美國再保險集團 (RGA) 2012 Q4 法說會逐字稿

Good day and welcome to the Reinsurance Group of America fourth-quarter 2012 results 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, Mr. Lay.

Thank you.

Good morning to everyone and welcome to RGA's fourth-quarter 2012 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, we will open the line for 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 investment performance, statements relating to projections of revenue or earnings, and future financial performance and growth potential of RGA and its subsidiaries.

Keep in mind that actual results could differ materially from expected results.

A list of important factors that could cause those 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 a pre-tax and after-tax operating basis for 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 and the 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 information may be found on our investor relations website at rgare.com.

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

Thank you, Jack.

Good morning, everyone.

Thanks for joining us.

We are pleased to report record operating earnings this quarter, driven by strong results in our individual US mortality business and in our Canadian segment as well as a relatively low effective tax rate.

The fourth-quarter performance helped complete an overall solid but somewhat uneven 2012.

RGA enjoyed good premium and operating income growth and despite the low interest rate environment, we produced a 12% operating ROE for the year, continuing a long trend of strong and stable returns.

After-tax operating income was $182 million this quarter, up 51% over last year and operating earnings per share totaled $2.44 and that's a 49% increase over $1.64 last year.

With the exception of Australia and the UK, results were generally strong across the board this quarter, particularly in the US and Canada.

We continue to manage through a tough environment in Australia, where we reported a modest loss for the fourth quarter.

For the full year, consolidated after-tax operating income was up 6% to $516 million or $6.96 per diluted share versus $486 million or $6.55 per share in 2011.

Reported net premiums increased 7% for the quarter and 8% for the full year.

In local currencies, those increases were 6% and 9% respectively.

Ignoring our spread-based business, investment income was up 6% quarter-over-quarter.

The portfolio grew $1.7 billion but the average yield was down 35 basis points compared to the fourth quarter of last year.

For the full year, the average yield decreased about 30 basis points and dipped just below 5%.

We are currently reinvesting just below 4%, so we will continue to feel additional downward pressure on our portfolio yield.

Book value per share increased 18% in 2012 to $93.47.

Excluding AOCI, it rose 13% to $64.95.

Turning now to segment results, our pretax operating income in the US traditional business increased 69% quarter-over-quarter totaling $140 million this period, primarily reflecting better-than-expected claims experience in our large individual mortality book.

The quarter's claims were about $36 million lower than expected.

The rest of this subsegment's operations were mixed with good results in individual health offsetting adverse claims experience in our Group US medical reinsurance business.

US traditional fourth-quarter premiums were up 5% over last year's fourth quarter.

For the year, pretax operating income for US traditional increased 16% totaling $371 million and premiums increased 8% to $4.3 billion.

Fourth-quarter results in our US asset-intensive business were also quite strong, with pretax operating income increasing 50% to $41 million.

That level of earnings is higher than our expected quarterly run rate for this business, which is about $30 million per quarter.

Fixed and deferred annuities performed well in the current period.

For the year, pretax operating income was up 56% to $109 million primarily due to the addition of the large block of fixed annuities that we took on April 1.

Financial reinsurance business in the US enjoyed another strong quarter and posted pretax operating income of $8.5 million, up 23% from last year's fourth quarter.

For the year, that measure increased 24% to $33 million, reflecting continued strong growth in fee income.

Turning now to Canada, pretax operating income rose 33% this quarter to $54 million reflecting favorable claims experience and the $16 million reserve reduction associated with the segment's creditor reinsurance business.

That adjustment was the result of refining the reserve calculation using previously unavailable individual policy level detail.

Fourth-quarter reported premiums increased 11% totaling $248 million.

In Canadian dollars, premiums were up 7% quarter-over-quarter.

For the full year, pretax operating income was better than expected and rose 11% to $159 million.

Full-year premiums increased 10% in US dollars and 11% in Canadian dollars.

In Asia-Pacific, pretax operating income was $8.5 million for the quarter versus a pretax operating loss of $15 million last year.

As mentioned in yesterday's earnings release, both periods suffered from weak results in Australia, where we reported a modest loss this quarter.

The result of our markets -- the rest of our markets in Asia performed well.

Reported premiums rose 4% in the fourth quarter to $363 million in Asia including a favorable impact from currency fluctuations of $6.6 million.

For the full year, results were disappointing in Australia but the rest of our Asia-Pacific operations had a solid year with especially strong results coming out of Hong Kong, the rest of Southeast Asia, and Japan.

In Australia, to give a little more color, we have seen some poor experience in several parts of our business over the last couple of years.

