美國再保險集團 (RGA) 2010 Q3 法說會逐字稿

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

Today's call is being recorded, and 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.

Okay.

Thank you and good morning.

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

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

I will turn the call over to Greig following a quick reminder about forward-looking information and non-GAAP financial measures.

We will make certain statements and discuss certain subjects during the call 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 the 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 pre-tax and after-tax basis.

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

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

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

With that I will turn the call over to Greig.

Good morning.

Thank you for joining us.

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

Strong third quarter operating income totalled $128 million, or $1.72 per diluted share.

Last year's third quarter was also strong with $115 million of operating income, or $1.56.

Consolidated net income also totalled $128 million, or $1.72 per share this quarter, compared with $118 million, or $1.61 per share last year.

Consolidated net premiums including $81 million from the group reinsurance business totalled $1.6 billion during the quarter, an increase of 16% on an original currency basis, and 17% on a US dollar basis over third quarter 2009.

For the first 9 months net premiums increased to $4.9 billion, or 18% on a reported basis, 14% on an original currency basis compared with last year.

Net investment income totalled $288 million this period, with an average yield on the portfolio of 5.66%.

This yield was slightly higher than our second quarter 2010 yield of 5.51% due to a higher level of income on our small limited partnership portfolio, which can be a little inconsistent on a quarterly basis.

Looking ahead to 2011 we expect continued downward pressure on our overall portfolio yield.

For example, if pre investment rates hover around 4% and remain there throughout 2011, we would expect to see an adverse effect of $0.20 to $0.25 per share next year compared with 2010.

Impairment losses including mortgage loan valuation allowances reflected in income were less than $10 million for the quarter.

Our net unrealized gain position rose to $833 million, benefiting our book value per share, which is up 29% since year end to $68.30, including AOCI.

Third quarter interest expense was significantly higher than we have seen in third quarters past, as we typically settle our previous year's uncertain tax position related to FIN-48, and reserve any applicable interest accrual.

Since we extended the prior tax year, that would have typically been settled in the third quarter.

We have not yet reversed any applicable interest on it, interest accrual on any related uncertain tax positions.

The effect was roughly $11 million of additional net income, or net interest expense, which we would expect to roll off in a future period.

The active financing led, exceptional legislation was not extended this quarter as well, so we added another $5 million to our tax position which had an adverse effect of $0.07 per share.

If Congress passes an extender package this year, we will reverse the position, which currently totals about $15 million year-to-date.

On a consolidated basis, foreign currency fluctuation added $0.02 per share this quarter compared to third quarter 2009.

Now turning to segment results our US traditional business including the group reinsurance business reported pre-tax operating income of $101 million, compared to $85 million in the third quarter of 2009.

Premiums were up 16% for the quarter, including the group reinsurance business, and 6% without it.

The group business posted another better than expected earnings result.

Mortality experience fell in line with expectations this quarter.

The US marketplace continues to be a little more competitive than a couple of years ago, but it still presents a generally favorable operating environment.

Our US asset-intensive business reported another strong quarter overall with $14 million of pre-tax operating income, down from an unusually strong $20 million in the third quarter of 2009.

We expect to earn about $15 million per quarter from our asset-intensive operations.

Turning to Canada, it was another good quarter which yielded pre-tax operating income of $28 million, up from $22 million a year ago.

This increase reflects better than expected claims experience in the current quarter, while last year's experience was more or less in line with expectations.

Premiums were up significantly this quarter, increasing to $206 million from $153 million last year.

The increase was primarily due to a longevity risk transaction, which contributed about $55 million in total premium, including a one-time advanced premium of $43 million, for which we established a reserve.

Foreign currency fluctuations added another $10 million to premiums for the quarter.

Regarding our international operations, Asia Pacific posted pre-tax operating income of $27 million, compared with $28 million in the prior year period.

Both periods reflected better than expected claims experience.

Original currency net premiums were up 6% for the quarter, and translated premiums were up 13%, totaling $274 million, including roughly $18 million from favorable foreign currency fluctuations.

Our operations in Australia, Japan, and Taiwan primarily contributed to the premium growth this quarter.

Europe and South Africa reported pre-tax operating income of $16 million for the current quarter, up nicely from $7 million a year ago, when the UK and South Africa experienced higher claim levels.

This quarter the UK posted strong top and bottom line results.

Original currency net premiums rose 20% for the quarter.

On a US dollar basis premiums were up 14% to $233 million.

Foreign currency fluctuation adversely affected premiums by $12 million in the quarter.

