美國再保險集團 (RGA) 2011 Q4 法說會逐字稿

Good day and welcome to the Reinsurance Group of America fourth quarter 2011 results conference call. (Operator Instructions). 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.

Thank you. Good morning and welcome to RGA's fourth quarter 2011 conference call. Joining me this morning is Greig Woodring 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 remarks, including premium and earnings guidance for 2012, we will open the line for your question. To help you better understand RGA's we will make certain statements and discuss certain subjects during this 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 for RGA and it's subsidiaries. Keep in mind the actual results could differ materially from the expected results. A list of important factors that could could cause actual results to differ materially than expected result is in the earnings release we issued yesterday.

In addition during the course of the call we will make comments on pretax and after tax operating income. Which is considered a non-GAAP financial measure under FCA regulations. We believe this measure better reflects the ongoing profitably and trends of our business. Please refer to the tables in our press release and quarterly supplement for more information on this measure and reconciliations of operating income to net income for our various business segments. These documents and additional information may be found on our investor relations website at www.RGAre.com. With that I will turn the call over to

Thanks, Jack. And good morning, everyone, thank you for joining us. We are pleased to report a solid fourth quarter and completion of a strong year in terms of operating earnings, capital generation, and overall business growth and development. We have achieve approximately 13% or better operating ROE in each of the last 6 years now. By almost any financial measure we feel RGA has performed consistently and strongly for an extended period of time , which speaks to the abilities of the team to develop and execute its business plans even in difficult economic times.

Getting back to quarter most of our markets performed better than expected notably Canada and several markets in Europe and South Africa. The only under performance related to disability claims experienced in our Australia operation and our US group operation. Consolidated operating income was $141 million or a $1.91 per diluted share in line with our expectation, but not as strong as last years $161 million or $2.15 per share which included $0.20 per share associated with extension of the tax related active finance exception legislation by Congress. That quarter also reflected better than expected claims experience.

The current quarter results included several tax related adjustments involving claims experienced on certain treaties, deferred tax refinements and other items in total a $9 million reduction in the tax provision or approximately $0.12 per share. Also we did not close a prior tax year with the IRS in 2011 so there was FIN48 related reduction in the tax provision or interest expense. Failure to close cost RGA an estimated after tax amount of approximately $19 million or $0.26 per share the combined effect of tax provision and interest expense.

Net foreign currency fluctuations lowered operating income by $1.6 million dollars or about $0.02. Quarterly reported premiums exceeded $2 billion for the first time ever, and increased 13% over 2010 this last quarter. Investment income was down 14% compared with the prior fourth quarter totally a $305 million, including a $51 million decrease in the fair value of option contracts which are included in funds withheld interest and support equity index annuity. Excluding those contracts investment income was flat quarter-over-quarter despite a 24 basis point decline in yield.

For the year operating income increased 7% to $539 million from $504 million in 2010. On a per share basis operating income was up 8% totaling $7.28. Including $0.13 of net favorable foreign currency fluctuations. Premiums grew 10% year-over-year and totaled $7.3 billion excluding foreign currency fluctuations premiums increased 8%. Book value per share increased 22% during 2011 to $83.65 including AOIC. Without AOIC book value per share grew 9%. Our net unrealized gain position now totals $1.4 billion more than double the position at the end of 2010.

Turning now to our segment results. Our US traditional business reported fourthquarter pretax operating income of $86 million compared with a $107 million last year. Group disability claims which can be quite volatile over short periods of time were nearly $11 million higher than expected. This adverse experience was primarily attributable to a few clients in this short term business. We have already adjusted prices where appropriate. The group disability business is expected to be volatile, and if you will recall performed better than expected in 2010. US mortality experience was in line with expectations. Premiums were up 9% this quarter totaling $1.1 billion. For the year pretax operating income for US traditional business totaled $332 million versus $365 million in 2010. And premiums increased 5% to nearly $4 billion.