In 2011 if you remember our disability income business, both group and individual, suffered from lower-than-expected termination rates.

That experience was not unique to RGA as other market participants reported similar issues and some on a larger scale.

In 2012, our life and total permanent disability business commonly referred to as lump-sum business did not perform well primarily on group size.

In addition to evaluating and improving our operations and approach to what is currently a fairly competitive market, we are working more broadly with market participants to address underwriting distribution and product design issues affecting the industry.

Additionally as we mentioned last quarter, our group business is typically written for a three-year term, so we can reprice this risk to reflect current experience or choose not to participate.

The situation in Australia is considered manageable.

Given the nature of the business including the size of some of our group contracts, we do expect some degree of quarterly volatility going forward.

Moving to Europe and South Africa now, topline growth was strong but bottom-line results were below expectations this quarter primarily due to somewhat poorer morbidity experience, critical illness experience in the UK.

Premiums were up 13% to $403 million.

Pretax operating income decreased to $14 million from a strong $33 million last year.

For the year, reported premiums were up 10% and local currency premiums rose 14%.

Full-year pretax operating income was hampered by weak results in the UK and totaled $62 million.

Substantially all of our Europe and South Africa markets outside of the UK performed well in 2012.

Italy and South Africa enjoyed particularly good growth and operating results.

The corporate segment pretax operating results were in line with expectations with a loss of about $7 million for the quarter.

So overall we are pleased with results in 2012, with top- and bottom-line results being in line with expectations going into the year.

It was a year where we experienced significant swings in results, both favorable and unfavorable.

Volatility is an inherent part of our business particularly as it relates to quarterly results.

Operating ROE was 12% for the year, continues to be a strong and consistent indicator of RGA's performance.

We have achieved approximately 12% or better operating ROE in each of the last five years but we are facing a difficult investment environment in terms of yield opportunities, as you all know.

Our excess capital position is around $600 million.

We continue to seek out attractive deployment opportunities for that capital.

Additionally our Board authorized a buyback of up to $200 million of our common shares.

We will evaluate the attractiveness of repurchasing shares along with other capital deployment opportunities depending on market and business conditions.

We think it is more appropriate to look at our business in terms of intermediate growth rates instead of short-term EPS targets.

Not only are we in a long-term business but the growing influence of block acquisitions, the timing of which is unpredictable and the subsequent potential impact on earnings patterns leads us to believe that it's more appropriate to view our performance over several year periods.

We saw the effects of both claims volatility as well as block transactions in 2012.

I will remind you we have intermediate targets for operating earnings growth of 5% to 8%, an operating return on equity of 11% to 12%, and these targets are similar to our recent experience.

These targets assume the continued low interest rate environment which is expected to have an adverse effect of $0.20 to $0.30 per share in 2013.

Further, those operating targets assume excess capital deployment in the $200 million to $400 million per year range.

We expect annual effective tax rates of approximately 33% to 34% assuming continued extension of the active finance exception legislation and the single years FIN 48-related adjustments rolling off each year.

We thank you and appreciate your support and interest in RGA, and now we are ready to take any questions you might have.

(Operator Instructions).

Sarah DeWitt, Barclays.

Good morning.

I was wondering if you could update us on your view of whether or not there is any risk for the need to strengthen reserves again in Australia in 2013?

And how should we be thinking about the earnings and mass business going forward?

Should we expect continued modest losses or what is the trajectory for recovery there?

Sarah, we expect -- first of all, we are always refining reserve calculations as each group achieves critical credible information levels, we refine our estimates all the time, and in that group business, the GAAP reserves are not locked down.

So it is always open for adjustments like that and we expect that to happen in 2013.

We do expect 2013 to be a much better year than 2012 but not at the levels of 2008 or 2009 for example.

It's somewhere around a breakeven here would be a good result.

It's -- continued work up situation as we are dealing with industrywide problems as well as repricing on individual contracts.

So it's going to take a little while but we are pretty confident we can work through it.

Okay, great.

Then could you update us on what you are seeing in terms of pipeline for deals and does the new buyback signal that you are seeing any less opportunities?

No, it doesn't.

We're seeing about the same level of opportunities, which is a fairly high-level, as we've been seeing all year.

They range from small to large and we can never really be sure of when or if they might land, but we would view our recent buyback authorization as an opportunity to provide us some flexibility and to manage our capital in the event that price sinks below a target level.

So we are going to be using I think that during the course of 2013 and hopefully our best use of capital is to find strong transactions we can put it in and we are actively looking at that, but we can't predict the timing of those, so that's why we wanted some extra flexibility here.

Okay, great.