In summary, we are pleased with another solid quarter, which produced an annualized operating return on equity of 13%, in spite of the challenging interest rate environment.

We remain encouraged by our international and domestic operations, which both again performed well, and we are excited about our growth opportunities across all markets.

Our group reinsurance continues to perform well, our investment portfolio and capital position continue to improve.

The quarter was particularly strong from an operating standpoint when considering non cash tax-related expenses, reduced earnings per share by roughly $0.18 when compared to the prior year's third quarter.

Those tax-related expenses were associated with the act of financing exception and FIN-48 issues I mentioned earlier.

While we do expect a drag on investment income in the near to medium term associated with historically low new money yields, our business model does not rely heavily on investment income.

Rather our results are primarily driven by our ability to effectively price mortality and morbidity risks.

Risks upon which we have built a solid track record of success.

We continue to review block opportunities.

However, the timing and whether or not we will be successful is difficult to predict.

Earlier this month we announced an organizational restructuring which we believe will result in improved strategic alignment with our clients' needs across the globe.

We will continue to review financial results and allocate capital on the same geographic basis that serves as the basis for our external segment reporting, and therefore we do not anticipate making changes to our reporting at this time.

If in the future a change in segment reporting is necessary, we will provide prior period restated figures.

Finally, we are looking forward to seeing investors at RGA's first ever Investor Day Conference to be held February 17th, 2011 in New York City.

With that, let me say we appreciate your support and interest in RGA, and will now take any questions you may have.

(Operator Instructions).

It looks like we will take our first question from Jimmy Bhullar from JPMorgan.

Good morning.

I had a couple of questions.

The first one is just on trends in the US market.

You mentioned that competition had picked up a little bit, maybe if you could talk about outlook for top line growth?

It seems like cession rates are continuing to drift lower in the US.

And then the second one was just elaborate on your comments on low interest rates.

Just wanted to see if you have been, if rates do remain around where they are right now, would you at some point begin to raise prices to reflect that, or would you have to take a hit on your margins, especially on new business?

Jimmy, the cession rates in the US do continue to drift downward.

This is particularly true in some segments of the US market, and what we have found is that our flow of new business is gradually drifting a little bit downward.

We continue to, as over the last couple of years of course, increase our market share just a bit.

That has made up for a lot of it.

We do expect that, though the amount of business in the marketplace will continue to drift down for conventional mortality risk business.

Not in any major way.

There is not a lot of new products coming out, so the old products and the old relationships continue to provide the bulk of the flow, and that is something that is favorable when you have a large market share to see not much turnover in the existing arrangements that are out there.

With regard to your second question, yes, obviously over time if interest rates stay down, we will reflect that.

You would be surprised at how little impact a slight change in interest rates has on true mortality risk pricing, though and remember we are pricing over a longer term.

So what is the average interest rate yield we are going to see over say the next ten years is the more important to question to ask, not what are the current rates of two year treasuries or ten year treasuries.

So obviously it will have an effect at some point in time, and when appropriate we will raise rates.

And then just one more; on your premium growth in Europe you have had 20% growth roughly the last couple of quarters ex currency, just on what is driving that?

We are, first of all, seeing good growth through continental Europe where we have not had a strong base in the past, and so we are growing from a low base, and the percentage growth rates are quite high.

We have also had pretty good results in terms of growth in the UK.

Some of that coming from longevity business, but a lot coming from mortality business as well.

So it is really coming across the board in the established markets of the UK, and in the developing for us, new markets I should say of continental Europe.

Okay.

Thanks.

I will take our next question from Andrew Kligerman from UBS.

Great.

A few questions.

First, Greig, you mentioned you are taking some market share in the US despite the lower cessions, so you had a good US number up 6% in the quarter net premiums.

Looking forward do you think you could sustain mid-upper single-digit premium growth in the United States?

Yes.

When I said we have been taking market share that is over the last couple of years.

Whether we are actually currently taking market share, I don't know.

We will see when we get results from the market out next year exactly how the year all settled down, because the US is a pretty big market and a big, big space.

It is not always clear exactly.

We can guess exactly how we are doing, but we really can't tell with some precision until we get the roll up of results.

Do you think that the growth would be upper single-digit going forward, or is it going to be a little tough?

I think we would be say over 5%, but I don't think we are going to be at 9%.

Got it.

Then following up on Jimmy's pricing questions I think I recall last quarter you mentioned that the 1997 to 2003 block of business the pricing was a bit more competitive and hence the results are not coming through, as well as say some of the later years and now let me couple that with some comments that you must just made on this call where it appears that pricing is getting a little more competitive.