Our US asset intensive results were quite strong this quarter helped by a recapture of a previously retrocede annuity treaty. Pretax operating income totaled $27 million including $14 million associated with that recapture. Going forward that recapture business should add about $2 million to $3 million to annual pretax operating income on our base. For the year this segment reported pretax operating income of $69 million versus $66 million in a strong 2010. Our VA business performed quite well this quarter reflecting the strong equity market performance. Financial reinsurance enjoyed a typically strong fourth quarter taking advantage of growth opportunities and generating strong fee income. This business added $6.9 million in pretax operating income up 23% from $5.6 million a year ago. For the full year pretax operating income total $26.5 million up over 50% from 2010 $17.5 million.

Turning to Canada fourth quarter pretax operating income rose to $41 million compared to $37 million in last years fourth quarter. Both quarters were strong and reflected favorable mortality experience. Reported US dollars premiums rose 9% to $225 million from $206 million last year. In Canada dollars premiums were up 10% quarter-over-quarter. For the year, pretax operating income was up 27% totalled a $145 million including $5.4 million benefit associate with currency fluctuations. Impressive mortality improvements continue to characterize our Canadian business.

Turning to international operations first in Asia Pacific, elevated disability claims in Australia lead to a fourth quarter pretax operating lossof $1.2 million compared to a pretax operating gain of $8.1 million last year. Lower than expected terminations on disability claims causedreserve strengthening resulting in approximately $16 million in increased liabilities. This reserve strengthening reduced our long-term claim term assumptions on all DI business both group and individual in Australia and New Zealand; however, Australia reserves were larger on the group side so the effect was greater there. In total we increased reserves including IBNR by about 7%.

During the fourth quarter our experience study placed additional emphasis on broader market experience and we engaged the third party to validate our assumptions, our approach, and conclusions. We continue to compete in the Australia market. We like our position in the market, and we like our team. We expect to generate about a $150 million in disability premiums in 2012 with good margins. In this market we have the ability to reprice group treaties when necessary and in fact continually do so.

The rest of Asian performed slightly better than expected. In the quarter premiums totaled $348 million up 8% from last year's $323 million. For the year pretax operating income decreased in Asian from $64 million to $84 million -- from $84 million in 2010. Primarily due to the poor disability experience that we just mentioned. Full year reported premiums were up 15% to $1.3 billion, and local currency premiums rose 5% in 2011. We expect our strong brand and market shares in Asian to pay significant dividends in the future.

Next in Europe and South Africa fourth quarter pretax operating income was $39 million up from $36 million last year. A very strong fourth quarter in 2010 makes for a difficult comparison, but the claims results this quarter were generally favorable throughout most markets particularly in the UK and South Africa. Reported premiums were $356 million a 38% increase over last year. Including about a $65 million associate with a single premium transaction and $9 million drag from currency fluctuations. For the year pretax operating income in Europe was up 13% to (Inaudible). Reported premiums rose 30% to $1.2 billion. Ignoring currency fluctuations premium rose 27% over 2010.

Overall we are pleased to report a good quarter and strong financial result of $7.28 per share. Operating return on equity was 13% in 2011. Our balance sheet and capitalization remains strong. Our prospects for long-term growth particularly in our international markets also remains strong. We estimate our excess capital position to be around $500 million. Low investment yields will continue to be a headwind, but perhapsnot as strong as it will be for others in the financial service sector given our mortality business focus.

Looking ahead to 2012 we have set an operating income target of $6.70 to $7.30 per share, and consolidated premium growth of approximately 7% to 9%. Our guidance reflects adverse effects of approximately $0.55 and $0.15 per diluted share related to the adoption of new DAC accounting rules and lower anticipated investment yields in 2012 respectively. As result of these factors we expect 2012 ROE to be adversely effected by about 50 basis points. We have provided additional premium guidance in our quarterly financial supplement , which can be founds on our IR website.

We are looking forward to our investor day conference, which will be held March 14th at the Plaza Hotel in New York City. Many of you who have already accepted and appreciate your support and your interest in RGA. we will now take any questions you

(Operator Instructions). And our first question this morning will come from Jimmy Bhullar with JPMorgan. Please go ahead.

