美國再保險集團 (RGA) 2010 Q2 法說會逐字稿

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

Just as 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.

Please go ahead, Mr.

Lay.

Okay.

Thank you and good morning.

Welcome everyone to RGA's second quarter 2010 conference call.

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

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

We will make certain statements and discuss certain subjects during the call today that will contain forward-looking information, including among other things, investment performance, statements relating 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 from expected results is included in the earnings release issued yesterday.

In addition during the course of the call, we will make certain comments about our results based upon operating income, both on a pre-tax and an after-tax basis.

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

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

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

With that, I will turn the call over to Greig.

Good morning.

Thank you for joining us.

I will provide some brief comments on the second quarter, and then we will open the line for your questions.

Our second quarter operating income totaled $122 million, or $1.63 per diluted share.

Last year's second quarter was very strong with $131 million of operating income, or $1.79 per share.

Tax adjustments helped last year's second quarter by $0.16, and hurt the current period by $0.07, and so there is a net swing of $0.23 in comparing the two.

Consolidated net income totaled $127 million, or $1.70 per diluted share this quarter, compared with $153 million, or $2.10 per share last year, which included a significant gain related to the repurchase of a portion of the Company's junior subordinated debentures.

Consolidated net premiums, including $73 million from the ReliaStar Group Reinsurance acquisition totaled $1.6 billion during the quarter, that is an increase of 12% on an original currency basis, and 15% on a US dollar basis over second quarter 2009.

For the first six months net premiums increased to $3.2 billion or 18% on a reported basis, and 13% on an original currency basis compared with last year.

Net investment income increased to $292 million this period, with an average yield on the portfolio of 5.5%.

New money rates are below that level, so we do expect some continued downward pressure on yield in the near term.

Impairment losses reflected in income were less than $5 million this quarter, and our net unrealized gain position continued to rise along with the overall strength of our investment portfolio.

Book value per share including AOCI is up nearly 15% since year end to $60.73.

Congress did not pass an extension of the active financing exception legislation, so we increased our tax provision another $5 million this quarter, which had an adverse effect of $0.07 per share.

If Congress passes the extender package later this year, we will reverse the provision, which currently totals around $10 million.

On a consolidated basis, foreign currency fluctuations added $0.04 per share this quarter, compared to second quarter 2009.

Turning now to segment results.

Our US traditional business including our newly acquired group reinsurance business reported pre-tax operating income of $96 million, compared to $100 million in the second quarter of 2009.

Premiums were up 16% for the quarter, including the ReliaStar business, and 7% without it.

For the first half, premiums are up 15%.

Our newly acquired group business posted another strong earnings result, and is clearly off to a good start as part of RGA.

Mortality experience was much better than the first quarter, at about 1% above expected, mortality experience in the second quarter of 2009 was slightly better than expected.

The overall level of price competition in the US market seems to be ratcheting upward slightly, although new treaty activity remains quite low.

Our US asset intensive business reported another solid quarter with $16 million of pre-tax operating earnings, roughly the same as the second quarter of 2009.

Turning to Canada, the segment produced very strong results for this quarter, with pre-tax operating income totaling $33 million, compared with $18 million last year.

The increase reflects favorable claims experience in the current period, coupled with adverse experience in last year's quarter.

Premiums were up 14% this quarter, due in large part to a relatively stronger Canadian dollar, for the first six months premiums are up 32% in US dollars, and 13% in local currency.

We continue to be a leader in the Canadian market.

Our international operations reported solid results again this quarter, most notably in the UK.

Our Europe and South Africa segment reported pre-tax operating income of $21 million for the current quarter.

A substantial increase over the $12 million from last year, when the segment experienced slightly adverse claims experience.

Original currency net premiums increased a healthy 20% for the quarter on a US dollar basis, premiums were up 17%.

Year-to-date original currency premiums are up 17%, and in US dollars 21%.

Similar to the first quarter, our UK operations reported strong results due to favorable claims experienced and a good premium growth.