Greig, maybe you can give a little color on just where pricing is relative to a few years ago, and relative to that 1997 to 2003 vintage or vintages?

Well, certainly.

Pricing is a little more competitive as I said.

There is not a lot of new pricing going on.

There is, most of the business is continuing to come in at old rates.

There is not a lot of new product introduction into the market in other words.

But even where there is new product, we have won nice shares of several of the treaties that have come out with what we consider good margins, appropriate margins.

This is a lot better environment than it was around the turn of the decade.

Perfect.

And then, lastly, you mentioned M&A that you continue to review blocks, but the timing and the success are hard to predict, but are you real active right now, Greig, are you seeing a lot, or is it kind of quiet, in terms of what you are looking at?

It is reasonably active, Andrew.

There are a couple of very large opportunities, so you have to sort of juggle mentally how likely they are to happen with the size and so forth, I would say it is a pretty good environment right now, and our sense is that it is going to get better, and we are out on a limb saying that a little bit, because we have been saying that there are a lot of opportunities for a while and there have been, but we have achieved a pretty good growth rate over this time, and while some of the opportunities that we have closed.

tend to be on the small side, we keep expecting that sooner or later, we are going to see something a little bit more meaningful happen.

Thanks very much.

And we will stay take a question from Steven Schwartz from Raymond James & Associates.

Hey.

Good morning, guys.

I have got a couple, but I will just ask a few and get back in line.

On the subject of US business, if I take a look at the assumed business for the quarter, the assumed business went up into the call it the $45 billion range in the fourth quarter, third quarter/fourth quarter, and you kind of told us that that was going to happen, that people were looking for capital and you saw your normal flow business heading up.

It came down again into the $30 million range for this quarter.

Is there something there?

Were there one year treaties that ran off or something like that, as the industry has gotten better capitalized again?

Steve, we did see some treaties that had changed and so forth, but I would caution you that there is a lot of reporting noise in the quarterly numbers, especially as it reflects new business, which tends to come in lumpy.

You might get two or three months worth of business from any company at a time, and so there is a little bit of lumpiness to that, so I wouldn't read too much into that, but it is true that our pipeline of expected annual flow of business is down a bit right now, compared to what it was say at the first quarter.

Okay.

And then if I can follow up on that before I ask a second.

Greig, you mentioned that there wasn't a whole lot of new product.

There is this UL term hybrid out there that seems to be gaining a lot of traction.

Does that maybe affect your business going forward?

Well, it certainly eliminated -- the design is intended to eliminate the need for XXX financing, but frankly in the reinsurance world reinsurers have not done a lot of XXX financing in recent years anyway.

They have done a little bit of it.

At least we haven't, and we get a small amount that just incidentally, but we don't really pick up large treaties on a co-insurance basis with a lot of XXX heavy lifting there, so that doesn't change our business too much.

If everybody switched over to it, I don't know that it would change RGA's operations very much at all.

Okay.

Great.

And then, Jack, can we go over the interest expense thing again?

I am not getting it.

Generally speaking there was a reversal that happened in the third quarter.

By the way, I thought part of that happened in the first quarter of this year, so that the effect would have been less in the third quarter, but it still would have been there, but is this, whatever, I don't know what year you were trying to settle, but was it settled and you didn't get anything back?

Was it not settled in that year, maybe settled next year, and maybe two years get settled next year?

What is going on there?

Yes, Steven, It is really the latter point that you just mentioned.

Historically it is like clockwork we have settled the year every year, and typically that is in the third quarter.

It didn't happen this year because the year that would have settled has been extended, so presuming that it settles in the way that I guess we would expect it to, and the way that historically they have settled, then we will have some uncertain tax positions that will ameliorate, and as a result we would reverse some interest expense associated with those tax positions.

Okay.

Is there is a potential double whammy coming some time down the pipe?

Yes.

You could look at it that way because likely we will end up with, back on a cycle of one year, settling per year, so the implication there is that two years will settle at some point.

Okay and what year was it that was not settled this time around?

It would be 2006.

2006.

Okay.

I will get back in line.

Thanks, guys.

And our next question comes from Jeff Schuman from KBW Investment Bank.

Good morning.

I was hoping we could talk a little bit more about your guidance with relation to flat flood interest rates.

The $0.20 to $0.25 was a bit more than I expected, I guess, given in part what you said, Greig about the fact that the pure mortality business isn't terribly sensitive to investment income.