Hi, good morning. I had a few questions. First one if you could just talk about disability claims being elevated in the US and Australia businesses. I think the business reprices each year, but this has been a recurring issue the past few quarters. What is you expectations for claims through 2012? And then secondly, you mentioned excess capital of $500 million. I wanted to get an idea if you are assuming any capital deployment in your guidance, and at what point do you start deploying that capital if you don't see any block transaction? And the final question I have is just on the -- you mentioned the $0.15 impact on 2012 from investing at lower new money rates. How should we think about that $0.15 changing if rates were to stay stable through 2013 and beyond should that compound overtime?

Well, let me take the first question you had on disability claims, Jimmy. First of all, we don't view that there is any real connection between US and Australia the economic conditions are quite different in the two countries and so forth. While in the US in taking a look at the claim, we didn't think the claims were necessarily of the sort that would be economy related. We did feel that it is possible that the economy has an effect on recovery rates from disability. Also with low interest rate environment that of itself required us to think about increasing on that business. In the US we basically for the year had a couple of bad groups , and those do reprice. One of them has already repriced. One is to be repriced soon. In the fourth quarter we actually had three groups that were troublesome. One though had a good year overall. When you put 2011 and 2010 together in the US and Canada, we basically were just about exactly on plan. So that business has shown the expected volatile we would reckon , but this particular quarter was a tough one.

Turning to Australia now the problem is mostly group business, because we have so much more group business than individual business there. And that does reprice periodically. Some of those group contracts in Australia maygo as long as 3 years. But we have not seen a whole lot of excess incidence rates in Australia. We have seen mostly damage from recovery rates being slow and that is an industry wide phenomena that recovery rates have seemed to slow down. In that sense it is similar to what it is happening in the US. But we have looked at industry information and used a lot of that -- incorporated a lot of that in our reserve increases trying to get on top of it. Because Australia after a long string of very excellent years has had a very rough 18 months , and we wanted to get out in front of this. So we believe we have to the best of our knowledge at this point taken care of the disability

Are you assuming recent recovery rates in the reserve charge or are you still assuming how the recovery rates have been historically?

No. We will assume recent experience. We look very deeply at reserves on the group side twice a year on the disability book, so it gets refreshed periodically, but we are using current experience.

Okay.

Jimmy, this is Jack. I will handle the question on excess capital. The guidance we put forth does not presume that we aretaking out any significant amount of capital either through significant increases in dividend rates or buyback or anything like that. You can think about it as we have resumed a modest redeployment of excess capital. Although, I will remind you that typically as we deploy capital in the business the returns are more modest initially and then they tend to build overtime. The redeployment does not have dramatic effect on earnings.

Hopefully that answers that question. In terms of the investment or the other question you raised on that front at what point during the year would we try to predetermine or take another look at any kind of capital deployment or return of capital. And we really do that -- it is not like have a specific time table because we do it continually. The deliberation are what opportunities do we have to deploy that capital in the business; how much -- have we built any additional cushion so to speak in terms of the capital level and that sort of thing. We do look at that continually in terms of our trading value of the stock, obviously, as well. We look at all those things continually to see if we shouldn't take a different step in or a different tactic in terms of capital refinement. In terms of the investment yield you should think of that $0.15 impact in 2012 as likely the most significant. We estimate that it would trail off as we get more to an equilibrium with respect to new money rates and the overall portfolio rate. So we certainly wouldn't expect to see that amount increasing, and overtime we would expect to see it moderating somewhat. Hopefully that answers your question.

Okay. Thank you.

We will take our next question from Andrew Kligerman with UBS.

Hey, good morning. Two questions, first on the robust premium growth. Maybe you could give a little color on the strength and maybe within your guidance where you expect premiums to go?We saw US Trad. up 9%, ex currency Canada was up 10%. Europe, South Africa up 42, and I think you mention a $65 million onetime contract in that region. I'd like a little color what you think those numbers would be as part of your guidance for 2012? Same thing on the tax rate it looked unusually low this quarter. What kind of rates should we be thinking about there? And then lastly with regard to the excess capital of a $0.5 billion. How much of that do you want to have at all times as a base just for whatever particular reason as sort of a buffer?

