美國再保險集團 (RGA) 2011 Q2 法說會逐字稿

Good day and welcome to the Reinsurance Group of America second quarter 2011 conference call.

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.

Okay.

Good morning.

This is Jack.

Thanks to everyone for joining us this morning for RGA's second quarter 2011 conference call.

With me this morning is Greig our CEO.

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

Following Greig's prepared comments we'll open the line for your questions.

To help you better understand RGA's business we will make certain statements and discuss certain subjects during this call that will contain forward-looking information including among other things comments about investment performance, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries.

Please keep in mind 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 we issued yesterday.

In addition, during the course of this call we will make comments on pre-tax and after-tax operating income which is considered a non-GAAP financial measure under SEC regulations.

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

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

These documents and additional financial information may be found on our Investor Relations website at www.rgare.comWith that I will turn the call over to Greig for his comments.

Thank you Jack.

Good morning to everyone.

Thanks for joining us.

The consolidated results for the quarter were in line with our expectations.

We had mixed underwriting results including better than expected performance in Canada and some adverse results in some of our international operations.

US operations, are largest segment, performed in line with expectations including solid contributions from asset-intensive business.

On the whole we met our expectations in terms of reported operating income which totalled $128 million or $1.72 per diluted share, up from last year's $122 million or $1.63.

Foreign currency fluctuations helped operating income by $3.8 million or about $0.05 a share.

Annualized operating ROE was 12% this quarter, or was 13% over the last 12 months.

Consolidated net income totalled $133 million or $1.78 per diluted share up from $127 million or $1.70 per share last year.

Reported premiums were $1.8 billion, up 13% quarter-over-quarter.

Ignoring the lift from currency fluctuations premiums rose 8%, a little off our expected pace perhaps.

Investment income increased 16% this quarter totaling $337 million with the yield of 5.35%.

Yield was down compared to last year's second quarter while it was flat with the first quarter of 2011.

Contributing to the increase in investment income was a $20 million rise in the fair value of option contract supporting equity index to annuities.

Without the effect of those option contracts, investment income was up 9% quarter-over-quarter.

A good result which reflects the continued growth of our invested asset base.

Investment impairments were relatively low again.

Our net realized gain position increased nearly 25% this quarter adding over $2.00 to book value per share which now stand at $71.88 per share.

Excluding all other comprehensive income, book value per share is $57.51.

Capital management continues to be an area of focus for RGA.

We're pleased to report a 50% increase in our quarterly shareholder dividend, which as announced yesterday, rises from $0.12 to $0.18 per share.

This action reflects our strong capital and liquidity positions while providing flexibility for future growth opportunities.

Further, we took advantage of the relatively low interest rate environment to issue $400 million of senior notes in May.

Turning to our operating segments, our US traditional business produced pre-tax operating income of $93 million compared to $96 million last year.

Premiums were up 4% this quarter totaling $974 million.

Our large mortality block performed in line with expectations.

However, we did experience some normal adverse claims volatility in our group LTD business contributing to the slight decrease from an excellent 2010 result.

Our US asset-intensive business reported another strong quarter with pre-tax operating income of $20 million, up from $16 million a year ago.

We still expect an average run rate of $15 million or $16 million per quarter from this business.

This quarter we benefited primarily from better than excepted spreads on our equity indexed annuity blocks.

Also our financial reinsurance business performed well this quarter with strong fee income.

That business reported $7 million in pre-tax operating income, up from $4.4 million a year ago.

Turning now to Canada, the pre-tax operating income rose sharply to $42 million, up 27% over a strong $33 million result last year.

Virtually everything went our way this quarter including strong premium growth better than expected mortality experience and favorable currency fluctuations.

Premiums rose 18% to $210 million for the quarter including 7% from favorable mortality.

Sorry favorable foreign currency movements.

Even without the help from the stronger Canadian dollar, we are quite pleases with the 11% boost in original currency.

Recall that our Canadian operations had a very good 2010 and 2011 has continued that trend quite strong as well.

Our international operations had a difficult quarter in total, driven primarily by poor mortality claims experience in Australia and the UK which are our two largest international markets.

First in Asia-Pacific, we reported pre-tax operating income of $8 million, down significantly from $22 million in 2010.