Asia-Pacific reported a solid pre-tax operating result of $22 million, compared with the very strong $25 million in the prior-year period.

The original currency net premiums were largely flat for the quarter and first six months.

Translated premiums were up 12% for the quarter, and 15% year-to-date, as the US dollar was relatively weaker against most of the Asian currencies.

As expected, premiums in South Korea and Japan continue to lag last year's pace, but we expect to regain momentum next year.

Overall, Asia-Pacific claims experience was in line with our expectations for the quarter.

So in summary, we had a solid quarter with annualized operating return on equity of 13%.

Our international operations performed well, and we continue to realize geographic diversification benefits as they grow.

Our newly acquired group reinsurance business continues to perform well.

Our capital position remains strong with estimated redundancy exceeding $500 million.

We haven't added any large block transactions this year, but continue to look at opportunities to deploy excess capital.

Our net unrealized investment position has improved over $800 million from this time last year, when we had net unrealized losses of $333 million.

We believe the current life reinsurance environment offers opportunities, and RGA is well-positioned to add long-term value for its shareholders.

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

(Operator Instructions).

We will take our first question from Mark Finkelstein from Macquarie.

Good morning.

Can you please just walk through a little bit more, in terms of what you are seeing in terms of the deal pipeline, where it is coming from.

Obviously there is a large property on the market.

Maybe how you think about a transformational deal as well?

Yes Mark, we do see a fairly strong pipeline of yield-type activity I will call it.

As I indicated earlier, the regular pricing in the US market is very light right now.

There are not a lot of new treaties being placed and not a lot of new products being introduced into the marketplace to cause it.

We do see a lot of potential transactions.

We don't know how serious some of them are.

The one transaction you referred to, I think everybody has become aware of the fact that one of our competitors has announced that they might sell their property, and we will take a look at it, of course.

But we are seeing possible transactions all across the globe, as companies are reassessing their strategy, and taking a look at how they want to structure themselves going forward.

And we are seeing opportunities in Europe, Asia, as well as in Americas.

Okay.

You mentioned the competition ratcheting up.

Where are you seeing that?

Where is it from?

And is it across businesses, across geographies?

Where it is it coming from essentially?

That remark was specifically with respect to the US marketplace.

Okay.

It is just our assessment that the US marketplace is getting a little bit more competitive.

I wouldn't overdo that.

But a little bit more competitive and we have noticed that recently.

Although as I said, there is not a lot of activity on the pricing front these days.

Okay.

All right.

Thank you.

And we will take our next question from Jim Bhullar from JPMorgan.

All right.

Thank you.

Good morning.

I had a question first on just the capital deployment.

Assuming that you don't complete any acquisitions, have you thought about buybacks, and what are the other uses of capital, assuming that you don't do a deal?

And then secondly, on the tax rate, assuming that Congress doesn't pass active finance exemption legislation by year end, what do you expect the tax rate to be in the second half?

Would it be in the 37ish percent range, and what do you expect it to be in 2011?

Jim, this is Jack.

Let me start with the last question on the active financing issue.

In terms of impact on the effective rate, I think we are right around 36% or so this quarter.

And near that year-to-date, that is probably a decent proxy.

It is affected by how much of the earnings are from international operations, and so on and so forth.

So it is hard to be too precise on it.

But I think probably a 36 or so percent effective tax rate is probably a good estimate at this point, if in fact, there is no extension this year.

And into next year as well, I don't see any reason that estimate would vary significantly next year.

In terms of the capital situation, any potential buyback or anything like that, we continually assess the capital structure, and the extent to which we have excess capital, and our own estimates on, for instance, probabilities of deploying that capital going forward.

And it is always a difficult call, because these deals kind of come up, and you don't know whether you are going to execute or not.

So our plan certainly is not to permanently sit on excess capital.

Our strong goal is to deploy that capital.

And as I said, we continually look at our own stock trading price, and our estimate of ability to deploy capital.