Okay Andrew, this is Greig. I will take the first one. Our estimates for 2012 are simply that. They take the into account things that happened late in the year the pipe line that we have that we believe we can count on at least to least to some extent, and our best estimate of what we might expect going forward. We feel for example in the US we will grow our traditional business at least 5%. We think that is a pretty solid number. We have had very strong growth out of Europe this year in 2011 that is. It is difficult to have too much visibility going forward. There seems to be a lot of unusual opportunities, but the regular day-to- day activity seems to be questionable as to how much growth we will see there.

And then Asian we are still refilling pipelines in Japan and Korea to some extent. Outside of those Asian is growing at a very nice clip for us too. Those are the sorts of things we take into account. In terms of unusual transactions there seems to be a lot of possibility on the horizon at the moment. So that is why we are very optimistic about some things happening but those are very uncertain as to when and how they are going to fall.

Unusual transactions across Europe and Asian?

More in the US and Europe some in Asian as well I guess. Across the board we are generating quite a bit of opportunity, but it is just that until it is actually wrestled to the ground. And we are working hard at that, but we will see what develops in 2012. We are optimistic going into the year that we have a lot momentum and a lot of things happening.

Greig, what was the strength in the US in the fourth quarter, the US premium?

It comes across the board a little bit. In any given quarter, Andrew, some of those things can be a little bit choppy. The traditional mortality market business as you know has been declining in terms of growth rate for some time. And that has fallen to a reasonably low level, but when you supplement that with some of the group businesses and the long- term care business that we have been doing you get a nice number. And there were some unusual transactions in the fourth quarter. There will be some in 2012, I just don't know what they are or when they will appear. And we will see pretty good growth rate in 2012 like I said we'll expect at least 5%.

Andrew, this is Jack. I will take the comment on the tax rate. It was in fact low actually for the quarter as well as for the year. I would guide you towards a run rate, it is choppy to from quarter to quarter so don't hold us to this each quarter, for the year our expectation going forward is roughly 33% effective rate in terms of our tax provision , so I think that is what you should presume. This year was choppy for a variety of reasons. You may recall in the third quarter in particular we had some differed tax liability that we adjusted that went through the tax provision and as result it effected the affective tax rate. We also did not close a year with respect to the guidance under 1048 that had some impact on the effective tax rate. It had more impact on our interest expense that we in fact didn't reverse some interest expense that we would normally have expected to.

So that's why I just guide you toward 33% rate expectation in terms of next year. Relative to your question on excess capital. We have about a $0.5 billion best estimation currently. As a matter of policy we do try to keep a buffer or a cushion. I would characterize that as roughly half of that , so $250 million to $300 million feels about rightin terms of keeping at least some excess capital. Now having said that, that doesn't mean we would be uncomfortable if we had the opportunity tomorrow to deploy all $500 million at a meaningful return that we would take advantage of that opportunity. In other words, that buffer cushion is more long term in nature. But to the extent that we would deploy some of that cushion and then rebuild it over a relatively short period of time we would certainly

And it sounds like the one off opportunities that Greig was just referring to in terms of premium growth would cause you to deploy a fair chunk of that $500 million?

It could it is just a matter of what we execute, and what we don't. As you know we continue to look at those sorts of opportunities. It really just depends on the extent we are successful on closing.

Great, thanks.

Our next question will come from Steven Schwartz with Raymond James.

Hey, good morning, everybody. I have a few as well, but I will take them one at a time. Looking at the guidance for 2012 a couple of questions there. I think first, Jack, are you guys assuming something from 1048 running through there for this year?

Steven, yes , we are. Although it is far from clear whether we will be able to execute on that. And it is not particularly dramatic it is not insignificant either. I think it is probably $0.12 to $0.14, would be the impact if we didn't close the year. It is kinds of hard to go year to year to year and sometimes include a year rolling off and sometimes we don't. So it is a matter of procedure we typically just presume we will roll off a

Okay. All right. And then also on guidance, I guess following up on Andrew's question with regards to the US. The business is slow we all know that primary companies are keeping more capital, so that is not a surprise. Greig, could you talk about maybe a split between how you see the in-force growing as opposed to how you see premium yield increasing as the book ages?

Our US mortality block will grow somewhere around a 1% would be my guess, Steven. It doesn't grow a whole lot.

Right.

But it doesn't decrease. It should grow at maybe a 1%, something like that.