Higher than expected mortality claims in Australia coupled with slightly adverse claims experienced in Japan more than offset good results in southeast Asia, Korea and Taiwan.

Reported premiums were up 23% to $316 million for the quarter in local currencies premiums rose 8%.

We expect premiums to pick up in Asia during the second half of 2011.

Next our Europe and South Africa segment reported pre-tax operating income of $15 million for the current quarter, down from $21 million last year reflecting adverse claim results in the UK of business that reported strong results in the second quarter last year.

The UK results were offset in part by good claims experience in other European markets in South Africa.

Premium growth was robust totaling $283 million up 35% quarter-over-quarter with strong contributions from the UK and from South Africa as well as from many of the other European market.

In local currencies premiums were up a strong 23%.

We believe the higher than expected claims experience this quarter in our International operations reflect no more than short-term mortality.

We have seen in recent years such volatility tends to even out over time.

The negative volatility this quarter was largely offset by our North American businesses, a diversification benefit we continue to see play out.

Overall we're pleased with the second quarter.

Look forward to the second half of 2011.

We continue to focus on efficiently managing our capital base and we look for opportunities to grow our global businesses.

We strive to exceed our clients' expectations and we're well positioned to assist those clients in most of the major insurance markets around the globe.

Our inforce continues to grow, now topping $2.6 trillion of mortality risk in force.

As a leader in the life insurance space we expect to continue our long run of delivering solid results and a value to our shareholders.

We appreciate your support and interest in RGA, and now we'll take any questions you may have.

Thank you.

(Operator Instructions).

Our first question this morning will come from Jeffrey Schuman with KBW.

Thank you.

Good morning.

I was wondering if we first talk a little bit more about capital.

I think earlier in the year you had said you probably wouldn't buy back more stock this year, but then as you noted you did do the $400 million debt raise which gives you some more flexibility.

So is share repurchase back on the table, or are you thinking more in terms of looking for opportunistic situations, or how should we think about capital for the balance of the year?

Jeff, this is jack.

I think its more the latter.

We certainly did raise an additional $400 million.

I look at that as $200 million because we really earmarked $200 million to finance some $200 million of debt that's coming due later this year, but you could argue that we have roughly $500 million of redundant capital.

We want to maintain some level of redundant capital at any point in time, but it does give us a little bit more flexibility.

I will say we haven't determined that -- because of that flexibility we want to return some later this year.

It's more held for opportunities.

Now having said that, if we get into next year and we don't see opportunities, we will certainly look to make the capital base as efficient as possible, and that could include return of capital or a number of other options.

Okay, and that's great.

And then one other area, if I might.

In the US I think premium growth year-to-date is maybe 3%, 4%, a little bit below your target range for the year.

Can you give us any color there or thoughts about whether the 5% to 7% is still a good range?

Yes.

5% to 7% is still an okay range, but probably shooting towards the bottom of that.

There is a couple things that are affecting that, Jeff.

First of all there's been an increase in lapse rates, so we are seeing a little bit more lapsing of policies.

I don't know if that reflects the economic environment or what, but whatever the cause though, we have seen that over the last six, nine months or so.

And secondly, some of the business that we have relates to taking pure mortality risk on some of the guaranteed minimum death benefits and that premium, of course, because the stock market has come back, has really dried up.

That's where we just ensure the mortality risk one month at a time, not take the long-term market risk at all.

But that business, when the market goes down, the amount of premium widens considerably and when the market goes back up, it comes back in.

So that's been a downward pressure on growth rates in the US for the last couple of years, obviously, as the market has come back.

Okay.

And just to follow up on the persistency.

Is that related to age at all?

Is it a function of the higher age market, or where are you seeing -- I am just wondering if there's been any change in the secondary market?

No.

It's mostly on term business and it's pretty broad based, Jeff.

Okay.

Thanks a lot, Greig.

We will take the next question from Jimmy Bhullar with JPMorgan.

Hi.

Good morning.

Thank you.

I had a couple of questions.

The first one is just on the disability block that experienced high claims.

Could you give us an idea on whether this was one client, spread across several clients?

And then just talk about your ability to reprice this.

Is this annual, or reprised annually, or [if it was less of a] (audio difficulty) frequency?

And then secondly on cession rates.

It seems like cession rates in the US market continue to decline.