And would certainly not rule out any sort of buyback on the equity front.

At this stage, we would still expect to deploy the capital.

We still believe that a lot of opportunities exist in the marketplace.

But we will be reassessing that as we go along.

Okay.

Thank you.

And we will take our next question from Jeffrey Schuman from KBW.

Good morning.

Coming back to the active financing exemption.

Do you have any read on the outlook there?

I mean, historically this has been extended across a variety of administrations, Democrat, Republican, a different variety of Congresses.

Is it your sense that this is more at risk just because of the pressures on the budget?

Or do you have a read on where this is going?

Hey, Jeff.

This is Jack.

I don't think we have any better read than anyone else.

We really rely upon our advisers to give us their best estimate on the probability that there will be an extension that sort of thing.

And we have been continually advised that it is being handicapped as probable, that it is more likely than not, that it will in fact, be extended.

But if you went back 90 days ago, there was an expectation that it would be extended in the second quarter.

And we are in the third quarter now, and it hasn't been extended yet.

So your estimate or guess or intelligence on that issue is as good as ours.

We still think there is a good chance.

But until it is done, it is not done, to state the obvious I guess.

Okay.

And then on another issue, obviously we have this kind of strange situation with the estate tax possibly coming back in force next year.

I think a lot of us are wondering whether there is a lot of estate planning going on, and could be a lot of purchases of estate planning motivated life insurance.

I would think if there starts to be, there is starting to be activity there, that would be pretty visible in the cycle of the market.

Are you seeing any indication that people are starting to put life insurance in place for the estate tax next year?

Jeff, no, haven't yet.

And in talking to some of our clients about that subject, they are beginning to think about it.

But they are really not doing much to dust off and refresh some of the old products that they used to use.

There is a possibility that we go through this year with actually no action and the estate tax comes back.

But that is an ugly thing to happen in the sense that nobody will be certain for a while, whether that is sort of a permanent status, or there is intended to be legislation some time in the future.

It would be better to have Congress address it and say something about what they really want to have happen, so that people can plan on it.

I think everybody is a little bit on the edge of their seat, in terms of how to deal with this uncertain environment here.

Okay.

And then lastly, growth in Canada does tend to bounce around a little bit.

There wasn't much premium growth this quarter on a constant currency basis.

Should we read much into that, or do you think those will continue to kind of bounce around a bit?

I think it is going to bounce around a bit.

A lot of the growth has come in the form of creditor premium in the last couple of years.

The growth on the traditional business has been decent, but more muted.

And the fact of creditor business and currency has made the growth rate in Canada look really high.

We don't expect that to continue, that the growth rate in Canada will slow down considerably.

But I think the Canadian dollar still remains quite strong.

Okay.

And likely to stay that way for a while.

All right.

Thanks a lot, Greig.

And our next question comes to us from Andrew Kligerman from UBS.

Hey, great.

Good morning.

Just two clarifications before I get into my question.

When you were just commenting on Canada, you said you don't think the growth rate will continue to be slow?

Or just clarify that please?

We don't think the growth rate will continue to be so strong.

Oh, so strong.

As it has been the last several years.

In the creditor area?

Well overall.

Overall.

Yes.

Overall we have seen very high double-digit growth rates in Canada, we don't expect that to continue.

And (Inaudible-microphone inaccessible) backdrop as to why?

Well, first of all, the Canadian dollar has had a big run-up.

We don't expect it to run up at the same rate going forward.

We don't expect to add as much creditor business.

That is something that is pretty well saturated for us.

And organic business in the marketplace is a little bit less, less than the overall growth rate.

There will be potentially some pick-up on the group side.

But nothing like what we have seen.

Great.

And then the comment earlier about competition in the US.

It was quote, a little bit more competitive, unquote.

What does that mean?

Does that mean pricing is down 1% to 5%?

Is it a lot more than that?

What does that mean exactly in numbers?

Oh, it is hard to gauge that, Andrew.