Okay . Just wanted to make sure. And then one more on Australia. Greig, in your commentary did you indicate that the problem was std not long-term

No, it is group long-term disability.

It is group long-term disability.

Typically lump sum.

Okay. Great. Thank you, guys.

Our next question comes from Nigel Dally with Morgan Stanley.

Great, thanks. First another one with capital. Your excess capital has stayed consistently at $500 million throughout the year. That implies that your ongoing operation really are not generating any incremental free cash flow? Any color there would be helpful. Second on corporate expenses seem particularly high this quarter. Can we get some details as to what was driving that? What is the reasonable run rate for corporate as we look forward? And then lastly the asset intensive annuity recapture. Are there additional treaties that you are also looking at recapturing, or should we view that as more as a one time item? Thanks.

Nigel, this is Jack. In terms of capital generation it changes year to year. But our best estimate going forward, at least for the near term is we would generate roughly a couple of hundred million, $200 million of free cash flow or additional capital probably is a better way to look at it, but generally it is available capital. So roughly $200 million a year I think is a good run rate. In terms of the expenses, we normally particularly in the fourth quarter we have closed a year we tend to refine some of the accruals incentive comes to mind. Where a lot of the team is compensated with some degree of incentive comp. Then at the end of year you have a better picture in terms of what the calculation will look like. So it is not unusual for us in the 4th quarter, in fact if you went back and looked you will see this in quite a few of the years where we will refine some of the expense accruals including incentive comp. And as result you have a little bit of dislocation in the fourth quarter.

Up or down that could be. In terms of asset intensive there are not a whole lot of situations where we will recapture. Although this is two years in a row where we have done some recapture on the annuities front. And we did a smaller recapture earlier in the year in one of our other lines of business. So we are continually on the lookout for situations where we can recapture on favorable terms and that happens from time to time. So it is a one off item, but it is not something that is unheard of either.

Greig, just to follow-up on the free cash play , the $200 million, is that the amount of cash which is generated to be dividend up to the whole (Inaudible) or is that a before whole (Inaudible) expense and dividend , or is that the total amount of free cash flow available for buyback and

Well, it is cash flow available that we could get from the holding company if we so desired, so in that respect it would be available for buybacks or dividends or anything like that.

Got it, thanks. .

Our next question comes from Jeffrey Schuman with KBW. Please go ahead.

Thanks. Good morning. I was hoping for us to circle back a little bit more on Australia. First of all clarification, I think when we talked in the past about the Australia group disability and the weakness from a year ago I think there was some discussion about a particular contract that had finite life. I thought it was going to wrap in fourth quarter of 2011, so am I remembering that correctly?

Yes, you are. The problem last year was one particular treaty that really soured badly, that treaty is no longer an issue. So this is a bit more across the board reserve increases.

Okay. And I think you said for 2012, $150 million of disability premiums, is that individual and group? If so how does that split out approximately?

Yeah, I believe that is overwhelming group 70% to 80% group I would imagine. That is a guesstimate, but the individual numbers are not very big.

Okay. I just wanted direction because I think on investor day there was some numbers that suggest that Australian group disability was about $80 million of premium , so it is a little bit surprised to see it increasing, I guess, given the fact that it has been a difficult market. Is that a business you think that is attractive to growth at

Yes, I suspect that is a bit of refinement in the number, Jeff. The group business in Australia has been a very attractive business for a while. It is some what cyclical business it has been in our past quite profitable, now it is quite competitive. It is going through an era where it is difficult. We haven't been growing that business very much. I would expect that you have seen very little growth in the last year. Some growth in the individual side. Individual disability in Australia is wrapped up in all the life insurance policy, so it is very difficulty to reinsure our mortality risk without taking some disability risk as well. So we take some individual risk incidentally , but it doesn't amount to that

Okay. And then I'm sorry if you mentioned this, but what was the nature of the large Italian transaction?

I'm sorry, I didn't catch that?

The large transaction what kind of business was that the $65 million premium?

It was a single premium business out of the Italy.

Mortality?

It was creditor business.

Creditor business.

So it had a mixture of different coverages in it.

And then lastly, I know it is early and these things are going to take a while, but any read from your lobbyist on the prospect or active financing exception?

