美國再保險集團 (RGA) 2010 Q4 法說會逐字稿

Good day and welcome to the Reinsurance Group of America fourth quarter 2010 conference call.

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.

Hi, good morning.

Welcome to RGA's fourth quarter 2010 conference call.

Greig Woodring, our CEO, will comment on the results we released late yesterday and provide earnings and premiums guidance for 2011.

We will then respond to questions from our participants.

I will turn the call over to Greig following a quick reminder of our 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 and earnings, and future financial performance and growth potential of RGA and its subsidiaries.

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

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

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

Good morning, thanks for joining us.

I will provide some brief comments on our fourth quarter results, provide guidance for 2011, and then open the line for your questions.

We had a strong quarter with overall favorable mortality experience and financial market conditions.

Consolidated operating income increased to $161 million, or $2.15 per diluted share, from $126 million, or $1.70 per share in the fourth quarter of '09.

Operating income per share was up 26%, including a favorable tax related adjustment of $0.20 per share, related to the fourth quarter legislation extending the active financing exception for 2010, and for another two years, and reversing the higher income tax accruals from the first three quarters.

For the year, operating income increased 15%, to $504 million, from $438 million in '09.

On a per share basis, operating income increased 13% in 2010 and totaled $6.75 including favorable foreign currency effects of $0.16 per share.

Operating ROE was 13% in 2010.

Consolidated net premiums totaled $1.8 billion during the quarter.

That's an increase of 11% on an original currency basis and 13% on a reported US dollar basis.

For the year, net premiums increased to $6.7 billion, or 13% on an original currency basis.

Excluding premiums from the ReliaStar acquisition, premiums were up 8% and 11% for the quarter and for the year respectively on a reported basis.

Net investment income totaled $355 million, this period, with an average yield on the portfolio of 5.43%.

We expect some continued downward pressure on our overall portfolio yield in 2011, driven by somewhat lower anticipated new money yields.

Impairment losses reflected in income, including mortgage loan valuation losses, were less than $15 million for the quarter, and totaled $36 million for the year.

Credit issues within the investment portfolio are clearly manageable at this point.

Book value per share increased 30% during 2010 to $68.71, including AOCI, reflecting strong net income contributions and an improved investment portfolio position.

Excluding AOCI, book value per share was up 15% to $56.34.

As I mentioned, the active financing exception legislation was extended in December, so the fourth quarter results reflected a $15 million reduction to the income tax provision adding $0.20 per share.

Turning now to segment results.

In our US traditional business, we reported fourth quarter pre-tax operating income of $107 million, compared to $82 million last year, primarily as a result of improved mortality experience which was better than expected in this quarter.

For the year, pre-tax operating income increased to $365 million from $340 million in 2009.

Premiums were up 10% for the quarter including the group reinsurance business and only 2% without it.

For the year, premiums rose 14% with the group business and 5% without it.

We expect a run rate of about 5% to 7% for traditional business in 2011.

Our US asset intensive business capped off a solid year with fourth quarter pre-tax operating income of $20 million, including $4 million related to the recapture of an annuity transaction, and that was up from $14 million a year ago.

For the year, pre-tax operating income was up 43%, reaching $66 million.

Financial reinsurance business performed well in 2010, contributing $18 million to pre-tax operating income.

Turning to Canada, which had an outstanding year, favorable mortality experienced in the fourth quarter led to very strong pre-tax operating income of $37 million, up 19%, from $31 million a year ago.

Excluding the effect of a relatively stronger Canadian dollar, the increase was about 13%.

Premiums rose 22% to $206 million in the fourth quarter.

For the year, premiums were up 30% over 2009, to $797 million, including $60 million from a longevity risk transaction added in the third quarter.

If you recall, this transaction included a one time advance premium of $43 million.

In Canadian dollars, premiums were up 17% for the quarter, 18% for the year.

Regarding our international operations, Asia Pacific posted a pre-tax operating income of $8 million this quarter.

That's down from $25 million last year.