What we are seeing and maybe this is a bit of a reflection of just RGA's perspective, where we have adjusted our mortality sites for large cases a bit, based on our historical data over the last five or six years.

When there is an excess treaty, we are finding that the competitive position is a lot more aggressive than we expected it to be.

And maybe that is just, we are not as competitive with those types of transactions.

But like I said, there is really not a lot of pricing activity in the market for us to get a good read on where this is.

Got it.

And then shifting over to your US asset cash intensive business, $16.5 million of pre-tax operating income in line with last quarter's $16 million.

But I would have expected, maybe some pressure in that business line, due to the weak equity markets affecting variable annuities.

I think the future value of business writers went up pretty sharply.

But I didn't see any change in the earnings.

So maybe just a little color about how your VA book performed, and why it didn't hurt you in the quarter?

I think our VA book performed okay.

The strongest performers were the more, were the fixed and the equity indexed pieces of that business.

But the VA business didn't perform that badly.

I think it is priced well and in reasonably decent shape.

So we were happy with the results there.

We are not adding a lot of new business to either, we are certainly not adding any new treaties to either of those categories in the last little while.

So this is basically a reflection of how the in force block has been performing.

So Greig, I can assume then that there are hedges in place that were effective, that there wasn't much breakage?

Oh, yes.

Absolutely.

Then with regard to Asia, you mentioned that there was some, I guess some pressure in the release, that there was some pressure in South Korea.

Last quarter it was mentioned that Japan also had some pressure on the larger treaties.

And then on the call just a little while ago, you mentioned that you would expect some pick-up in the Asian businesses next year.

So maybe just a little color on these large treaties.

Why Japan wasn't mentioned, why you would expect some significant pick-up next year.

Yes.

They actually suffer from the same things in RGA's books right now, but the reasons are a little different.

In South Korea we had some treaties that were product development treaties that had a five-year lifespan, where we were reinsuring the product produced with some of the big companies there.

And those ran their natural lifespan, and the companies produced their own products after the expiration of the first one.

It means that we have to fill in the slack and build up the book again, so that the new business production will keep the growth rates going up.

So there is a little hiatus in South Korea.

We expect to see that start to turn around some time next year.

It would be our hope.

In Japan we had something similar, in that we had a couple of one-time transactions that stopped producing business, because either the treaty expired, or that the company decided to retain business.

So we have a gap to fill.

Japan has a very strong pipeline of fairly significant transactions, and we are very optimistic about how Japan looks and the fall-off in Japan is not nearly as severe as in Korea, and we expect Japan to be kicking in pretty good results soon.

Got it.

Then just, sorry, one last question.

Interest rates.

The yields came off from roughly 5.84% in the first quarter to 5.51% on a consolidated basis, X funds withheld.

You mentioned that new money rates were low, so I guess you assume there is going to be more pressure.

But why the big drop-off on a consolidated basis?

I noticed in particular corporate and others saw a $10 million Q to Q drop.

Why the significant fall in the quarter?

Yes, Andrew.

This is Jack.

There is a little bit of noise around the edges, in that for instance, early in the year, I know there was a treaty recorded.

They had a little bit of, I wouldn't call it backdated, but accumulated investment earnings that came along with the treaty.

That is a modest impact, but it was positive.

And then that kind of exaggerates to some extent the change in the yield from quarter-to-quarter.

I will say the 5.5% yield now is a more normalized sort of yield.

And I think we commented earlier that there is certainly pressure in terms of investing new money at rates less than that at the credit quality that we are interested in.

So we could see some additional downward pressure.

And it will be modest in that we don't have that much cash flow rolling over, although we do have some new cash from operations.

But it won't be dramatic.

But, we do want to caution that the pressure is downward currently, and certainly not upward.

So we could expect to see perhaps a little more falloff in that yield as the year goes on.

Perfect.

Thanks so much.

Oh, Andrew, I didn't answer your other comment on the corporate line.

Yes.

Yes.

Yes, the corporate line really is, kind of aggregates all of the investment income and then allocates it all out to the various operating segments.