What your outlook is for growth in the US life reinsurance market over the next few years if this trend sustains.

Yes.

Jimmy, on the LTD business it is priced annually, it is one year business.

It is coming from a number of clients, but as a reinsurer we do take a fairly large chunks on individual cases, and so this business tends to be quite volatile.

Since we've been incorporating the numbers from the group business into our operations at the beginning of last year, business has performed very well, better than expected over that time, but it does bounce around on a quarterly basis.

So this is potentially a volatile business on the LTD side, but it does reprice each year.

And was this one client this quarter or was it a number of clients?

No, no.

It's a few individual [lives] (audio difficulty).

Okay.

And in terms of session rate declines we continue to see session rates declining.

We see one major company, for example, in the second quarter starting to retain significant more of their business going forward.

So we see that pressure continuing on.

We expect to hold our business reasonably flat and see reasonably strong new business activity, but clearly it's not the bullish market that it was for traditional life reinsurance a number of years ago.

Okay.

Thank you.

The next question will come from John Nadel with Sterne, Agee.

Hi.

Good morning.

So just following up on the group disability question.

We look through the statutory filings and found that a few of your larger counterparties are StanCorp and Met and Delphi and to Jimmy's questions, or just following up on Jimmy's questions, is there anything specific there in this quarter?

I mean, obviously, we saw poor results from StanCorp last week, but is it more than just a few individual lives, is this more case specific or no?

No.

It's not.

You are really talking about a few lives can swing this business from quarter-to-quarter and recoveries can swing this business from quarter-to-quarter in the other direction.

So there's really not any place that we're overly concerned about, nor are we concerned about the profitability of that line as a whole.

As I said, so far that line has performed excellently for us.

Okay.

And just can you give us an order of magnitude of at least relative to your normal expectations for that book, I mean in dollars how much of a factor was that this quarter?

John, this is Jack.

You could size it.

It's not that significant.

About $5 million pre-tax --

Okay.

would be the fluctuations this quarter.

And then just around the one year or the annual nature of these policies.

Is this more your ability to go and reprice the treaty with the counterparties, or are you more dependent upon the primary insurer going out to the market and repricing their business?

A little of both.

It's a typical group business.

It's got to be placed by the carrier and renewed in the marketplace and then it's got to be renewed with us.

And companies may decide from year-to-year to be reinsuring some or not reinsuring some as well, and so there's' a couple decision points in there, but it clearly has a pricing characteristic every year.

Okay.

And then just totally separately.

Just looking out to the potential change in DAC accounting.

Do you guys have yet a estimate for what impact that ultimate change in accounting would have on both your current DAC asset as well as future amortization?

John, this is Jack again.

That analysis is under way.

We don't yet have a number with any specificity that I would be comfortable giving you at this point.

Okay.

Not even a ballpark or like 2% to 5% of DAC or 5% to 10%?

Not yet.

Not yet.

Okay.

Thanks very much, guys.

(Operator Instructions).

We'll now hear from Andrew Kligerman with UBS.

Hey.

Good morning.

A couple of follow-ups.

First just with regard to the capital management question, M&A --

Andrew, having a hard time hearing you.

I'm sorry.

Let me just -- can you hear me better?

Yes.

That's fine.

Okay.

Sorry about that, okay.

With regard to M&A, as a follow-up are you seeing much activity in the second half, do you expect to complete a block acquisition, or do you think we'll end up next year seeing something in terms of capital management?

That's always hard to estimate, Andrew.

We're always working on a few things, and some of them are more likely than others.

I would say it's lukewarm at the moment as opposed to hot in terms of the environment, but it's lukewarm instead of cold, as well.

One of the things that we're excited about, potentially, is the future needs for reinsurance to help companies manage their capital with respect to Solvency ll in Europe.

So that's may be still a ways away before that heats up to the pitch that we hope it gets to ultimately.

So the Solvency ll could be sizeable transactions then?

Well it could be depending on how things evolve, but it certainly could be a situation where there are a lot of opportunities from companies who need to bolster their capital or do something with their own capital measures under the Solvency II regime.

Got it.

And then with the really sharp decrease in cession rates over the last several years.

Of course, supply then has fallen.

Does that mean that the pricing -- I mean supply is pretty wide now in terms of reinsurers.