And then if I could sneak one more in just in terms of the guidance of 5% to 8% earnings growth over the intermediate term, what's the right baseline to be using for 2012?

Is it about $7 of earnings ex unusual items?

Sarah, this is Jack.

Maybe I could respond to that.

I think in terms of the baseline, roughly $7, in other words pretty close to where we landed is not a bad starting point.

The guidance I will remind you is intermediate-term guidance and which in our parlance that's roughly three-year sort of guidance, that sort of thing.

And because the block deals or even stock buybacks are difficult to forecast in terms of timing up front for a variety of reasons as you might expect, I think -- I would argue that in terms of just coming up with an estimate for 2013, that range I guess we would argue is a good range, maybe a little aggressive, but not dramatically so.

So you really have to kind of consider really high-level assumptions in terms of capital deployment and that sort of thing.

That's why more and more each year and this year is the first time we really thought the idea of issuing the EPS guidance can be based on such high-level assumptions.

Maybe it's better just to go with longer-term expectations in terms of returns and growth rates.

Does that help?

Yes, thanks for the answers.

Erik Bass, Citi.

Good morning.

I guess just to follow up on a couple of Sarah's questions.

First if you could just talk a little bit more about near-term expectations and where you are talking about growth being consistent with recent results, just what period are you referring to?

When you are looking at historic growth, I am assuming it sounds from your answer like you are adjusting for kind of the reserve charges or releases and other large one-time items.

This is Jack.

I guess I would say yes, but you've got to be a little careful about what you pull out of the near-term results because ours is a business that has a lot of refinements as you go.

So I would say, take a look at the last couple of years.

When we said near-term we're kind of thinking of that in terms of growth rates.

We don't expect to really depart from the growth rates we've exhibited over the last couple of years and so that's probably the look back period you may want to consider.

Got you, then on the tax rate, I think you mentioned 33% to 34% is kind of the expectation.

Is that assuming that kind of the active financing exception, the benefit is a little bit lower than it has been historically because of the lower international earnings from Australia?

Or is there another reason that the tax rate is a little higher than it had been historically?

Yes, certainly that -- the overall expectation is that the active financing exception will be extended.

I guess that remains in part -- 2013 that remains to be seen.

It didn't have a dramatic effect on us in 2012 primarily because of the pattern of earnings in our international operations.

The fact that we did not reflect an AFB -- call it contribution to the tax provision in 2012 had very little effect just because of as I said, the pattern of earnings and the difficult situation we experienced in Australia.

In fact if you look at our effective tax rate in 2012, you see it's off 3 points or so off our more expected longer-term rate and about 2.5% of the beneficial effective tax rate really relates to the fact that we had a difficult experience in Australia and some of those treaties are written in such a way that if you do have worse experience than you expect, you do pick up some of -- or I should say -- offset some of that in your effective tax rate.

Now we don't necessarily expect that to continue so we would expect the expected tax rate, the effective tax rates to move up and we have articulated that as roughly 33% to 34%, and that's pretty much what we are expecting.

Also relative to FIN 48, while I am talking about the tax rate, we do expect one year to roll off, so some modest benefit from the effects of FIN 48 in 2013.

Okay, thanks.

Just one last one -- I know on the third-quarter call you spent a decent amount of time talking about kind of the legacy US mortality blocks, kind of the early 2000 vintage.

Can you talk about kind of how that block performed this quarter and kind of in the outperformance in the traditional US, kind of where you saw the better experience?

Erik, I actually don't even know how that particular block performed because I have not seen a breakdown by year on the US.

I assumed it performed reasonably well this quarter.

It's always difficult to look at a quarter at a time and draw any conclusions whatsoever.

So the conclusions we draw on are longer term in nature and that business is still a problematic business via the returns on our US mortality block are very nice if you exclude those issue years from say, 1999 to 2004, our policy issues maybe of 2000 to 2005, the competitive period of 1998, 1997 to 2003 or so, the treaties lasted a little longer in effect.

So that business is the most difficult return business and without that, the returns are very nice in the US mortality market, so we would hope to get them showing through a little bit more in the future.

Okay, thank very much.

Jeff Schuman, Keefe, Bruyette & Woods.

Thanks, good morning.

I was wondering if you could talk a little bit about topline growth.

I think for 2012 you did consolidated premium growth of 8%.

I think the fourth quarter was a similar pretty strong number.

Just so we can kind of understand retrospectively, how much of that roughly was kind of core growth, and how much of that was due more to sort of one-off transactions?

And then can you give us a little bit of perspective going forward kind of what core growth rates look like at least in a couple of your key markets versus how much you would have to sort of layer in your other means to kind of get to the 5% to 8% earnings growth?