The current period was depressed by elevated group disability claims in our Australian operation.

These elevated claims related to a single treaty, which despite the spike in the fourth quarter, has been profitable on an inception to date basis.

We are looking at potential remediation strategies for this particular treaty.

Pre-tax operating income for the year was $84 million, and relatively flat compared with 2009.

Fourth quarter premiums were up 14%, to $323 million, reflecting strong growth across these markets and a $21 million boost from currency fluctuations.

For the year, premiums rose 14%, and totaled $1.1 billion.

Excluding currency movements, premiums were up 3% for the year and in line with expectations, given the expected slow down in South Korea and Japan production.

Recall that we had several large treaties in those two markets that reached the end of their life cycles at the end of 2009, and we expect growth rates in Asia Pacific to pick up again in 2011.

We continue to be a leader in the primary Asian reinsurance markets and expect continued growth in these areas.

Europe and South Africa reported pre-tax operating income of $36 million for the current quarter, up 50% from $24 million a year ago.

Favorable underwriting results in all markets for this segment drove with the considerable increase this period.

Full year comparables were equally notable as pre-tax operating income increased 63% to $83 million.

Despite adverse effects from currency movements of $6 million, premiums were up 15% to $258 million for the quarter, including strong production from our UK operations and other European markets.

For the year, premiums were up 17% including translation effect and 18% without them.

So, overall, we are quite pleased with a solid quarter, which yielded annualized operating return on equity of 16%.

For the fifth consecutive year we produced an ROE of at least 13% and remain encouraged by future growth opportunities for all of our operations.

Our in force mortality risk now exceeds $2.5 trillion.

We were once again named best over all life reinsurer in the US market based on a client customer survey in the reinsurance marketplace.

Our investment portfolio and capital position continued to strengthen throughout the year, enhancing our ability to take advantage of reinsurance opportunities.

Lower investment yields in 2010 relative to '09 resulted in a drag on operating EPS of about 19% during 2010.

We expect further drag in 2011 from 2010.

We estimate our excess capital position to be in a range of $500 million to $600 million and continue to evaluate various deployment options.

We plan to comment more broadly on capital deployment at our Investor Day scheduled for February 17th.

Looking ahead to 2011, we have set an operating target of $6.70 to $7.30 per share, and consolidated premium growth of approximately 8% to 10%.

We expect ROE's to be around 12% to 13%.

Our guidance does reflects anticipated lower investment yields in 2011, lowering operating EPS by about $0.22 per share.

Coupling this assumption with the roughly $0.20 per share favorable immortality experienced in 2010, leads to a normalized growth rate of earnings of about 10% between 2010 and 2011.

We've provided additional premium guidance in our QFS, which can be found in our IR web site.

As I mentioned, we look forward to our Investor Day conference, which will be held on February 17th at the Pierre Hotel, in New York City, and we hope to see all of you there.

We appreciate your support and interest in RGA and are now ready to take any questions you may have.

Thank you.

(Operator Instructions) We will go first to Mark Finkelstein with Macquarie.

I guess I heard the comment on talking more about it at the February Investor Day.

But is there anything that you can say in respect of how you derived the guidance range on whether capital management is part of that equation?

Yes, Mark, this is Jack, I will take that question.

The guidance really does not contemplate any significant deployment of capital.

So you can think of that almost as a typical run rate without any meaningful refinement of the capital base.

Okay.

Then, I guess can you just maybe elaborate a little bit on the interest rate assumptions as well in guidance.

I mean, I recall the comment you made at the third quarter, if rates stayed essentially where they were or a new money yield, I should say, around 4%, it would be $0.20 to $0.25.

Obviously rates are a little bit higher now than what they were.

What are the assumptions that we are thinking about for 2011?

Did we freeze them from where we are today?

Are we assuming further increases in rates?

Maybe just walk through that, please?

Okay.

This is Jack again.

In terms of new money rates, we increased, relative to the comments at the end of the third quarter, in other words, we have introduced in to our modeling a slightly increased rate a little bit less than the current new money rates.