Does that mean that pricing is coming off amongst you and your competitors?

Are you lowering your pricing?

I would say no.

That you would expect that because supply is quite a bit greater than demand is that you would see some price differential, but it's such a long-term pricing business that nobody has become crazy at this point, and so we're not really seeing a lot of real pricing pressure.

That's not to say that it isn't competitive or that occasionally we don't see something that we don't understand, but for the most part the market is behaving reasonably responsibly in our opinion.

Great.

And then just in terms of the long-term disability block, could you just size the premium in force and what the benefit ratio was in the quarter and where that might have been a year ago or last year?

Since you don't break that out in the supplement.

Yes, Andrew, this is Jack.

The premium level annually is $35 million to $40 million.

I would say that the fluctuation from last year is probably -- because we had some positive variants, so to speak, last year it's probably in the $8 million to $10 million range.

$8 million to $10 million?

I don't have the margin number handy here.

Okay.

That's the variance over last year in the quarter?

Yes.

Okay.

Hey Andrew, just to clarify that's for the first six months versus the first six months of last year.

Got it.

And then just lastly maybe the same question around the UK.

What's the premium volume on that book and maybe you could give us a variance, or the benefit ratio on that business versus last year?

Yes.

Andrew, this is Jack again.

We don't typically break it down by country level in terms of putting out margins and variances and so on.

I would say overall, Andrew, the premium in the UK is something like $800 million give or take a range around that.

Now, some of that is life business, some is critical illness, some is longevity business these days.

The life is the biggest piece of that, critical illness is sizeable and longevity is growing.

And the variance around the UK in terms of the impact there?

In terms of excess claims this quarter I would say we ended up somewhere around say give or take $5 million to $10 million over -- this quarter and we had a strong -- we had roughly the same amount going the opposite way last year in the second quarter.

I think is your question.

Comparison quarter-to-quarter.

Perfect.

Thank you very much.

And Steven Schwartz with Raymond James has the next question.

Yes.

Hey, guys.

Just real quickly was that for the Company -- before I get into my question -- besides the $10 million -- was that for the Company as a whole or was that for one of the segments?

That was the ESA segment.

Just the ESA segment.

Okay.

I just want to make sure.

Okay.

If I can beat the DI horse some more, it sounds, Greig, when you say, "it's just a few lives", are you talking about frequency here, or are you talking about a couple of high insured lives?

Are you talking about severity here?

You're talking about severity, but remember that we're taking excess here, so the amounts tend to be large on average.

And the reserves that you setup when there is a disabled life are very high at the outset.

Okay.

Now let me ask you this.

Most of the business that you do on the DI side, is that, I guess for lack of a better term, is that normal flow business or are you primarily reinsuring closed blocks of claims?

It's primarily normal organic flow business.

Okay.

And were these losses from the normal organic business, or were they from the closed blocks?

Yes.

They are from the normal organic business.

Okay.

Alright.

That's what I wanted to know on that subject.

Looking out longer-term I believe ReliaStar was a big player in stop-loss.

I don't know but there have been a number of articles studies talking about what could happen to the group business with small companies, in particular, putting their employees into the exchanges.

Have you guys thought about that?

What your exposure might be?

You mean the stop-loss medical business?

Yes.

That's a proportion of our overall business from ReliaStar.

That's been performing very well.

Okay.

But any thoughts on what that might look like in the future, or not yet?

No.

I think we've got a very credible and experienced team that's navigating all those waters up there in Minneapolis.

They do a great job with this business, and I think they'll be watching it very carefully and maneuvering as things evolve.

Okay.

And then two more quickies, if I may.

Jack, in the corporate and other we've got some volatility in -- I have to put on my glasses here, excuse me -- in the other operating expense shoots up from $13.6 million in the fourth quarter, up to $17.6 million, down to $13 million?

Anything going on there?

No.

I think if you take a look I would advise you to take a look at the year-to-date run rate and that's pretty much what our expectation will be.

We are going to have some degree of volatility quarter-to-quarter.

Okay.

And then, Greig, back to you.

Korea, Japan; new programs.

How is that coming along?

In terms of trying to fill off some of the holes in the pipeline --

Yes.

I guess is your question.

Yes.

Korea is coming on.

It's a little slower than we expected in terms of materializing some of the premium through.