Jeff , this is Jack. Our lobbyist are pretty confident that in fact that legislation will take place. We are a little more conservative, so it remains to be seen. We are encouraged by what the lobbyist , we pay for their opinion, we are encouraged by what they

Even our lobbyist have said that if it is going to happen it is going to happen it is probably going to happen after the election in November. It is not going to happen early in the year.

Right. That makes sense thanks guys.

Our next question comes from Sarah DeWitt with Barclays Capital .

Hi, good morning. Following up on your excess capital position. You are holding a meaningful amount of excess capital and that should continue to build . How should we think about the timing in terms of deploying that? Are you holding on to excess capital for a certain amount of time in hopes that opportunities for acquisitions present them self, or at what point would you look at share

Sarah, this is Jack. We don't have a set time table. We continually look at opportunities to deploy the capital. That is just a matter of course, we are continuously doing that sort of thing. Now, if we get well into the year and have not deployed any meaningfully amount of that excess capital and maybe more importantly don't see opportunities in the pipeline to deploy it, then we would look more seriously at what is a better way to refine the capital base. So there is not a set time table , but we are continually cognisant of the fact that we do have additional capital so we continually have that discussion internal in terms of what is the best course of action at this point. Does that answer the

Okay. Yes, that's great. Thank you. Secondly, I want to see if we get a little more color on your expectations for premium growth in Europe, South Africa and the Asian Pacific segments? I was surprised that you expect that to slow quite a bit from the double digit level currently and would have thought those would be your faster growing segments. So could you give a little more color on your outlook there?

Yes, Sarah. As I mention we have been repairing pipelines in Korea and Japan. It looks like we are growing again in South Korea a little bit. And in Japan we had another large treaty that ran its course, and is now no longer producing and we will have to replace that. So if you exclude Japan and Korea, Asia grew at a very nice clip. And we would expect that growth rate to more or less continue with the potential exception of Australia, which as I said is a very competitive market on the group side, and group business is a little more than half of our business. We would expect Australia to have a tougher time growing, but the rest of Asia will have a pretty good run. We expect growth from Korea and Japan to recommence soon.

You put all that together and it is a little bit uncertain. I think the same thing could be said of Europe we see a lot of opportunities and a lot of momentum at the same time we are little bit cautious about exactly what the organic growth rates might be in Europe with all the dislocation coming there. We believe we will do well in those markets relatively, and we are competing strongly in most of the European markets and South Africa is a place that grew nicely in 2011, kind of hard to predict where it is going to go in 2012. We are encourage by the experience in South Africa in 2011. We had great results there. And we are just a little bit cautious in projecting though the same kinds of growth rates we seen in 2011 into 2012.

Okay. Great, thanks for the answers.

We will hear next from John Nadel with Sterne, AG.

Hey, good morning. I have a couple of questions on the guidance. Particularly thinking about the US traditional business. I guess in the guidance are you assuming that sessions rates in the United States have bottomed?

No John.

Is there some improvement there?

They might come down a bit. We also expect that our market share in 2010 was higher than reasonable to expect, and we expect our market share to be coming down in 2011 and a bit in 2012.

Okay.

Nevertheless, we see also some opportunities in 2012, and while we can't count them until there done. Like I said we believe 5% is a pretty good number as a minimum.

If I look at the full year 2011, US traditional life you grew premiums about 5.5% year over year. Can you give us a sense for how much of that growths was what you guys would refer to more traditional mortality business versus maybe other less traditional businesses for you guys; group insurance or long-term care or the combination?

John, this is Jack I will take that. Of that growth rate I would say what you characterize as purely US traditional business was a little bit lower, not dramatically, but a little bit lower than that overall growth rate to the extent that you get up to 5% is because the growth in for instance group or the LTC business is at a little bit higher rate.

Okay.

But keep in mind those are substantially smaller blocks of business. So still the impact of what we would characterize as traditional business is the most dramatic.

Long-term care grew at the fastest rate, but it is real small piece of the overall.

So thinking out to the 2012 the 5 % to 7% growth you are looking for premiums in the US traditional should we be thinking sort of similar to 2011.

Yes.