Jeff, I think the 8% was pretty much core growth for the most part of the -- there was in the fourth quarter in Europe a couple single-premium blocks that totaled about $100 million that will not necessarily repeat.

But outside of that, most of the premium growth we've seen for the year has been core growth, I would say.

We have done some block transactions, in particular a fairly large mortality block at the beginning of the year that has throughout the course of the year added something.

But we are always looking at those, and we're looking at some of those right now ranging from small to large.

So I would say that that growth is pretty solid.

Okay.

So, for example, in the US you still had a pretty high growth rate, and the bottom line is you start from a pretty good point in the core business and then they're just going to look for ways to supplement that.

Is that still a fair read?

I think that's right.

Similarly in Canada, I think growth in Canada was particularly -- was surprisingly strong in a pretty mature market, but you're still able to grow there?

Yes, the growth in Canada is maybe stronger than the US because it's still in a different place in terms of the amount of the business being seated, and also the fact that the liabilities are so long in Canada and the persistency is so high means that we don't have a lot of lapsation of the in-force block compared to other markets.

So that tends to make for higher growth in Canada, and we expect sort of double-digit growth in Canada going forward, for a little while anyway.

That's what I needed, thank you.

Jeff, this is Jack.

Maybe I can just comment just briefly on the US growth rate, a lot of it gets down to your definitions in terms of core versus -- in other words, if you consider core not to involve any block opportunities, then if you look to 2012, there was certainly one block opportunity in there that probably enhanced the growth rate by maybe 2% or so for the year.

But as Greig was saying, we constantly look at those sort of opportunities, so I guess it gets definitional in terms of whether you would call that core or not but there's (multiple speakers) one block opportunity in 2012.

Okay, that's helpful.

Thanks, guys.

Sean Dargan, Macquarie.

Thank you and good morning.

Just when we look at your reported book value per share, your AOCI component is very high relative to most companies we look at.

I guess A, why is that?

And B, would you ever consider selling securities at a gain and deploying that capital somewhere else?

Sean, this is Jack.

A part of the reason that it's relatively high is we have a fairly long portfolio that supports our reserves in Canada.

And so as you might imagine a fairly long portfolio in this environment does attract quite a bit of unrealized appreciation in value.

So that's certainly a part of it.

I think if you're comparing us to a lot of primary life companies, I think that would be one differentiating feature to our business.

Relative to your second question, we look at all opportunities and have looked at the extent to which we may want to realize some of the unrealized appreciation in the investment portfolio, but it's not -- there's a whole lot of friction involved in that depending upon where the underlying securities reside in terms of our operating companies and the frictional costs of just liquidating some of that portfolio and the fact that you would pay tax on it or incur tax [liens].

So there is a lot of moving parts on that and it's not as easy as you might think in terms of just deliberating, but certainly we do look at that sort of a transaction and consider it continually.

Thank you, and one more.

Just in regards to the change in philosophy about giving EPS guidance, I think you guys have always said that on a quarter-to-quarter basis your business is volatile but on an annual basis, you are able to give a guidance range which more often than not you hit.

Is the change just the wild card of block acquisitions or what's changed exactly?

This is Jack.

The block acquisitions to me is the overriding influence.

It just seems to be more and more part of our operating structure.

So around the edges, that is incrementally, it does have an effect on our returns in any particular year and the pattern of operating earnings.

So yes, it's -- volatility has always been the case.

That hasn't changed dramatically but the fact that we do seem to be looking at more and more block transactions over the last several years and in fact put a rather large one on the books in 2012, that's influenced our thinking on EPS guidance.

Okay, thank you.

Jimmy Bhullar, JPMorgan.

Thank you.

Good morning.

I had a couple of questions.

The first one is on Australia.

You seem fairly optimistic but results have actually continued to disappoint the past several quarters so I am just trying to get a better idea on when you expect the benefit of repricing to help your results?

Maybe if you could give us some more specific idea on when you started to reprice the business, how much of the poorly performing contracts have been repriced already, and when should the entire book be done?

And then secondly just on your share buyback program, maybe if you could talk about potential in terms of timing of when you initiate the program and just the timing of the potential completion?

Let me take the first one, Jimmy.

The biggest problems in 2012 were from the group business.

The group business is more than 50%, a little bit more than 50% of our business in Australia.

They typically are three-year contract and there's been a lot of bad experience in the industry that has just in the last little while started to show and deteriorate.

And so we are repricing.

We have not been very aggressive in pricing that business, so you have seen a leveling off of our -- of premiums and even maybe a contraction in some of our premiums.