And that is based upon a somewhat complicated formula that involves our own estimate of economic capital for each of those segments.

And that tends to vary a little bit from quarter-to-quarter.

And it is refined somewhat.

So to the extent there is either some refinement in the economic capital, and a little bit more or a little bit less investment income goes out to the operating segments that is offset in corporate net, some of what you saw this quarter versus last quarter.

Very helpful.

Thanks.

And we will take our next question from Steven Schwartz from Raymond James and Associates.

Hi, everybody.

Good morning.

Can you hear me?

Yes.

Okay great, good morning, guys.

I have got a number of questions here.

Jack, looking at the tax rate in the third quarter, historically you have had a bene, I think it was from FIN-48.

I think you put some of that in the first quarter, or are we going to see another benefit in the third quarter like we have historically?

Steven, not to the extent likely, I should say likely not to the extent that you have seen in the past.

Because we are still trying to make a determination as to whether we will have a tax year that frees up, so to speak, in the third quarter.

So it has been very systematic the last several years.

It is not quite clear this year, and so I wouldn't necessarily say expect the same sort of impact on the tax rate in 3Q of 2010 as you have seen in the past.

No, no, I certainly wouldn't.

Because if I remember correctly, you recorded some of it in the first quarter, would the total for the year maybe be the same as historically it had been in the third quarter?

Likely.

Likely.

Likely it would.

Okay.

Okay.

That was the question I was asking.

And then a couple of others.

On a follow-up on Canada, Greig, I think it was the first quarter, maybe it was the fourth quarter.

You talked about some changes in the regulatory environment in Canada, which could lead to a slowdown in the need for reinsurance, a decline of penetration.

If you could follow-up with that, is anything going on there?

Certainly nothing is going to happen this year.

It is unclear whether it is going to happen next year or the year after.

But we believe that those changes are still in train and coming.

And most likely will affect us next year, but it remains to be seen.

Okay.

And then to follow-up on Solvency II, I was reading that Bermuda is going to be Solvency II compliant, they have decided to do that.

How would that all affect you?

Well, the US will not be Solvency II equivalent in the first round.

It is unclear how that affects us.

Of course, we do have a couple operations, a couple of entities that will be Solvency II compliant, our European operations.

And so we will have to become familiar with the ins and outs, and intricacies of dealing with Solvency II environment.

In terms of the US, it is unclear how the game will be played, and we will see how everything happens after that.

And I am not talking about reinsuring US entities.

I am talking about what happens when we are talking about reinsuring entities of European companies that are Solvency II reporting.

So we will have to see how that plays.

Okay.

So it still hasn't been worked out really whether you might have a capital advantage over your European competitors, because that has not been decided one way or another?

That is not clear.

Okay.

All right.

And then just to follow-up on Japan.

You said you are seeing a lot of new business.

I think Japan has been kind of the Holy Grail for you, to the extent that penetration is so low.

Yet you are dealing with the second largest life insurance market in the world.

Has that broken finally?

No.

I wouldn't go that far.

Not by any means.

I would just say that a number of fairly large transactions we are looking at is noticeably bigger than it has been.

And the frustrating thing about Japan, is that it does move very slowly.

And the market itself moves extremely slowly.

We have a good position there.

We are well respected in the marketplace, and we continue to work it hard.

That is all we can really say.

Okay.

All right.

Great.

Thank you, guys.

(Operator Instructions).

We will take our next question from Alec Ofsevit from Credit Suisse.

Good morning.

I have got two questions.

The first one, can you just elaborate a little bit more on the US higher claims experience in terms of what that means?

Maybe where you are seeing that in terms of products.

And second, on the pricing environment, I am just curious if the lower new money environment is part of what is not being reflected in new business pricing.

And that is another area you are seeing pressure competitively?

Taking the second part first, it is possible I suppose, Alec, I expect that everybody would be facing somewhat similar depression in expected yield going forward.