So, I guess one could argue it's still a little bit conservative, but not dramatically.

Okay.

Then just finally, on the issue in Australia, in the disability experience, I guess can you just elaborate a little bit on that?

Is it -- do you view that as just a one-time anomaly?

Is there an issue in some blocks underwritten?

Can you just kind of elaborate on what we're seeing down there?

Yes, Mark, this is a group disability case.

There is -- therefore, not individual underwriting on these particular policies.

It was a substantial flow of claims that came in, in December, they appear to be December claims.

We have 30% of the risks of the seeding company is incentivized to be on the same page we are.

We are working closely with them.

It is a short-term contract.

So, when I talk about remediation, the ultimate remediation of course is just to cancel and get off the block.

We will take a look at that and other options as we work our way out of this.

And it might be something that just occurred one time, or it might be something that we are going to have to do something about.

But it is a short-term contract and we don't expect long-term fallout from this.

Okay.

All right.

Thank you.

Our next question comes from Nigel Dally with Morgan Stanley.

Great, thank you.

First is with capital management, just had a couple of clarifying questions.

First, the $500 million to $600 million of excess capital, how much of that is at the whole curve relative to the subsidiary level?

Second, are the buybacks still the most likely use of that capital as an exhibition opportunity?

Perhaps we can start there and then I will come back with a follow-up.

Okay, Nigel.

This is Jack.

Most of that excess capital is either at the holding company currently or easily accessible to the holding company.

So you can think of the majority being accessible at that level.

In terms of the methodology that we are considering -- and we do this continually, so it's not a new activity, obviously -- but we look across the water front at buybacks or maybe various other methodologies that we could use to deploy capital, and including deploying capital into the business operations.

So, we are looking across the spectrum so to speak at how to refine the capital base currently.

Great.

I just had a quick follow up on the interest rate question.

I guess I'm still unclear why the negative here hasn't diminished since rates have backed up in the fourth quarter.

We typically look at the 10 year treasury.

Perhaps that's the wrong metric for us to be looking at, but it seems the negative [here] that you discussed last quarter, and this quarter hasn't changed despite the movement we've seen in rates.

Perhaps we can just -- provide a little additional commentary on that?

Yes.

Nigel, I guess your question relates to the guidance more than just the aberrations we are seeing quarter to quarter in the effective yield.

Is that right?

That's correct, yes.

Yes.

I guess I referenced it earlier.

Perhaps we are a little conservative in that we haven't used year end rates in terms of that guidance.

We have been a little bit conservative.

As I said, it's a little bit -- roughly between where we were in the fourth quarter, at the end of the third quarter and where we were at the end of the fourth quarter.

So, we could refine it.

It would likely drive that impact down somewhat.

But every month the rates are changing, so we kind of, at some point, just stop the refinement and just use that as a rough approximation of expected impact.

Got it.

Very helpful, thanks.

Our next question from JPMorgan from Jimmy Bhullar.

Thank you.

I had a question first just if you could talk about pricing trends in the US life reinsurance market; also just the year outlook session rates?

Because it seems like session rates have continued to decline over the past couple of years.

Then just to following up on the question on the disability business in Australia.

Could you be a little bit more specific on what the duration of that contract is?

If you were to cancel it, would it be -- would it still affect your results for a quarter or two or would it be a year or longer than that?

And then I have a follow up after these.

Jimmy, the pricing, it's not clear that there is a noticeable trend in pricing in the US.

There are some situations where we think the pricing is a little aggressive, but other times we think it's not.

And so it looks like it's pretty much the same environment we have been in I think, but you are correct in noting that the session rates continue to fall.

For RGA, our market share has been creeping up over the last couple of years while the market session rates have fallen.

So, you may not have seen too much of a fall off in our business.

But clearly, our business is off a little bit from the beginning of the year to the end of the year.

We expect that 2011 will see less production than 2010 in traditional mortality risk business in the US marketplace, but still at a reasonably good level.