That is to be expected going forward as well.

And so this is occurring but these are three-year contracts and we will be repricing everything over the three years.

But you have started -- have you been into the process for about a year I'm assuming given that you had the charge in the fourth quarter last year?

Yes, yes, we have been -- the charge last year was more on disability, but yes, we have been repricing continually and probably it's good to think of this year as the sort of first year where we are seeing major repricing in the marketplace.

Yes, Jimmy, on the share buyback, we really look at that as an opportunity and a lot will depend upon where the shares trade, as you might imagine and our own internal analysis of likelihood of deploying capital in other ways into the business.

So it's not like we have an ironclad plan on when to complete for instance that authorization.

It may take a while.

If the stock trades off, obviously we would get it done more quickly but we just see that as one of the flexibilities we have in managing capital going forward.

Any reason why you didn't pursue buybacks?

Obviously you didn't have an authorization but why didn't pursue buybacks after -- when the stock declined sharply after third-quarter earnings?

Primarily as you mentioned, we didn't have the authorization and so we didn't have the opportunity to pursue buybacks at that point.

We were putting together a longer-term capital outlook, so we were taking a good longer-term look at not only how much excess capital we have but how that's going to be growing over the next several years.

But then as you think about going forward, should we assume that you would buy back stock if everything is normal and the results are fine or are you going to be more opportunistic and only do it when the stock actually pulls back because of a weak quarter or something else?

You know, that's a hard one to answer, Jimmy.

I can't say that our plan right now has it defined in one of those two categories.

Okay, thank you.

Ryan Krueger, Dowling & Partners.

Good morning, guys.

I don't want to beat the issue to death but I did want to just come back to the guidance and clarify something I think you said, Jack.

Did I hear you correctly that you said the 5% to 8% intermediate-term EPS guidance might be a bit aggressive near-term, implying that the near-term growth rate might be slightly less than that?

Is that what you said?

Not exactly.

Well, not exactly.

I did say that it could be considered somewhat aggressive but I didn't mean to leave the impression that that means near term we would expect to be out of that range.

Maybe a better way to put it is would be towards the lower end of that range depending upon how quickly we deploy capital check.

Yes, if you look over three years and you took the top of that range, 8%, that would be pretty aggressive to think of 8% for three years.

Okay, there's more just within the range than maybe you stated lower due to the timing of capital deployment near term.

Is that a fair way to think about it?

Yes, I think that's a better way to look at it.

Okay, great.

Then I just wanted to come back to the US mortality.

It bounced around a lot this year and I think you characterized the first three quarters as below your expectations and then this quarter much better.

When you think about the full-year 2012 experience, is that relatively consistent with what you would actually expect over time for the US mortality results or does it differ?

We think, Ryan, that we will look back on 2012 as a generally good mortality year and that part of that is saying that mortality on that block from the troubled years has deteriorated enough and settled in at a lower level than our previous expectations and for business of the same age and duration in surrounding years so that when we look back we will probably think 2012 was a pretty good year.

Okay, I see.

So it actually ended up a bit better than your full-year expectations?

Modestly.

I think that's what we will say, modestly.

Okay, great.

Thanks, guys.

Humphrey Lee, UBS.

Good morning, a question about the UK results.

I think UK operation has reported unfavorable claims in three of the last four quarters.

I think first quarter is critical illness and the second quarter was for mortality and then this quarter again it is critical illness.

So first can you quantify the drag in the UK for this quarter and then also how should we think about the operating results in the UK going forward?

Are you seeing any secular trend?

Humphrey, this is Jack.

In terms of quantifying the effect for the quarter, it's probably in the $7 million range.

In terms of what to expect going forward, the critical illness business had been running very nicely for us up until this year and we have had two bad quarters.

We are always alert for whether there is a trend involved.

The experience in the fourth quarter tended to be reflected very late in the year, so it is hard to get a reading at this point on it.

We have heard a lot of anecdotal evidence about poor critical illness experience in the marketplace in the fourth quarter outside of RGA.

So we don't know how to read it yet.

Having two bad quarters in a certain line of business is not anything to be concerned about.

It was first in the fourth quarter for critical illness this year, as you said, that that was difficult and we will be paying a lot of attention to it but we don't at this point hear or see any reason to send up any alarm bells.

Yes, the reason I wanted to ask about this is because some of the primary writers have been complaining about pricing in the UK.

Market has been quite aggressive in recent years so I was just wondering if there's any kind of quality issue a bit more recently in (inaudible) blocks?

You're right about that.

The market is a very aggressive and competitive market and has been.

