure out why it was so up, and I think that's what everybody is trying to get to.

You have three businesses in there.

You have the fixed annuity business; the assets there are down.

No surprise, although spread was up a bit.

You've got the VA business, which is up; and I believe that affects -- I thought that that affected your fees.

And then you've got the indexed annuity business; and as you pointed out to Eric, the interest income is so high because of the value of the options going up, which is in your general account.

On the other hand, the indexed credits that are being credited to the holders of these things goes up as well.

Obviously there is some basis risk, but those two should basically offset.

And indexed annuities, that has grown a bit, but not hugely.

So I guess there is this $8 million, $9 million onetime effect that I just can't figure out what is explaining that.

Is that something to do with the variable annuity, some type of DAC adjustment, something like that, Jack?

Maybe we could delve in a little bit further.

Yes, we're talking about -- it's not a DAC adjustment, we're talking about operating earnings here.

So there is a fairly large contribution from VAs.

We probably need to pull it apart better because that is kind of what your question is getting to, in terms of relative contributions from the various components there.

But it may be a little bit larger than you expect on the VA side.

I think that may be causing part of the confusion.

So it's probably not for this call to disaggregate all that.

Maybe we have to do it off-line.

Okay.

My thought process is correct, though?

Yes, I think so.

Okay, great.

Thanks.

Gentlemen, at this time there are no further questions.

I'll turn the conference back over to you for any additional or closing remarks.

Okay, well, thanks to everyone who joined us for the call today.

To the extent any other questions or issues arise, you certainly know where to find us.

And with that we will end the third-quarter conference call.

Thank you very much.

Once again, ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.