So we are not unhappy with that.

In terms of the -- I don't know off the top of my head exactly when that contract terminates, Jimmy.

I think it probably does have somewhere between zero and a year to run.

So, it probably does have at least another quarter, but like I said, there was a spike in one month's claims.

It's not clear whether that is a trend or a one time event.

So, we will be monitoring that and our team in Australia is all over the case right now.

So, more to come.

This just happened in December, so it's a little early to know.

Do you expect any impact on your business from Solvency II, whether positive or negative?

Certainly in our European operations, we will be writing business out of entities that will be Solvency Ii-compliant.

So, to that extent, we will have to be aware of Solvency II, and we are.

We are prepared for that, or will be prepared for that if we are not already.

We do see that there are a lot of opportunities potentially coming out of Solvency II for a company like RGA that can take a look at stress put on certain organizations that have to be Solvency II-compliant.

We think that could really be the time when we start using a little bit more capital in to our business, but we have to actually see that happen before we get too excited about it.

But we are planning for it, we are working with companies at this point on Solvency II solutions.

Okay.

Thank you.

(Operator Instructions) We will go next to John Nadel with Sterne, Agee.

Good morning everybody.

I have a couple of questions.

Greig, in the release last night, I think one of your quotes indicated that claims experienced for 2010 was in line with expectations for the full year on a consolidated basis.

Yet, you indicated, I think in your prepared remarks this morning, that mortality was favorable to 2010 earnings by about $0.20 a share.

Can you give us a sense for which one of those we should be thinking about?

I think if you look at the overall picture, I think it's the latter that claims experience was a little bit favorable in 2010.

That as we refined our models during the course of the year, compared to where we were expecting things at the beginning of the year, we would have put it in that ballpark.

We also have -- had some very good experience in Canada this year and in the UK this year.

The US was, I think, pretty much unexpected, a little bit worse in the first part of the year and a little bit better in the second part of the year.

You put it all together, I think we are a little bit under for the year.

Okay.

Most of that coming out of Canada?

Well, you know it's -- you can say that, yes.

I mean, you could say that.

I mean, you could say that if you throw away one event, like the disability claims in Australia, you'd -- extra $0.10, but there is a lot of pluses and minuses, and Canada certainly had a very fine year.

Yes, okay.

Then can you just give us an update on the M&A environment, please?

Take the last couple of just -- last couple of quarters, I think you guys had indicated that there was at least one, maybe more than one relatively large sort of dial-moving potential transactions that you guys were looking at.

I just wonder where things stand today relative to a quarter or two ago?

Yes, we are certainly not counting on any down-moving M&A activity at the moment.

M&A activity seems to be a little bit farther distant today than it did in the third quarter, let's put it that way.

We are still looking at several potential opportunities, not insignificant, but they're at the very early stages right now.

So, really, there is nothing on the horizon.

Is it fair for -- can you give us maybe a sense for -- you know, because it sounded like there was at least a few things in -- potentially, anyway, in the works and a lot of things can -- a lot of reasons for things not getting to the goal line, right?

But can you give us a sense for, is this just sort of bid ask spread is too wide or was the -- can you give us a sense for why there hasn't been any follow through?

Typically the things we are working on, I don't know that anything has happened on them.

So, it isn't particularly a price competition.

But, as you know, these things, they come and go, and sometimes things look favorable, sometimes they don't.

We've been somewhat disappointed in not being able to put capital to work as actively as we wanted to over the last couple of years, as you know, if you have been following us.

We have done a lot of good organic business and a lot of financial reinsurance, but we haven't put capital to work in exactly the way we expected to maybe a couple of years ago.

But we still have a lot of opportunities out there, so we haven't given up certainly trying.

But at some point we will bow to the need to make our capital structure a little bit more efficient and return a little bit of that capital.

Okay.

Then just last one is on that excess capital, that $500 million to $600 million, is that a number that you would -- that you would feel that the rating agencies would agree with you on?

I think in the past you guys have indicated that on your own internal models, you actually viewed it as a little bit higher than that.