We've mentioned that a few times ourselves -- a competitor in the UK market has been really for the last four or five years and this is business we will, as I said, be watching very carefully going forward and doing a lot of the study on.

But at this stage like I said, we don't really know that there is anything to be overly concerned about yet.

Okay, got it.

And looking at Canada, with the credit reinsurance reserve adjustment aside, the noncreditor business seems to be doing quite well for the fourth quarter as well.

I think the loss ratio was 87.5 compared to the mid-90s in the past two quarters.

Anything there going on and then also kind of how should we think about it going forward?

Well, that creditor reserve adjustment, you can think of it as catching up from the inception of time on the creditor business with more refined data.

That business, we expect that creditor business to be actually lower margin than our individual mortality business, but more predictable, less volatile because there's a lot of small amounts and reasonably manageable.

So we do expect that business to be stable although a little lower margin than our other business, so this was a bit of a one-time catch up to where we should have been over time.

Sorry, I think maybe I wasn't clear -- I meant the noncreditor business, the loss ratio seems to have improved this quarter compared to the past quarters.

So I think for this quarter it's 87.5 and for the past two quarters it was in the mid to high 90% range.

I was just wondering for the kind of the more traditional business if there's something changing going on?

Humphrey, you are right, the noncreditor business has performed very well throughout the year.

Some quarters a little bit better than others, but that performance of just the individual mortality business in Canada has performed better than our expectation for several years running.

Okay, then if I can sneak one more in, you mentioned that for 2013 your expense (inaudible) FIN 48 come through.

Like I think in the past usually comes through in the third quarter.

In terms of timing wise for 2013, should we expect that to happen as well or kind it will be different?

You're right that in the past when it was a more irregular role of year to year, it was typically in the third quarter because that's when we would finalize the tax return and so on.

I think probably any impact would more likely be in the fourth quarter of 2013.

That's a guess because we could become aware in some other quarters that -- or comfortable that we can release a year, but best guest right now would be the fourth quarter.

[Bill Proctor].

Good morning.

First of all, getting back to your guidance, I'm not sure if the numbers jive.

When you say you will have a return on equity of 11% to 12%, and your payout ratio is about 15%, so that would suggest earnings growth, earnings per share growth of about 10%.

Even if you invest $200 million to $400 million of excess capital a year, it would appear you are generating more than that even after paying your dividend.

So should we assume that you could make 10% with the difference between the 5 to 8 coming from either acquisitions or share buybacks?

This is Jack.

That latter point, that's the difficult part to predict in terms of not only how much capital will we deploy, but how quickly will it work its way into the return on equity?

And when we deploy it into a transaction, how quickly it reaches its sort of cruising speed in terms of ROE.

Those are all guesses.

Okay, the second point, I appreciate you don't want to create a capital gain from selling some bonds in your portfolio but on a go forward basis would it not make sense given bonds have outperformed equities over the last like 20 years that you would start allocating some money through equities as opposed to bonds?

Yes, you know, that's certainly a deliberation that we consider.

The capital requirements are different so a lot depends on where you would have those securities.

It's very difficult to allocate a lot of capital to a lot of investment to equities because of the capital required to do so.

It's also the case that taking capital gains on some of our biggest portfolios such as the Canadian portfolio means we would have to put up more reserves and more equity in Canada because our going forward interest rate would be lower.

So there's all sorts of implications of taking capital gains prematurely.

And my last point would be what would be your guess as to the split on your 33% to 34% tax rate?

What would your guess be as to the split between current taxes and deferred taxes?

Predominantly deferred taxes (multiple speakers)

Does that continue for some time?

It would be likely to continue for some time.

Okay, great.

Thanks very much.

Good quarter.

Steven Schwartz, Raymond James & Associates.

Good morning, guys.

I apologize in advance, I've got a few.

First if I can, a public service statement.

Would it be possible -- I know you guys don't want to do the yearly guidance and I can't blame you for that.

But would it be possible at least to get maybe a breakdown of the quarter or the year of what premiums look like in various countries, knowing that in the past it's been helpful in trying to predict the effects of forward currency.

So that would just be a request.

Greig, maybe you can talk about pricing in the US.

Assumed it was $19 billion.

I think that was a new low for as long as I've been covering the company.

What is going on with pricing given that penetration is obviously continuing to decline?

You know, there's -- I think we think that pricing is still okay.

We think that the returns we are getting on current new business are meeting our expectations.

We are aware of the fact that the size of the market continues to shrink a bit in the US and we expect that to ultimately put some pressure on some players, but we don't really see that having a huge effect on pricing.

It's a little more competitive than it was five years ago, but I wouldn't say too far.