The results are strong this year so far, but the premiums are a little bit lagging what we expected.

They're up from last year, though, and we have seen, I think, the turnaround there.

In Japan we are still struggling a bit to fill up some of the pipeline because we had some really big deals come to an end, and so it takes awhile to fill that back up.

But we're actually quite encouraged with the way Japan is developing, and the things happening in Japan for us.

Okay.

Great.

Thanks, guys.

We'll now hear from [Thomas] Gallagher with Credit Suisse.

Good morning.

Question on Asia-Pacific.

What gives you confidence that this is a short-term blip?

That we're going to get back up to normal profit ranges that you have seen in the past?

If I just look at the last year or so, you've had two quarters in the $8 million pre-tax range, two quarters mid $25 million to $27 million.

So how should we be thinking about that business, and maybe just discuss a little bit about what you saw in Australia and why you think it's just a short-term issue?

Well, that is something that we always worry about because whenever we do have a blip we do all the investigation we can possibly do to assure ourselves that it can be a random event and there's no systematic problem that we're uncovering, or treaty, or something like that we need to deal with.

Now, we did have a problem with a particular LTD situation last year in Australia, and this year what we've seen in the second quarter was individual claims coming from five or six different companies in large amounts.

So we've basically saw a lot of large claims hitting us at one particular time.

Now, until you go down the road some ways, you can't put that in perspective exactly, but this is a business that's performed okay in the past, and our Australian operation is a good operation that has had a long history of excellent results.

And it's had frankly, some difficult experience in the last 12-months or so in a number of different directions, so they're working hard to overcome this and we will hopefully see this all turn around.

But we see no reason based on the claims, where they came from, how they're spread in the organization, or in that one operation from different companies, different years, different treaties to conclude that it's anything outside of the ordinary.

It's not a statistically significant event in the sense that it's well outside the range.

It's very possibly and likely -- very likely actually, just a fluctuation.

Okay.

And so it's severity, not frequency?

Did you say they were larger than expected claims ?

Yes.

In this case it is.

Like I said, they did have a problem with one treaty that we talked about in the fourth quarter last year, and that treaty runs through the end of this year.

There was an opportunity to increase pricing at the July 1 point, which has happened that the client -- it's a group case and the client and ourselves are both all over it and trying to manage it as best we both can.

And so that particular case, I think we'll see the end of it at the end of the year.

Got it.

Okay.

And just on the lapse rate comment you made on term life in the US.

I don't know if you can discuss at all the types of policies.

Were these ten-year level term or was there a specific reason why you think you're seeing the increase in lapsation from a specific product type?

And also have you now fully reflected that in your DAC amortization, or is that something you're going to have to watch in terms of looking at the path of DAC amortization as it relates to lapse rates?

Yes.

No.

First of all I don't think it affects our DAC amortization at all.

Some of it is ten-year term policies and if the lapse rates are more than we expect after ten years, we would have all of our DAC amortized by then anyway so that's not an issue.

The lapse rates are something we've been studying and have just produced quite a bit of information about.

I think it's going to take some time to really understand exactly what's driving it.

It's not easy to see in the instant exactly all the things that are going on, but it's clear that lapse rates have increased a bit.

Okay.

Thanks.

We'll take a follow-up question from John Nadel.

Thanks.

I just wanted to follow up on Solvency II.

Greig, I definitely understand the theory that implementation of Solvency II could have a positive impact on opportunities for reinsurance activity for you guys to help out some of the companies implementing, and where they might see opportunities to use reinsurance a bit more effectively to manage their capital.

But I guess I'm also wondering on the flip side, given your sizeable foreign operations, if we need to think about the implementation of Solvency II for RGA as having any impact on your own capital levels, and how much you'll need to hold in your foreign operations?

Should we think about that $500 million, or roughly $500 million of excess capital maybe a bit differently under that scenario?

No, John, we don't really expect that we are going to have a big capital event with Solvency II.

We will have to comply with Solvency II and will do so, but for most of the types of business we have on the books at this point it's not an event.

Okay.

I mean it's my understanding -- maybe you could give us your thoughts.

It seems that at the margin the biggest impact of Solvency II, at least as it relates to insurance companies, it appears that it has more of an impact on the higher asset leverage type products like annuities, et cetera.