This was more, I think historically, a rating agency view of excess capital, is that still consistent?

Yes, John, this is Jack.

That's a reasonable way to put it.

That estimate of excess strongly weights the way the rating agencies look at our capital base.

Now, having said that, when we talk about refining capital, we would be reluctant to refine to the extent that we have no redundant capital.

So we always like to leave some degree of cushion in there.

Yes.

No, I get that.

Okay, thank you.

Our next question comes Andrew Kligerman with UBS.

Hey, good morning.

A few questions for you.

First, your premium growth guidance, I'd like to get a little color behind the regional growth guidance.

I guess you have 5% to 7% in the US and Canada, 10% to 15% in Asia and Europe, South Africa.

I guess how should we interpret that in the context of assumed new business production year over trend?

So, in the fourth quarter you were down 16% in the US; down 2% in Canada; down 14% in Europe, South Africa; and up 8% in Asia.

So I want to get a little color behind the regional growth guidance and then I have two quick follow ups.

Andrew, our premium growth in the US marketplace has been coming down for some time.

We expect it to be somewhere around the 5% mark next year, Canada a little higher than that.

They had a very strong year this year, they will have a tough comparison, but things are a little bit more active in Canada in terms of session rates staying up, at least for 2011.

But the growth is more from international markets and a little bit on the group side and the annuity side as well.

But international markets we expect Asia to pick up a bit from where it was this year and in 2011, and Europe we expect to have another strong year of growth in premium amounts in Europe.

So, a fair amount of momentum for us there.

What parts of Europe are strong?

And same question in Asia?

Well, we've had a good reasonable growth in the UK, but in addition we have seen high percentage growth in continental Europe because we had fairly low base there.

We expect that to continue into 2011.

In Asia, if you remember, growth is coming in everywhere except for Japan and Korea where we had this gap in our pipeline due to the termination of some -- or the natural expiration of some large treaties.

We are beginning to fill that pipeline back up.

So, we'ree bringing Korea and Japan back online.

Japan was up 8%.

So we are coming back and so we see that Asia as a whole, we see some more robust growth next year.

And the US 5%, that would be driven more by renewal than anything?

Yes.

Most of our premium is clearly renewal premium, not that first year.

Got it.

Okay.

Then shifting over to the US asset intensive business, you produced $20 million of pre-tax operating earnings.

I think in the past you were guiding for about $15 million a quarter.

So, I would like to get a sense of where you think a normal run rate should be?

Andrew, this is Jack.

Let me take that.

If you looked at -- rather than at a quarter, if you looked at the year to date, I think that's a reasonable run rate.

Maybe in terms of going forward, we would expect some modest growth.

But if you look at asset intensive in the mid to high $60 million range for the year, the financial reinsurance at $18 million or so, that is pretty representative in terms of expectation with the modest growth rate on top of that going forward.

Okay.

Good.

You kind of hit into my follow-up question.

I think I heard you say $18 million for financial reinsurance for an annual run rate?

That's right.

You did about $5.6 million in the quarter, so I will assume that financial re was just a little high this quarter or --?

Yes, that's right.

That's correct.

So, nothing in particular to read in to the higher numbers in asset intensive and financial re this quarter, just --?

No.

And if you look at it quarter to quarter you will see some degree of volatility or aberration there.

We did mention a recapture of a financial reinsurance treaty.

So that drove the fourth quarter a little bit.

But we have those from time to time.

That's why I try to guide you a little bit more towards the annual results, because that gives you a better feel for run rate.

Got it.

Okay.

Look forward to seeing you at the Investor Day.

We will go next to Jeff Schuman with KBW.

Good morning.

I had a few follow ups on Australia.

Can you give us a little bit of a sense of the size of this disability book, and then remind us of the overall size and complexion of the Australian business generally, please?

Yes, Jeff, the -- let's see -- Australian business is somewhere around $600 million.

It's split 50/50 more or less, and so actually a little bit more weighted to group than individual.