We are reasonably happy with the pricing levels, just not with the production levels.

Okay.

If we can turn to taxes, I'm a little bit confused, Jack.

You talked about the active income finance exemption.

That didn't get passed until the first quarter as part of the fiscal cliff deal.

Did you apply that retroactively to 2012?

No, Stephen, we didn't because of the timing when it was extended, we determined that we really couldn't reflect that in 2012.

So it will be reflected in 2013 but because of the pattern of our international earnings, it won't -- the 2012 AFB won't have that dramatic of an effect.

We will reflect that in the first quarter, but it's fairly nominal.

Okay, so what you are saying is what just passed is going to be in the first quarter.

It's not going to be -- it's not going to have a big effect?

That's right.

My comment on further extension would affect the rest of the year and it's a little harder to call how much effect that would have.

Okay, all right, I understand that, thank you.

And then just revisiting capital and capital management, the $600 million, Jack, that you cited, I don't remember, does not include a buffer?

Yes, we are a little bit over $600 million kind of at year-end.

And yes, that -- what's the best way to describe it?

That doesn't include a buffer.

In other words that's an amount above and beyond what we view to be the typical requirement.

If we want a buffer, for instance, if we wanted a $300 million buffer, that would imply we've got $300 million that we could deploy.

But the way we looked at it, just to be clear, that buffer is kind a nice to have that over time we do shoot to have some sort of a buffer but if we had the opportunity to deploy all $600 million at what we view to be an attractive return, we don't feel compelled to maintain a buffer at any point in time.

That's more of a long-term issue.

Okay, great, then just thinking about capital generation, I know you don't want to get into earnings but how should we think of maybe free capital generated relative to GAAP?

Yes, what's the best way to answer that?

Our best estimate would that be that we would -- with our current portfolio of business, generate probably over $200 million, maybe $250 million-ish of capital in a typical year and it won't be exactly that.

It will be more or less.

But that's what we would expect and we would expect to have access to that capital.

In other words, it's not locked to any meaningful degree in operating subsidiaries.

We can move it and we can use it if we have deployment opportunities.

Okay, one more if I may.

On the creditor business in Canada, if my understanding is correct, what you are basically saying here that upon further review, the loss ratios in the past were probably recorded a too high a level.

I notice if you add back the $16 million, the loss ratio in the creditor business in Canada would be around 34%, which would be kind of the low-end of the historical range.

Is 34% a good number to go forward?

I am not quite sure of your calculation.

Keep in mind that that $16 million adjustment is cumulative over not -- seven or eight years, a fairly long period of time.

Okay, that's good info.

Thanks, guys.

Good quarter.

John Nadel, Sterne, Agee.

Good morning, everybody.

I just have a question about the 5% to 8% over the intermediate term.

Should we be thinking about that as interchangeable between operating earnings and EPS in that -- I think you are baking in $200 million to $400 million of annual capital deployment.

Perhaps that comes in the form of a deal.

Perhaps that comes in the form of buybacks or some combination of the two.

So should we be thinking about the 5% to 8% as interchangeable?

John, this is Jack.

It's very close to interchangeable so yes, I think the differential would be fairly insignificant, so I guess the answer is yes.

Okay.

And then on the -- I may have missed it.

I think it was mentioned in prepared remarks, could you just remind us what your estimate is for pressure from sustained low longer-term rates?

Yes, best guess is probably about $0.25 a share.

In 2013 over 2012?

Yes, and then likely diminishing after.

In other words we don't expect that to just continue at that level, but that's a reasonable estimate for 2013.

My last question is a little bit more touchy because I want to ask a little bit about compensation.

In the past, as I recall, management's short-term incentive compensation was very highly correlated to achieve EPS within your annual guidance range and so now without specific annual EPS guidance, I'm just wondering if that shorter-term incentive program is changed as it relates to sort of what are the key drivers?

The answer is no, John.

We will have an internal target that we are aiming for with an operating earnings EPS target in there and we will also have revenue and ROE as components of our compensation as well.

Okay, I understand the idea of moving away from stated annual EPS objectives but if it is indeed still a key driver of how management gets paid, I guess I am unclear as to why it wouldn't be disclosed publicly.

I think it's for the reasons that we mentioned earlier, that we tend to have a fairly broad range of possible results.

Even though we've managed to hit near the center of our guidance I think the last two or three years at least, that -- it's really the case that we have a fairly broad range of possible outcomes and we live within that but we think it's not anything to fixate on, the annual guidance.

We would rather look at longer-term growth rates and trend rates.

I appreciate that fully, especially with your business.