Can you maybe decompose sort of the sources of the $0.20 to $0.25?

In other words, to what extent does that represent sort of compression on existing business, versus marginally less profitable new business, versus maybe sort of just less investment income on surplus or excess cash, can you stretch that out for us a little bit please?

Yes, Jeff.

This is Jack.

I think you ought to look at it as every year we have a considerable amount of free cash flow, and that is either from operations.

or that is from portions of the investment portfolio turning over, and we try to project that in a way to try to determine what is the impact of higher, lower, and in this case lower new money rates that it is hard to predict but we just kind of took a crack at if new money rates stay essentially where they are now, and we turn over the investment portfolio in a way that we typically do, in other words have the typical prorate amount of that portfolio turn over, so we are reinvesting in terms of new money rates, and project what kind of operating cash flows we will have, and likewise that would be invested in new money rates, what would be the impact overall on operating income, and as a result operating EPS.

So that is, it is imprecise, but that is our best estimate in terms of how that exercise plays out, and what the impact would be in 2011.

And we wanted to do that analysis and share it, because it is such a hot topic.

The other one, of course, is what happens to the US dollar, and that can swing just about as much.

Your guess is as good as ours of where it is going, but the trends are for a weaker dollar at the current moment clearly.

So I guess it sounds like you are not really fully immunized on your existing business, but you will take some margin compression on the existing business, and then potentially layer in new business at somewhat compressed margins?

Is that kind of the way to think about it, Jack?

Yes it is, considering our business is very long term, and the duration on our investment portfolio doesn't match that, nor should it just because it grows off of positive cash flow every year.

Okay.

And then in Canada, the creditor business continues to kind of wind down I guess it looks like.

Should we assume that continues to wind down, or does that flatten out or reverse at some point, how should we think about that?

The creditor business that we are doing in Canada?

Yes.

Yes.

That has been a source of growth for the last couple of years in our premium book in Canada.

This year it is actually flat, if not down a percent or two, and so you could say yes, we have kind of topped out on that business, but it is not going to reverse.

It is business that we would like to see at least stay at this level.

Okay, I guess the trend looks more dramatic than that, I think the third quarter comparison against a year ago was $18 million versus $39 million, and then the recent sequential trend has been 76, 34, 17, so it kind of looks like it is dropping off pretty fast but maybe --?

Yes.

I think we are down a percent or so for the year-to-date though, in premiums.

Okay.

And that is sort of how we should think about it as being relatively stable from here?

Yes.

That is what we would hope.

Okay.

And then, lastly, you may have addressed this but I guess I didn't catch it.

The longevity business in Canada was that something related to a DB type pension plan, or what was the source of that, and is there more of that stuff out there?

There is more of that out there.

It was a transaction with another insurance company, a client company, where we swapped payments.

We swapped actual for expected payments.

But the underlying business is what, group pension type business or what is it?

Yes.

Okay.

Great.

Thank you.

And I will take our next question from Nigel Dally from Morgan Stanley.

Great.

Thanks.

Good morning.

First just follow-up on interest rates.

Do you have an estimate of the total amount of cash flow you expect to have for all investment in 2011?

And then second I wanted to focus on capital management.

A numbers of components, first what is your estimate of risk based capital ratio in the quarter, the excess liquidity at the [holdco], and the total excess capital?

Second, with acquisitions can you discuss where the Transamerica rate remains a property of interest, and third, if acquisition opportunities don't present themselves, are buybacks the most likely alternative as we look to 2011, if so, how much do you see as being free for buybacks?

I am assuming that you wouldn't want to use all of your excess capital.

Thanks.

Nigel, this is Jack, let me take that first one.

I don't have the analysis in front of me here in terms of free cash flow, but if you look at just cash flow generated from operations it is typically between $0.5 billion and $1 billion annually, so we have got that as well as the typical roll-off of the portfolio, which I am I just going off the top of my head, that is at least $2 billion there.

So it is not insignificant in terms of the amount of free cash flow that we would have to invest throughout the year next year.

Okay.

And then on the capital management side?

I am sorry.

Was the question on, was it the projected RBC ratio or --?

Yes.

The overall risk based capital ratio, and your total estimate of excess capital, Transamerica RE and buybacks?

Okay.

The RBC ratio that gets to be a little bit difficult in terms of it applies solely to the US operating sub, so it is when we take a look at excess capital, which we estimate to be $500 million to $600 million currently, that just simply presumes that we will maintain an RBC ratio of 3.30 to 3.40, if that is helpful.