Okay. And then just curious on a couple of quarters an ago maybe it was even as long as ago as late last year. You guys had called out as early 2000s maybe early to mid 2000s cohort of business in US trad. that was maybe producing lower returns than your overall book. You had mention that was peaking or about to peak as a percentage of the business. Can you give us an update as to where that stands? I am trying to understand as you build out your forecast for 2012 should we be expecting meaningful improvement in, let's say the benefit ratio or the underwriting results of US traditional?

Yes, John. Those things don't move very quickly. Peaking may give the wrong impression. Plateau might be a better term, because it doesn't really hit a peak and come down real fast. It is the lowest return business we have and the new business we are writing and have written for the last several years is much higher return than that business. I can say that. And that will ultimately erode that negative effect from low returns on business written from about 1998 to 2003 or 2004.

Okay. So slower. If we are thinking about underwriting results, let us say benefit ratio or benefit plus expense ratio, we ought to be thinking about a more modest pace of reversion back to a historical level.

Yeah, Yeah. It moves only gradually.

It is very softly.

And then last, and I know this is probably a tougher one. You reported $7.28 of operating EPS in 2011. There is obviously changes in mortality and risk experience relative to pricing, but there is also a lot of other one time item; tax items, the recapture, a few other things. As you guys think about the right base line that we ought to be thinking about to judge your EPS growth for 2012 is there sort of a core level you would points us to as the base line for the 2011 results?

Yeah , John, this is Jack. We did have a lot of noise so to speak -- every year we have some degree of noise. In 2011 we probably had more than we would normally have. To me the most obvious to pull out of there are the refinements of deferred taxes that is truly unusual you wouldn't expect that to recur and that was to our benefit. Any how when you put all that's together we view the run rate for 2011 as roughly

Okay.

To get to heart of your question.

That's very helpful . Thank you very

Our next question comes from Ryan Krueger Dowling & Partners. Please go ahead.

Thanks, good morning. First a follow-up on the US growth. You mentioned further cessionary declines as the lower market share expectation for 2012, but the 5% to 7% guidance is in line to better than we saw in 2011. I was hoping on a little more color. It seems like you have some factors that maybe would push the growth rate slightly lower than 2011? I am wondering if there is some specific considerations we should be keeping in mind where you're going to pick up that loss growth?

Ryan, it does sounds a little bit contradictory in some senses. First of all we don't expects our business to go down a whole lot, and we are also mindful of what happened in the later part of 2011 taking that into our expectations for 2012, as well as some degree the elements that we see in the pipeline right now. So we are putting together a lot stuff that we have available it is our best estimate. It is nothing we can actual put in the bank. But it is something we have some conviction on based on all the things we are seeing. Even though it does sound contradictory I think that is what we come out with.

Thanks. And then on Japan and Korea the pipeline. Can you give us a sense of the premium growth you are expecting in those two markets versus the rest of the geographies in Asia Pacific?

Off the top of my head I am not sure I can do that. Korea is in single digits expectation for 2012. And I would expect Japan will struggle to get back to 0 after 2011. I expect Japan will be negative growth next year or pretty flat if not.

Okay. Lastly on the active finance exception. Should we expect a higher tax rate to be booked in the first few quarters like 2010 experienced followed by a (Inaudible) or would you expect us to book it the whole year like you will get the exception?

Ryan, this is Jack. You should expect a higher tax provision, higher effective tax rate unless and until that legislation is passed. We talkedabout that earlier that it would not be unusual for that legislation not to be passed until the 4th quarter.

Okay. So your guidance assumes it is passed, but the emergence of it would imply a little bit of backend loaded benefit?

That is absolutely right and you refereed to 2010. That is the sort of pattern that you could expect.

Okay. Great, thanks a lot.

We will here next from Thomas Gallagher with Credit Suisse. Please go ahead.

Good morning. Just a few higher level question. Can you talk a little bit about just the general competitive environment some of your major competitors are European financial institutions that where clearly things have been a bit more challenging. Just curious if your seeing related improvement in pricing pretty much across the board in terms of the geographies, because they obviously compete with you in multi jurisdictions? That is my first question.