If I could sneak one last one, just asset-intensive, Jack, this quarter was significantly above what at least I can say what I was expecting.

Can you help us understand what sort of drove that?

Yes, maybe let me take a step back first in terms of going forward.

That is an intensive business.

We would expect a run rate just based on the generic business as well as what's in the portfolio now to be in the $30 million to $35 million per quarter range, maybe a little bit towards the lower end of that estimate.

In terms of the fourth quarter of 2012, we had several treaties that just performed better than we would have expected and sometimes you will have things fall your way a little bit with respect to investment earnings and that really what happened in the fourth quarter.

I will remind you also that the large transaction that we executed as of the beginning of the second quarter for the second and third quarter, we were doing a lot of investment repositioning.

We really completed that process in October.

So we really had a pretty good run rate on that business for all of the fourth quarter and that contributed fairly significantly.

Is it fair to characterize the Hancock fixed annuity coinsurance deal is now especially given they are fully invested, is that at your sort of targeted returns?

Yes, it is.

We have completely deployed in the manner that we expected and it is meeting those return hurdles.

Terrific.

Thanks, guys.

Paul Sarran, Evercore Partners.

Thanks, good morning.

It seems like you've had a fair amount of luck getting block deals done in Europe.

I was wondering if you could comment on what the outlook over there is, what you're seeing, and kind of how much more to this opportunity there is?

It's hard to tell.

The opportunity set looks pretty rich.

We have done a few transactions that were similar over the last couple years.

We did a couple of this year and one last year and so we are trying to repeat that process wherever we can.

But it's not clear how much additional opportunity scope there will be.

There is potentially a couple, I suppose.

But we do view that the European market does offer a lot of in-force block opportunities because of some of the Solvency II and some of the other things happening in Europe and the realignment of insurance companies there as they react to these new forces hitting them.

So there seems to be a lot of opportunities.

It's always hard to predict exactly what's going to happen.

If we have an opportunity to repeat a success, we will try to do that like we have done successfully in the last couple years, but it's hard to say what is really going to happen in 2013.

Okay, then a quick question on FIN RE.

It looks like operating expenses were a little bit high, kind of $4.5 million versus a run rate the last several quarters of $1 million to $2 million.

Was there anything unusual in the quarter there?

And then looking forward, you have had pretty strong growth rate -- I guess same question, how much more is there to this opportunity?

You know on the expense levels we did have some structuring costs associated with some deals that we put on the books.

So that will bounce around a little bit but that's what you saw in the fourth quarter in terms of growth rates.

But Greig, I don't know if you want to add.

A lot of the growth has come in international markets.

We think that in Asia in particular there's a lot more financial reinsurance opportunities in the near term because the growth rates in that market are so high that it puts capital pressure on companies and it looks like a very good market for us.

We're also trying to develop more opportunities in other markets that we haven't really penetrated yet, so we are pretty optimistic about the reasonable growth in the financial reinsurance businesses.

Okay, thanks.

Scott Horsburgh, Seger-Elvekrog.

Good morning, thank you for taking the call.

Just another way of trying to spin the guidance, the intermediate-term guidance, so maintaining the 11% to 12% return on equity target and growing 5% to 8% a year implies the excess capital generation you guided to something like $3 to $6 per share per year on average.

And so what's the priority and the timing of reinvesting the excess capital or then ultimately deciding to return it to shareholders?

Scott, I would say the priority is -- typically has been to reinvest in the business if we see returns that are attractive.

So the problem is determining timing on that because you just can't tell.

There are extended negotiations and that sort of thing on most of these block transactions.

So I guess I would state that we are looking at deployment in terms of in the business as well as through opportunistic buybacks somewhat equally.

In other words, both are attractive and we think we can accommodate both going forward.

I don't know if that necessarily answers your question but that's the way we look at it.

In a way it does.

I guess I'm just wondering at what point does the capital build up to where you kind of feel forced to do something either on the dividend or on the buyback?

Yes, that's a tricky one because as you can imagine at any point in time, a lot depends on where we are vis-a-vis discussions on block deals and how we handicap actually executing and closing those deals.

But maybe a better way to express it is if we go deeper into the year and just don't feel we've got opportunities that we think we will be able to execute, then we look much more strongly at certainly our dividend as well as buybacks.

Okay, that was helpful.

Thank you.

There are no further questions in the queue at this time.

I would like to turn the call back over to Mr. Lay for any additional or closing remarks.

No remarks other than thanks to all the investors and analysts who took the time to participate this morning.

With that, we will close our call.

Thank you very much.

This concludes today's conference call.

We thank you for your participation.