In terms of Transamerica RE we really can't say whether we are involved or not, but that is a process that our understanding is still in the middle, not towards the end.

In terms of buybacks for next year, we at this point continue to remain very positive about the opportunities we have to deploy capital, but we will at some point think about how best to manage our capital if some of those don't materialize.

We would, as you say, not use a buy back strategy for all of our excess capital, but we save some gun powder.

I am not sure that we have made a determination of what that would be at this point, Nigel.

Okay.

So that determination will probably be made more towards the end of the year, perhaps for your Investor Day next year, at that conference?

Third quarter.

Yes.

End of the quarter.

Early next year.

Again, we will be gauging the relative attractiveness of doing that versus the growth opportunities we have.

We are still showing this year a double-digit growth rate overall in our books, so that is pretty good growth.

That is great.

Thanks a lot.

And our next question comes from John Nadel from Sterne, Agee.

Hi.

Good morning everyone.

A question on the income statements, I guess in each of the segments.

If I just calculate the benefits and claims, or the benefits line as a ratio divided by premiums or net premiums, that is how I would typically think about measuring mortality, and on that level, the benefit ratio was up quarter-over-quarter in just about every segment.

Now, the offset really seemed to come through sort of lower DAC and insurance expenses as a percentage of premiums.

So I guess my question is, this looked like a very atypical quarter, because there seemed to be a lot of noise between those two lines.

Can you give us a sense for what drove that?

Should we really be looking at measuring mortality results more on a combination of those two line items?

How should we think about modeling that, because if I were just looking at those ratios without looking at the earnings or your commentary, I would have thought mortality was poor.

Okay, John.

This is Jack, and I have cautioned investors in the past, that you really have to look at both of those lines that is the policy acquisition cost line, as well as the claims and change in reserve line, just because there is a certain amount of interplay there, and you can come up with a little bit of a funny answer if you look at one and not the other.

There are other issues every quarter that affect that, and maybe an example would be like that longevity deal that we put on in Canada, where we will because a lot of the premium is prepaid, so to speak and not yet earned, we will reserve that, and as a result you end up with some implication on that loss rate that may give you somewhat of an erroneous conclusion, simply because we are trying to make sure that we don't reflect that profit until we have actually earned it.

So that is just one example, but there are always examples like that.

Okay.

In any of the lines, so that is why you really should look at kind of a total ratio to get a better feel.

Okay.

I mean I guess that is helpful.

I will follow-up with you guys to think about that more in detail sort of geography by geography, but that makes sense, if I look at it sort of on a combined basis, it clearly shows the trend was in the right direction quarter-over-quarter.

Thinking about corporate results, I mean despite the higher level of interest expense this quarter, your corporate pre-tax earnings was among the highest I can sort of remember.

Should we be thinking about this as a reasonable run rate?

Has there been some sort of change in capital allocated that drove that, and how should we think about that?

Yes.

John, that is always a difficult question to answer.

Part of it is capital allocation which can have some impact, because you can think of corporate as kind of the repository of all of the capital and investment income, and then it is allocated based upon the economic capital needs of the various segments.

So it is always hard to say what is the actual run rate that you should presume in there, but I would offer that the current quarter run rate is not atypical in terms of what we expect going forward.

Okay.

Is it fair to think about your, when you quantify that sort of your view of excess capital as $500 million to $600 million is that residing in corporate, or is that still in some ways allocated amongst the other divisions?

John, it is both, but it is predominantly accessible in corporate or at the holding company.

Okay.

Okay.

And then the last one, not necessarily, let me address it this way.

The 13% ROE this quarter you are sitting on roughly $500 million to $600 million of excess capital, your quantification of it, so if you guys were a little bit more right-sized on a capital level, it sure looks like the ROE is more like 14% to 15%, understanding there is some interest rate or new money yield pressure here, but I guess my question is how much, to put maybe being a little bit more specific, how much longer do you sit on that kind of capital waiting for an opportunity to either get to the finish line or not?

I mean I just look upon your stock, and I think about it relative to some others that I cover, maybe not the VA companies or the larger multi-lines, but you think about it relative to some of the more underwriting-driven earnings streams, and everybody is buying back stock, and buying back stock it would appear to be over the long term very attractive levels, and you are still not sitting here not.

I guess I would just ask for a little bit more specificity on your timing?

John, this is Jack.

That is certainly a fair point, and it is obviously one that we deliberate upon here, that we have a continual discussion of.

We recognize we don't have a particularly efficient capital level now, but at the same time you are weighing opportunities that are out there, and we are certainly looking at that.