We certainly reflect the current investment climate when we put out a quote.

So we are at least taking it into consideration, and that is reflected in our pricing.

In terms of higher claims, you mentioned by product.

We really don't see much change by product.

There is a little bit more, a little higher claims level for term products and permanent products.

That is something we have expected all along.

Always have expected.

Persistency and claims and mortality tend to be inversely related, and permanent products tend to have better persistency, less any selection and all of those other factors.

That gives us a little bit of a higher expectation for term products.

Now I think that we have a lot of information about our mortality, and we can take a look at it by product type and by company and by issue year, and by auto fac, and all of that information.

But it is not clear we are pulling a lot of great messages out of that information, except the details that we use in pricing today.

Maybe just a quick follow-up.

Just the 1% higher claims, is that like $7 million in the quarter?

Or that is not 1% of the benefit ratio, right?

No.

That is 1%.

Yes, it is more like probably about 10.

$10 million.

Okay.

Thank you very much.

And we will take our next question from Eric Berg from Barclays Capital.

Thanks very much.

Good morning.

I have a couple of questions.

The first one involves following up on the question on your US traditional business.

When you say that mortality experience in the June quarter was essentially in line with your expectations, just modestly worse than your expectations.

Does that mean that the death claims experience was consistent with your original pricing, or are we still looking at a situation in which you have, we will call it, an underperforming block of business, written many years ago, you revised your expectations downward, and now you are getting results consistent with the new or the revised lower expectations?

It actually may work out the other way more often.

If you look at business say that was underwritten back in say the early '90s, late '80s, that business is performing much better than the original pricing.

So we would base it on our expectation of where mortality has been, not what we originally priced for.

As you mentioned, there are some years basically around 1997, 1998 or so, to about 2003, where there was a lot of competitive pressure.

And that is the lowest marketing business we have.

We built that into our expectations.

The business before that and after that is higher expectation, pretty much the last period since then is probably close to pricing.

Before that is quite a bit off from pricing.

Does that help?

Okay.

So, yes, it does, your answer does help me, it sounds like when you talk about expectations, that is a separate sort of idea from pricing, some of your expectations are, right?

That is correct.

Great.

And then my second question is a broader one.

It would seem to me that you would be in a position to assess not only the state of competitiveness in the reinsurance market, but also in the life insurance market.

And because you are seeing what is being charged in contract terms, and futures and all of that.

So here is my question.

We have seen in general, let's call it a tightening of conditions in the life insurance business with certain companies, Lincoln and Son, for example, pulling back from the no-lapse guarantee, by either raising prices or not offering products and certain sales.

We have seen a major tightening up of, or reduction of risk, in the variable annuity business through price increases, and through the scaling back, or the elimination of certain risky features.

Is this increased conservativeness on the part of the life insurance industry, the primary companies, your customers.

Is it holding, or are the companies sort of showing signs of slipping back into their old more aggressive ways?

Eric, you are right that we probably at some level know quite a bit about competitiveness on the direct side.

And most of the time our detailed pricing actuaries don't get involved in that, because we are just taking a look at the mortality piece of that.

We can tell you in detail how mortality charges are faring in the competitive rate.

And as some of our people can talk about some of these competitive features you mentioned.

But it is really not appropriate for us to comment on what companies are doing, and how things are holding up.

We think that the industry is going through a period just generally speaking of reassessing their strategies.

Some are falling back to more traditional and conservative postures.

Others are trying to be more aggressive and force some more growth.

Everybody is struggling for growth right now.

And we hear that time and time again with a few exceptions, that companies are looking for ways to help them grow.

And I think that they are feeling those sorts of pressures.

And you can imagine for yourself what happens in the environment I have just described.

So a lot of changes are going on.

Thank you.

Very helpful.

(Operator Instructions).

We will take another question from Mark Finkelstein from Macquarie.

Hi.

Thank you for the follow-up.

Can you just talk a little bit about Europe and South Africa?