Tom, I would say no that we haven't seen any effects of any stresses on European competitors they are still competing very vigorously. In fact if anything competition is generally higher than it has been. It is not unduly high, but it is a little bit higher than it has been in a last while. It is trending upwards if anything but it is spotty.

Got it so you're not seeing any elevation from a pricing standpoint?

We don't see it.

Got it. Just a question on Bermuda their capital change is coming from the regulatory regime there, adopting solvency II I believe in 2013. Can you comment whether this is going to have any impact on you? Also do you see this creating any potential opportunities.?

First of all it shouldn't have very much of an impact on us. We do have a subsidiary in Bermuda that we use for some things, but it is not really likely that will have much of an impact at all on us. Nor do we really see it as something going to effect in any major way most of our competitors, who will use writing subsidiaries in other jurisdiction. And we would expect competition pretty much going to be similar. Some of the annuity transactions where the competition comes from the Bermudan operations might be effected a bit. We will see. We are not doing a whole lot in that space given the environment right now in terms of new business activity. I really don't expect the advent solvency II in Bermuda to have any big changes.

Got it. And then just lastlyjust on a related note. It would seem the biggest area of dislocation in the US is clearly the variable annuity market. Do you see there being -- I know you had done some transactions a while ago, do you see there being any opportunity for you for the industry as it relates to any structured variable annuity risk transfer type deals or any comments there?

We continue to look at the evolution of the variable annuity space. We are trying to finds some spot where volatile is not a significant problem and where the return expectations are reasonably full. So we haven't found any yet that have encouraged us to take a plunge. Certainly if we wanted to reinsure variable annuities we could have discussions with a number of companies that would like to reinsure variable annuities either back books or new business. So that is not a problem in terms of demand from our perspective. It is finding the right product possibility that will enable us to go forward. We haven't done any in , as you said, a number of years

Okay. Thanks.

We will go next to Steven Schwartz, Raymond James. Please go ahead.

Hi, just a quick follow-up. The deal in Italy. Did that add or subtract earnings at all in the quarter?

Don't know ,Steven, but my guess would be it would be almost zero.

This is Jack. It was very modest.

All right just wanted to make sure.

We will take the next question from Jeffrey Schuman KBW.

Thanks. Just wanted to get a little more perspective on the US pipeline. Itsounds like you see a number of potential one-off larger transactions. I am wondering if there are some general themes. Tom asked about variable annuities, I suppose that is one possibility. Are you seeing companies strategically wanting to exit lines of business, or are you seeing different types of risk managements exercises, or capital arbitral , are there any themes that kind of dominate those

We are seeing companies Jeff, that do want to exit the business. We are seeing companies that want to streamline their operations. So we are seeing some one off disposals or one time events as possibility. Again it is hard to say what might happen or might not happen. Because they are quite varied , but some of them are in the traditional mortality space. So we view that a very sweet spot for

Okay thanks a lot.

We will go back to John Nadel Sterne AG.

Hey, just a quick one maybe to take this way down into the weeds. I apologize. Just a quick one on the DAC accounting change. If we are looking at a roughly $0.55 headwind, more of a modeling question, can you give us a rough sense breaking that $0.55 by region or segment?

John, this is Jack. A lot of -- I don't have the break down in front of me. But a considerable amount of the impact relates to our international operation.

Yeah, I understand that.

Because they have grown fairly rapidly over the last few years there has been a lot of the infrastructure build up, infrastructure not in terms of buildings but just systems and people and that sort of thing. Some of which entered in to the DAC calculations. I would say in terms of impact on historic earnings youwill see more impact on the international operations than you will on the North American operations.

I can follow-up with you off-line if it is necessary . I was just wondering does that mean 50% of the DAC headwind or does that mean something more like 75% or 80% of the headwind comes from

We will probably have to take it off line. I'm not sure I have a summary. And it is very different from office to office and that sort of thing, so that gets to be rather involved.

Okay. I will follow-up with you. Thanks.

And gentlemen we have no question remaining. I will turn the call back over to you for any addition remarks.

Okay. Thanks , everyone, for joining us today. And to the extent that any other issues or questions come up, feel free to give us a call here in Saint Louis and we will respond. With that we will ends the call. Thank you very

Once again that does conclude today's conference call. We thank you for your participation.