Your question is at what point do we as a team throw up our hands and say, you know we are better off returning some of this capital, or in some way right-sizing the capital base, and we don't have a day on that.

I think we kind of answered previously that likely by the first quarter, we will have a better feel for opportunities to deploy that capital, and that would be an ongoing deliberation.

Okay.

We recognize the issue certainly, and we recognize that it is not the most efficient capital base now, but you always have to weigh that against ratings implications, as well as opportunities in the marketplace, and that is what we do continually.

Yes.

Understood.

I mean it just seems to me that you could pretty easily right now deploying that capital, whether it is into a deal or into buybacks or something else, I guess.

You could pretty easily offset the new money yields drag to the extent that were to continue through 2011.

Yes.

Understood.

Absolutely.

We certainly (inaudible).

Okay.

Alright.

Thank you.

Okay.

Our next question comes from Alec Ofsevit from Credit Suisse.

Yes.

Hi.

Good morning.

Just one question following up on the low interest rate issue.

Are you seeing any changes to lapse rates on the underlying policies, due to lower rates because customers view the value of policies priced five or ten years ago much more highly?

No, Alec.

We do a detailed lapse study once a year.

We did it, concluded it in the summer time.

I don't know that, I certainly didn't hear anything like that, and in fact, a lot of our business comes from the mutual companies , who are paying a pretty good interest rate on their dividend scale these

So in your initial pricing, is there a lapse assumption that you have kind of across the board?

Yes.

We have a set of lapse assumptions that would vary by company, by type of product, and all sorts of, and by age, and by all sorts of different things, so there are a lot of lapse assumptions.

Generally we have been achieving what we need to achieve on the lapse side.

It has not been an issue, or even a concern.

Okay.

Thank you very much.

Our next question comes from Sean Dargan from Wells Fargo Securities.

Good morning.

I have a couple of questions about the upcoming Congressional elections and the possible impact on your business, with a possible change of majority in at least one House, just wondering what that means in terms of the active financing exception, and also the estate tax?

Thanks.

I will take the AFE question, and it is an easy one to answer.

We don't really know.

It is very difficult to predict the extent to which Congress will find a reason to extend the AFE.

We are hopeful that it will happen in the fourth quarter, but kind of changing dynamics in Congress, and it is kind of hard to determine what implication that has on something like an AFE extension.

There is the possibility that before the new Congress is installed in the lame duck session, that matters are attended to that have been neglected all year, and hopefully we are on that list.

In terms of estate tax, when I talk to companies around the industry on the direct side, I don't find too many that are really gearing up to do anything major on the estate tax at this point, but certainly it is something that needs to be addressed one way or the other, and if it is addressed through inaction, that is if it just reverts back to the 55% tax and the higher deductible, at some point the estate tax will generates large insurance sales, which of course, would be generally beneficial to us, but I don't expect that to ramp up real quickly after the beginning of the year.

I expect people to wait and see exactly what is really going to happen, and some of these estate planning efforts take many months to put together anyway, so I would expect that it will be almost a year from now before you really can gauge what has happened on life insurance sales from estate tax, and certainly on reinsurance sales.

Thank you.

And we have a follow-up question from Steven Schwartz from Raymond James & Associates.

Hey, guys, again.

Yes.

Just a couple like I said.

Jack, the spread fixed annuity looks like you came down a lot in the quarter, I expected it to come down but it came down a lot sequentially.

I was wondering if you could comment on that?

Yes.

I guess there is some impact of amortization there that would influence that spread, but we see that a little bit on the fixed annuities every quarter that there is some change up and down, and that sort of thing.

But we would not expect the overall profitability of that business, we don't see it changing dramatically.

Okay.

And then if I may just as a follow-up on the corporate, which I think John asked, really I thought looking at historical numbers the outlier there that pushed that number up just by the interest expense was the interest income, and I just want to make sure that there is nothing weird going on there, that is just capital allocation and that is real earnings?

Yes, it is.

It is real earnings.

Okay.

Okay.

Just wanted to make sure.

Thanks.

Our next question is from Eric Berg from Barclays Capital.

Thanks very much.

Good morning to everyone.

I wanted to return first to the issue of excess capital.

I believe you said that the operating cash flow of the business runs between $0.5 billion and $1 billion, and that turned into, well maybe I misunderstood a discussion of excess cash flow.

Pardon me.

Yes.

Excess capital of the same amount.

Is that coincidence that the operating cash flow and what you are now calling your excess capital are both in the area of $500 million?