The ex-currency growth was up about 20% in the quarter, which I think is above what you went into the year in terms of the upper end of your guidance range.

I know it is just one quarter.

But I guess what are you seeing?

I know you have opened up some new offices and expanded in certain areas.

But what is really driving the above-expected growth in Europe?

Yes, Mark, we are getting good growth in Europe and South Africa.

And the UK still comprises the overwhelming majority of Europe for us.

And so that means that UK growth is pretty good this year.

And we kind of expected that based on what was in the pipeline.

We have put a pretty ambitious plan out for the UK in terms of growth, and they have been achieving it so far this year.

But we are getting good growth in the continental Europe, although it is small compared to where the UK is.

We have in South Africa and in India some growing operations in developing countries, and that contributes reasonably to the growth rate, too.

But when you look at that segment, you have to conclude that the UK drives the whole result in that segment, because they comprise close to 80% of the action there.

Okay.

And then just thinking about interest rates a little bit.

I mean obviously the yield kind of went down in the quarter.

But you price on a long-term basis.

I mean what are the ranges around what the embedded interest rate assumption on new business is currently?

Can you give us that range?

Typically, Mark, what we do is we take a look at what we are investing in, and the duration we are investing in.

We factor that in.

You would be surprised how little that matters for a typical YRT mortality-type quote.

So it is really not that much of an issue.

And what I would say is that for the asset-intensive business, we haven't been able to conclude any transactions in the last year-plus, any new transactions.

And so that reflects our maybe conservative posture on investment income among other things.

And we would make sure we had assets and liabilities match, when we took up either an in force block of business like that, or with new business we would only have the pipeline open when we were confident we could invest the proceeds in a duration, and a rate that would be sufficient to get us the return we need.

So it has more of an effect on in force business than it does for new pricing, frankly.

Okay.

Thank you.

And we will take our next question from Dennis Zavolock from Sterne, Agee.

Good morning.

I am calling for John Nadel with a question for you guys.

We have heard from some skeptics who believe one of the primary reasons your mortality results in the US have been somewhat weaker in the past one to two years, is that several of your larger treaties are with companies we know were more aggressive in selling not STOLI or stranger-owned life insurance.

Can you comment on whether you believe that this type of business is having any adverse impacts in your mortality results?

Well, let me talk around that.

There is perhaps a grain of truth to that.

First of all, I don't think we have any unusual concentrations of, or big treaties with companies that were STOLI writers.

Our facultative shops shut off STOLI business very early on, and almost right away actually.

We have been pretty much in the forefront of the vanguard who was trying to prevent STOLI from happening.

So I think we would be surprised if we have an unusual concentration.

Having said that though, there was a period of time when we and the whole market were not priced correctly for older-age issues, older issue ages, and because that really had not been a factor in anybody's lives up until the time when we started seeing a lot of STOLI business.

So there was a period of time where we were underpriced as was the whole market, and that period ran up to maybe 2005.

So you might see some extra claims from there.

We haven't noticed any particular or surprising STOLI-like features in claims that we have seen.

Okay.

Thank you.

And we have a question from Jenny Jones from Schroeder.

Yes.

Could you go back to Eric Berg's questions about the traditional business.

I am just trying to look through them.

In terms of what you think is really impacting you, I couldn't hear the answer.

But I also could not understand your obtuse responses.

So could you directly talk about the blocks of business in, over the last ten years, which are impacting you now.

Okay.

So those are two direct questions.

So if I could have direct answers.

And what are the expectations, again repeating what he said, are the expectations different, or are the results different than one had expected when the blocks were written?

I could not hear them, number one, the answer, and I didn't get direct answers.

So if you could supply me with those, please.

Okay.

Jenny, when we talk about expectations, that is different than pricing.

That is clear, first of all.

In some cases expectations might be higher than pricing.

In most cases expectations are quite a bit lower than pricing.

For the period of time since say 2003, 2004 and later, pricing and expectations are pretty close, because we haven't seen a lot of evolution yet.