Yes, it does.

Long-term guarantees and high asset amounts have big capital charge, potentially, and it's typically why YRT business or risk business does have some long-term guarantees in it, but some of that's overcome by being able to take some of the present value of future profits into the picture too.

So the picture for us doesn't look like we're going to be sticking any considerable amounts of capital over and above what we've already got, which are pretty high.

I mean we already have a lot of capital allocated to European operations.

Okay.

And then just a bigger picture -- maybe follow-up thinking about premium growth levels, especially -- or just in relation to your original guidance for 2011.

I think we were looking at the US and Canada guidance 5% to 7% growth for the year; Europe, South Africa and Asia-Pacific 10% to 15% growth.

I think that's ex-currency.

Where you stand year-to-date, how you look at those targets, what should we be expecting for 2011, and maybe just a hint on what it looks like a little bit longer term?

Yes, John.

The currency always gets in the mix as well, and I will try to pull that out, but as we sit here through six months we're very happy with where we are.

Our premiums and revenues are coming in a little stronger than our original plan going into the year, and our earnings are pretty much right on what we expected through six months and so we see no reason to adjust our thinking at all on average.

Now, if you were to ask would we adjust individual -- if we go down to country level or product line level, yes, we would certainly have some pluses and minuses, but overall we would say we're doing exactly what we thought we would do through six months and that's a happy place to be in some ways.

Okay.

And then related to that; just thinking about that organic growth rate.

I think on a consolidated basis what that put your premium growth rate at was about 8% to 10%, if I recall.

And if we thought that 8% to 10% was a reasonable longer term view, under that scenario about what proportion of your annual earnings do you think would represent free cash flow?

Yes, John, this is Jack.

That's always a hard one to answer because it's affected by so many different things, but I think you could look at, and I think we have mentioned this before in very general terms, redundant, or call it additional retained earnings, that result in redundant capital in the neighborhood of $200 million per year.

Just so I understand that.

So $200 million of your annual earnings would be necessary to be retained?

Yes.

To support that --

No.

That would be the excess, John.

That would be the excess.

So $200 million of your annual earnings could be deemed excess under that organic environment?

That's correct.

That's very helpful.

Thank you, guys.

And we'll now take a follow-up question from Andrew Kligerman.

Great.

Thanks.

Just a little color on the interest rate outlook.

Ten-year treasuries have come down 40, 50 pips in the last quarter or so.

What are your thoughts as we move into the second half of the year, and any material changes in investment income?

Yes, Andrew.

Because our reinvestment rate is lower than the portfolio yield, we do expect to see a gradual continual decline under this rate scenario and non-investment income.

You probably noticed the effective rate was identical first quarter to second quarter, but that's affected by a number of the different things including how much of the portfolio is rolling off and reinvestment opportunities and all that sort of thing.

But if you take a step back, we would expect to see, still a continual -- not significant, but gradual decline in effective yield.

Any magnitude?

So was it 5.35%, or something like that off the top of my head?

Fine.

That's fine.

Maybe you see like a 10-bip decline, do you see 20%, 30% over the next 12-months?

Where do you think the trends going?

Yes.

If you wanted to annualize it I think 20% to 25% is not a bad estimate.

Over the course of a year?

That's right.

And then the pressure kind of remains at that level annually?

Yes.

If we stay --

Yes.

In the current scenario.

That's right.

Got it.

And I guess a new business for you over the last two years or so has been long-term care.

Just curious about how big the book has got, and has it been performing well?

Just what are your thoughts about the long-term care book that you have?

Yes.

This is Greig, Andrew.

The long-term care business has been performing very well so far.

That doesn't tell you so much because it's still fairly early days, but a little bit better than expected in terms of experience.

It's about $150 million of annual premiums, so out of our $7 billion of premium it's a small percentage, but it's been doing fine.

And you expect to see a lot of growth there or are you not going to move very quickly?

Well, we don't see skyrocketing growth.

We do expect to see a little bit of growth.

This business sticks around, so every year's premium adds a little bit more to the book.

From the base we started it will continue to grow at a nice percentage clip, and it wouldn't surprise me if we're adding $50 million to $75 million a year to that for awhile.

Thanks a lot.

And we'll take a follow-up question from Steven Schwartz.

Hi, guys.