That's group life and some lump sum disability.

The breakdown between life and lump sum disability coverages in that is something I don't know off the top of my head.

But we have a significant amount of group business in Australia.

It's the one place outside of our US operation that we acquired from ReliaStar that we have a big group operation at this point.

Okay.

So, this originated with ReliaStar, is that what you said?

No.

This is legacy RGA.

This is legacy RGA.

Yes, we have a big group operation in Australia.

Okay.

And what did you contemplate for this piece of business in the 2011 guidance?

Did you budget for any softness or not?

No, we didn't.

Okay.

Separately, I was wondering could you give us a little update on your thinking about life settlements?

I mean, the issue has continued to be pretty visible recently, a lot of the primary companies are litigating, other parties are trying to raise capital to do a lot of settlementtransactions and think there are opportunities there.

Given your strong presence in the facultative market, you have a lot of exposure to higher age, larger amount policies.

What's your current assessment of the extent to which you may have been exposed historically to STOLI type business and selection concerns, and in terms of kind of how you see the marketplace today in terms of underwriting and primary companies really screening out that sort of business?

The settlement business is a lot less than it was during its heyday.

I mean, I should say the STOLI business.

There is a lot of settlement activity in policies that are already issued, but we are not envisioned to be settlement policies at the time of issue.

The STOLI, where the policies are issued with the intent to settle at the time they are issued, is the abuse that I think everybody is trying to stamp out.

RGA was the first company I think in our marketplace, either direct or reinsurance, to start raising rates at old ages.

We did that in about 2005.

And I think at Investor Day you will see pictorially one of the charts that I've actually previewed that exactly how much exposure we have relatively that predates that.

So we do have a little bit, but from that point on, we think that we are pretty well covered in terms of having the right mortality prices, in terms of covering those older age risks.

Just as a practical matter, I mean, do you think your mortality experience is likely to be very sensitive based on the volume of secondary market transactions?

In other words, people who buy these things clearly believe there are some opportunities, but then I think some of the experiences of these investors hasn't been that great.

I think in the UK there was some funds put together to invest in settlements and they have not performed particularly well.

I mean, is there a big arbitrage there or not?

Well, no, I mean, you are right.

Most of these settle policies have not performed like the investors who bought them as investments have predicted, and I think they are getting a little bit better at gauging where the mortality is, but some of these have been resold, as you may know.

There is an active reselling of some of the funds that is popping up because of the troubled nature of the experience.

It's very difficult to get a good spread of risk in some of these deals, and it's very difficult for investors to invest in mortality at that sort of level and have some confidence that they are doing it right.

Okay.

Thanks a lot, Greig.

From Raymond James and Associates, we will go next to Steven Schwartz.

Good morning, everybody.

I've got a lot of little follow-ups, but if I could follow up quickly on what you just talked about with Jeff.

It was my understanding that the life settlement business really wouldn't have that much effect on you all, since you basically transform whole life and universal life policies into yearly renewable term as part of the reinsurance.

Am I misunderstanding?

No, that's correct.

That's correct.

What I was trying to say, though, Steve, is that there was a period in, say, 2003 or so, 2003, 2004, where there was some of this business starting to be put out into the market before rates adjusted at older ages.

And so we do have a little bit of exposure there, but it's not overly troubling.

Okay, great.

Okay.

Then if I may on my own.

I'm wondering about the guidance for new premiums in US traditional new business written was down; obviously it sounds like you are suggesting it's going be down year on year, I understand that.

In your modeling, Jack, you see insurance in force in the US traditional side, do you see that being up year on year?

Yes.

But we do see the new business volume trending down -- I'm talking about the US now -- trending down in 2011.

But the in force as a total should still be up?

That's what I want to --

That's right.

Okay.

And then, if I may, following up on the spike in the Australian DI business, you said that was one month, but maybe I missed it.

Did you say which month that was?

That was December.

That was the reported month.

That was the -- okay.

And then one more.