Could you just clarify what the $500 million that you referenced earlier was, and whether in fact the excess cash flow is also $500 million?

Excess capital is also $500 million?

Yes.

Eric, look at that as nothing but a coincidence.

They are two pretty different issues.

I think the earlier question related to impact of changing investment rates, and I was trying to articulate just how much cash flow, don't think of it as free cash flow at the holding company, but just cash generated by our operations that we typically invest, so they are really two different things.

Okay.

Second, I was hoping we can build on an earlier response regarding these longevity swaps.

I understand that the underlying, I guess in response to Jeff's question, that the underlying liability is a defined benefit plan that the customer here is one of your ceding insurance companies, and that you are swapping cash flows, but can you just explain a little bit more, what is the notional amount, what are the cash flows being swapped here, and you mentioned actual to expected longevity, could you just explain in a little bit more detail how this arrangement works?

Thank you.

Think of it, Eric, as the opposite of YRT mortality business, of regular mortality business, where we are collecting a premium for the expected death benefit and paying actual claims.

This is the other way around.

We are paying actual, actual benefits for people who live, and receiving expected payments the other way.

So it is almost like the inverse of YRT, and part of this is a risk management tool, because we have so much mortality on our books, we have a pretty good situation to write some longevity risk, which has got basis risk in it, but it is still somewhat negatively correlated to our mortality business, and under extreme scenarios of changes in or shocks to either mortality or longevity, we will do really well in one and poorly in the other, but in most scenarios we will expect to make money on both sides, and so we have a limited appetite for longevity, and most of what we have done so far has been in the UK.

We were happy to pick up a nice transaction in Canada from a good client, a solid company, and we will expect to look for a little bit more of this, but we do have a limited appetite on the longevity side.

Last question relates to the earnings in Asia.

I certainly paid attention when Jack was saying that results do vary from quarter to quarter, and should not be focused on as intently as the year-to-date results, but still is there anything that I need to understand as to why, I believe it is the case that excluding the impact of currency earnings in Asia were down, even though, yes, they were down?

Well, I think, Eric, that only has to do with the fact that last year's third quarter was extremely good.

Was it?

Yes.

It doesn't, is certainly wasn't a disappointment region-wide.

We as always had some ups and downs.

Australia didn't have a particularly good quarter, but New Zealand did, for example.

Most of the other countries had good results but if you look, if you aggregate it enough you get to the region-wide, we are very happy with the Asia results this quarter.

And was the mortality experience, is the idea here that it was unusually good last year, or both this year and last were was good, and this year was just not as favorable as last year?

That is it.

Yes.

Yes.

That is it, last year was extremely good.

Thanks very much.

I am all set.

And we will take a question from Mark Finkelstein from Macquarie.

Good morning.

Question about US mortality.

I think it was in the first quarter you talked about certain vintages of US business that had slightly lower margin having a more prominent impact on earnings currently that was affecting the benefit ratio, and I guess my question is, when does this start to subside?

Is it a 2011 event, or is it later?

Yes, Mark.

We expect it to start subsiding in 2011, but having said that, what that means is that it will be marginally less impactful in 2011, and will wane in future years, remember the lifetime on this business is 30 years.

Right.

So this will continue to blend into the overall stream of results for a long time, but the business is higher return before that era, and higher return after that era, and it is one of those waves that goes through our lifetime, and we will see that affecting us for some time, but it will begin to wane by our reckoning next year on an expected basis.

Okay.

Just going back to Nigel's question actually, I think you sized the capital margin at 500 to 600.

I don't know if you actually said how much of that you would be willing to use on a block or an acquisition?

Mark, this is Jack.

The reality is we would be willing to use all of it on an acquisition.

I mean if we see an attractive opportunity, we would use that and then some if it was needed, because the presumption is if the pricing is attractive, we can find other means including accessing the capital markets to take advantage of the opportunity.

Okay.

And then just, finally, on the UK kind of pretty strong ex-currency growth, better trend for the last couple of quarters.

I guess what drove the growth this particular quarter?

I think just overall business.

As I said, a lot of it was longevity.

We have done some longevity transactions in the UK over the last couple, two or three years, that have begun to weigh into the premium accounts, but we are getting growth on the mortality side, too.

Okay.

Thank you.

(Operator Instructions).

We have another follow-up question from Steven Schwartz from Raymond James & Associates.

I am sorry, guys, but if I may, Asia the outlook there as we know not a whole lot going on, kind of a pause we are seeing premiums be flat.

Greig, you talked in the past at least that you thought new business was coming as new products were developed.