Yes.

A couple.

One more on the group DI.

I just want to make sure that I understand what's going on here.

The primaries, they do new business, they get new clients, they generally have a rate guarantee period; two, maybe three years.

You're not tied into that at all.

Is that correct?

I think, Steven, that may depend on the treaties.

I don't know exactly in these particular cases that had some claims whether we're tied in for a longer period than one year or two years, but we have a contract that's typically renewing each year with the underlying company, and it's not necessarily tied to their direct contract with the underlying groups.

Okay.

Yes.

That's what I wanted to make sure about.

And then just on the lapsation question.

Jack, if you were in our shoes how would you track this?

Historically what I have done is on a quarterly basis I start with assumed business in force, add in new business assumed, you subtract from that the assumed business at the end of the quarter and that, I thought, gave me my lapse number.

Is that an inaccurate way of doing this?

No.

Steven, it's fairly general, but yes, that's in the ballpark.

Okay.

Because I am wondering because it does not show, and maybe this is mix that you're really talking about, but that wouldn't necessarily show an increase in lapsation six months-to-six months or even in a quarter-over-quarter.

Yes.

There's so much noise in that is the problem, Steven.

Really when we talk about that what we do is a true actuarial study which says lapse rates in year 7 for ages X to Y are supposed to be a certain level, and they're a little bit higher than that.

Okay.

Alright.

Okay.

So it just sounds more like product specific mix.

Okay.

That's what I had.

Thanks.

We'll take a our next question from Colin Devine with Citi.

Good morning.

A more generic question.

Guys, I assume you certainly have been approached many times to look at variable living benefit blocks, and also secondary guarantee universal life and I wondered what it is that you see in those products that has made you I guess very reluctant to reinsure them ?

Well, Collin, we did do some variable annuity reinsurance.

We got into that, we thought carefully, picked what we thought were the best designed products from our perspective, built the capabilities to manage the hedging required and so forth, and then the financial crisis hit and we spent a lot of time discussing variable annuity results which were only a minor part of our business, so we decided to cool that for awhile.

We basically have not done any more variable annuities and those treaties are not active at the moment.

We're still managing the in force business and actually they're performing very well contract-to-date, I think.

They're in good shape, but it's not impossible that we would look at variable annuities sometime in the future, and we'll continue to keep our eyes open for the right opportunity and the right situation.

I guess we always want to try to find ways to help our customers manage any risks or any potential capital needs or other structural needs that they have that can be approached by reinsurance.

And so something like secondary guarantee UL, for example, we have wanted to find a way to get comfortable with, but we've never really gotten comfortable with the level of risk in those products.

We reinsure the mortality, straight mortality out of them quite a bit, but taking the actual guarantee risk is something we haven't gotten comfortable enough to do yet.

That's what I'm trying to get at.

So it's the guaranteed risk there that, from your perspective, has clearly been a fundamental issue.

And when you look at that and, I guess, capital or reserve requirements, does that guarantee risk, is it making you then uncomfortable with what current capital requirements are for that product?

And then just to clarify, I was aware you had done some VA stuff in the past.

It wasn't clear to me.

I thought that was older vintage stuff that didn't have some of the more generous features that got added into products in the later go-go years?

No.

I think it was some of the more recent products right towards the end, but --

Okay.

some of the less adventurous of those.

Selectively going with situations that were better for us.

And like I said, I think if we were to take a look at the performance of that block contract to date, we would be ahead of the game.

But yes, I think on the secondary guarantees we just have never gotten comfortable that the risks were adequately priced.

Maybe to put you on the spot.

Do you think the A Triple-X reserving levels are adequate?

Well, I guess what I'm saying, is there is enough uncertainty around them that they might require a little bit more capital than the current levels are.

It's clearly not the same as Triple-X.

That's where I was --

You have an absolutely clear redundant reserve situation on XXX.

On a AXXX you might have a redundant reserve our you might not in our opinion.

Thank you very much for that.

And with no questions remaining, gentlemen, I will turn the call back over to you.

Okay.

Well, thanks to everyone who joined us this morning.

To the extent if you have any other issues or questions feel free to call us here in Saint Louis.

And with that we'll end the second quarter conference call.

Thanks again.

Once again this does conclude today's conference call.

We thank you for your participation.