For say 1997 to 1998 or so, to 2003, I would say our expectations today might be a little bit higher than we priced at that time.

That was a very competitive period of time, and we have reassessed I think in the fullness of the perspective that time gives us, where that is.

Prior to that though, I would say that our expectations are considerably below what we were pricing at, because mortality --

Our claims flow when you say that, right?

Yes.

That mortality expectations for business written in eras prior to that are considerably below and--

Your expectations today are below?

What we priced at.

Okay.

Because mortalities improved so much.

If you go back in time far enough, you would see that differential open up considerably.

Okay.

So it really is a mixture.

All right.

Actuarily, why were they priced below?

I would have thought they would have lapsed earlier enough.

You would have actually better profitability than that, than an actuary would have assumed maybe 15 years ago.

I am sorry.

In policies that were written sometime ago, we priced it at a level X.

Mortality has improved considerably.

Our expectations would be that it would be less than 1 times X, mortality now.

Why haven't they lapsed?

Well a lot of those products remember are permanent products.

They are not looking at replacing one set of mortality charges with another.

They are basically looking at a whole life level premium or a universal life-type product.

So the products stay in force for a long time.

We have a lot of business in force from eras that precede 2003.

Alright.

And then going back to the estate law changes, you would say then just for the question, that you have not seen any pickup and it is because people really can't plan, so they are not about to get an estate policy in place when they don't really know what is ahead.

Is that your response?

Correct.

In the discussions I have had, the limited discussions I have had with some of our clients about what are you doing about estate planning, are you seeing any uptick, they are all thinking about it.

Some of their agents are thinking about it.

They don't really have any plans at this point to develop new products to service that market, because they really don't know where the law is going to be come next year.

Alright.

Has it had an impact on you negatively this year?

No.

No.

I mean, it's --

On the marketplace generally?

Yes, it has been the same for quite a while.

Right.

Right.

I mean I would think that.

Alright.

Yes, this is a potential opportunity going forward.

Yes.

Okay.

Alright.

Alright.

Thank you.

(Operator Instructions).

And it appears we have no further questions, I am sorry, I spoke a little too soon.

We have a question from Richard Spashing from Hovde Capital.

Hi good morning.

I just had a quick question.

I noticed that in the past quarter there were a noticeable uptick in the deaths of billionaires.

I counted about six in the quarter.

And traditionally that has had a big impact on you guys.

I am just wondering if that, there is any noticeable impact in the quarter due to that?

Richard, I don't know.

I actually only know of three billionaires who have died this year.

Maybe you are more up-to-date than I am.

And I only know that because of the discussions around estate taxes, and so forth.

But we do have a lot of wealthy people insured, but it is not appropriate for to us comment on individuals.

Okay.

But I guess it wasn't, the slightly worse than expected mortality in the quarter, wasn't in your facultative book, or something like that?

No.

No, it wasn't.

Okay.

Great.

Thanks.

(Operator Instructions).

And it appears we have no further questions at this time, gentlemen.

I apologize.

Mr.

Andrew Kligerman has a follow-up question.

Yes.

Just to follow-up on Jenny's question earlier.

With regard to the mortality then, Greig, would you say that the net of the pricing from say 1997 through 2003 and prior to 2003, so you have got one big positive timeframe.

Somewhat negative timeframe.

What does it all net out to?

Do you feel like going forward, you are on track for meeting expectations?

Yes, Andrew.

I think so.

We had a return last year of 13% on that mortality market's business.

We expect that as we said in the first quarter, expect that to slightly fall this year.

And that is based on the relative prominence, or effect of those more pressured issue years in the overall result, that this would be the bottoming out year, and overall when we look back over time, we will expect decent returns overall.

Excellent.

Thanks a lot.

(Operator Instructions).

And gentlemen, it appears that at this time we have no further questions.

Okay.

Wonderful.

Well, thanks everyone who joined us today.

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

Louis.

And with that, we will end the second quarter call.

Thanks again.

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

Thank you for your participation.