I was wondering if your thoughts had changed there?

Yes.

That pertains to Korea, to Korea especially, and Japan to a little bit lesser extent.

Right.

I think we are seeing good signs in both those markets that growth is turning around as we expected, especially in Japan.

Korea we are seeing smaller transactions than we had done before.

I think the smaller individual agreements begin to come online, so it does look like it is starting to turn around, but the outlook there is a little less certain, and Japan looks like it is going to come on very nicely for us over the next five or six years.

Have we broken the Japanese code?

No.

No.

Not yet.

Okay.

We would still view that as a very attractive market for us.

Okay.

Thank you.

And a follow-up question from Jeff Schuman from KBW Investment Bank.

Hi.

I was hoping to come back one more time to the longevity business.

You noted that longevity the risk is a natural hedge to the mortality risk.

I am curious as to the motivation for client companies to do that, because I would think it would serve as a useful natural hedge to them as well.

Is there a particular reason why companies would look to lay this off, is it a matter of just their own unique capital situation, or kind of what would sort of motivate it from their end, given that it would appear to be a natural hedge for them as well?

Yes, Jeff.

It is to a certain extent but there is so much more longevity risk than there is mortality risk in some of these markets, especially the UK these days, that companies quickly get overloaded with longevity risk, and that is the reason that they lay it off.

It really is a situation that if a lot of the longevity risk were actually written by insurance companies as opposed to just being held by individuals say in the US, the number is I have seen anywhere from $3.5 trillion to $5 trillion of premiums that could be laid off, if that was all in the hands of insurance companies.

What is really the case is that there is only a few markets where insurance companies are heavily involved in taking this longevity risk, and one is the UK, where they are quickly overloaded with longevity business.

Okay.

And then, apparently in Canada as well?

Well, at least in one particular case, and it is growing around the world though.

Like I said, unfortunately in some senses we have a limited appetite.

We really don't want to become a longevity company.

We like the mortality business, and so we will have to make sure that we approach this in the correct way.

This will probably come off as a stupid question, but does being a mortality risk expert translate directly to longevity risk, or is it not quite that simple?

It is not quite that simple but certainly we have a lot of insights from our expertise on the mortality side, and we actually even do a fair amount of underwritten annuities in the UK market, where we use our underwriting expertise.

Okay.

And then one other area I was curious about.

We have seen a couple of transactions lately basically consolidating run off life insurance operations, United Investors, and then more recently Liberty Life.

Do you have any interest or ability to kind of partner up with people who might be in a position to kind of administer blocks like this, and for you to kind of provide the financial capacity?

Is that something that you have kind of worked on, or would be interested in or not?

Yes.

We did not work on either one of those particular cases, but we have worked on others, and that is a scenario we would very happy to participate in.

And do you think these recent transactions represent an expanding pipeline, or how should we think about that?

Yes.

We think that they are the apparent part of the first wave of this consolidation.

Okay.

Great.

Thanks a lot, Greig.

And we have a follow-up question from John Nadel from Sterne, Agee.

Thanks.

I have got a question for you.

If we think about your year-to-date actual mortality results versus expected, or versus priced for, however you want to think about that.

Given 1Q was relatively poor on mortality, but obviously the second and third quarters have been okay, about how far have year-to-date results on mortality deviated from expected?

John, that is always a little bit hard to exactly pinpoint, but we certainly have not filled up the hole of the first quarter completely.

We are not too far off of expected, and certainly the last two quarters have been pretty good, either expected or maybe even a little bit better in the third quarter, but we have not gotten back to where we would like to be for the year.

Yes.

No.

It didn't seem like that.

I guess let me ask it slightly differently.

I am interested in sort of the sensitivity.

If you had a one sort of standard deviation shortfall or God forbid, better than expected mortality over a full year, how much of an impact is that on EPS?

I don't know whether you can say it in actual per share earnings hit, or percentage change, can you help us with that?

Yes, I can but maybe not off the top of my head, because I don't remember what the most recent standard deviation number is, but it is certainly something we can calculate and do calculate.

Okay.

It is over $10 million of pre-tax so it is over $0.10 a share.

It is probably quite a bit more than that actually.

Yes, it is.

I would think it is many cents per share.

Okay.

I will follow-up with you offline then.

Thank you.

(Operator Instructions).

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

Okay.

Well, thank you to everyone for joining us for this conference call.

If any other questions develop, feel free to give us a call here in St.

Louis, and with that we will end the third quarter call.

Thanks again.

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

We appreciate your participation today.