We've -- you've talked a lot in the past, so it's nothing new, about the slowdown in Japan and Korea as the old contracts ran off, new contracts hopefully coming on.

I know there are all kinds of reporting issues in Asia Pacific to begin with, but new business written in Asia Pacific was up significantly year-over-year in the quarter.

I'm wondering if that's a harbinger of what is coming or is that just one of those things with reporting?

Don't know for sure until we get some perspective on it, Steven, but it's -- we do expect that it will pick up.

So, it could be a harbinger; it could just be a big quarter.

Okay.

One more if I may, investment income, on US traditional was down a lot, sequentially, I know yields are -- obviously new money yields are down so the effective interest rate on the portfolio there is down.

But that seems kind of like a lot.

I think there was like a $5 million decrease.

Was there anything there, Jack?

Was money moved from one area to another or something like that?

No.

Part of that relates to the yield was up in the third quarter because of some private equity investment.

Kind of some lumpy reporting there.

So it relates a lot more to the third quarter than it does the fourth quarter.

But that impact as well is just a gradual decline in effective yield on the portfolio.

Okay.

Great, thanks very much, guys.

We will go next to Peter Suss with Surveyor Capital.

Just two quick questions.

The first one is did you have any FIN 48 benefit in 2010, and do you assume that you have any benefit in 2011?

Yes.

We had very little FIN 48 benefit in 2010, just because we didn't close any particular tax year.

We have resumed closing one tax year in 2011, that's contemplated in the guidance.

So, since you didn't close any last year, is it possible that you closed two in 2011?

Yes, it's possible.

Then how much of a benefit would that be -- if you closed two?

You could think of closing any one year is probably, round numbers, $10 million or so.

Okay.

Then just for foreign exchange, what foreign exchange rates do you assume in guidance?

Do you take year end or do you take something else?

It's centered pretty much on effective rates at year end.

Yes, okay, great, thank you.

(Operator Instructions) We will take a follow up from John Nadel with Sterne, Agee.

Follow up, guys.

I just had a question for you on the capital management.

I understand you guys are going to -- Greig, from your commentary, that you are going to give us a -- maybe lay this out a little bit more detail in a couple of weeks at the Investor Day.

But I guess just -- is that telling us that you guys just aren't quite done yet with that overall view of your capital and finalizing your strategy there?

Or is this just a "guys, just wait until we're up in front of you"?

(laughter)

(multiple speakers) I don't know if that makes sense.

I guess I'm trying to understand why you guys are separating the -- provide the formal guidance versus the more elaborate or deeper discussion of your capital management strategy.

No, John, that's certainly a fair question.

It's more of the former as you laid it out.

We are kind of actively deliberating on what makes the most sense at this point in terms of capital refinement going forward.

So it's not to say we couldn't have some degree of discussion right now, but we are right in the middle of it and we haven't made, although we are close, we haven't made any particular decisions.

So, we thought it better just to wait until mid February when we have the Investor Day to lay it out.

But it's more the former.

We are in active deliberations, kind of, as we speak.

Then I guess just as a follow up to that.

I appreciate that.

Assuming some level of capital management, whether it's a buyback or something else, is injected into sort of the financial plans for 2011 and beyond, is it fair for us to assume that you would revise your guidance commensurate with that?

I know that your EPS is a -- your EPS guidance is a significant driver of management compensation plans and otherwise, and just wanted to get a sense.

We very likely -- what's the best way to put it?

We wouldn't formerly revise guidance because, as a matter of policy, we don't do that.

Now, having said that, to the extent we do announce any kind of capital refinement, there will be a discussion on potential impacts on ROEs and EPS and so on.

Okay.

Thanks, guys.

Mr.

Lay, at this time there are no further questions.

Sir, I will turn the call back over to you.

Okay.

Thanks to everybody who joined us this morning.

Thanks for the questions and the interest in the stock.

And to the extent additional questions or issues come up, feel free to give us a call here in St.

Louis.

And with that, we will end the call.

Thank you.

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

We thank you for your participation.