Reinsurance Group of America, Incorporated Analyst Meeting
Copyright: | (c) 2011 CCBN, Inc. and Roll Call, Inc. |
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We appreciate you taking time to be here in the room and to those also on the webcast. Before I turn things over to
We'll make certain statements today and discuss certain subjects that during the course of this meeting that will contain forward-looking statements, including among other things, investment performance, statements relating to our growth potential of RGA and the subsidiaries. You're cautioned that actual results could differ from expected results. A list of important factors that could cause actual results to differ materially from expected results is included in the presentation as well as our
In addition during the course of the meeting, we will make comments about our results based upon operating income and operating return on equity, under
Turning quickly to our agenda, you can see we've got a full list of speakers here today. We will take a break mid-morning around 10.00, there'll be refreshments out here for people in the room. We have a 45-minute Q&A at the end of the meeting so I'd ask that you hold all your questions until then, that will allow us to get through the presentations. We certainly hope you find them information and we plan to wrap things up at noon today. So with that, it's my pleasure to introduce
RGA has been -- from its history as a public company in 1993, a growth company -- a double digit growth company. We want to make a point today among other things that we still are in some sense a growth company that has growth businesses embedded within the operation and there are a lot of engines for growth within RGA. At the same time, there's also parts of our business that are maturing, that are running efficiently and producing considerable value and bottom line results.
If you take a final look at RGA, you'll see we can break down either geographically or by product mix into a series of businesses that are either on the value side or on the growth side. And in some cases, for example,
Haven't been very successful at doing that and we're at the point now where we're beginning to refine our capital and trying to operate on a more efficient basis and Jack will focus a lot of his discussion around some of those themes. Nevertheless, having said that, we did enter into the significant number of capital motivated transactions last year, they weren't all the sort that used a lot of equity capital, a lot were financial reinsurance with the fee income base. But, generally speaking, we've been doing a lot of work for companies that have been looking to raise capital or bolster their balance sheet one way or another.
And furthermore, we feel that those sort of opportunities are continuing to come along. And so whether we actually use equity capital or do financial motivated reinsurance, it doesn't use our own equity base to a great extent. We feel there is a lot of activity in this sphere and it's going to continue for some period of time and a lot of that has to do with the -- some of the changing dynamics in the world and we'll talk a little bit about that too.
So we feel that we can pursue these opportunities from a position of strength. We have strong operations located in most all of the major markets where life reinsurance has done around the globe. And not only that, we've had a strong history of success in building those operations where we've been established for a period of time, RGA is always and I think without exception, among the leaders at least in the market place.
We posted another strong year in 2010, it was -- yet another in a series of strong years and we had the fifth consecutive year where ROEs were at least 13% and we'd like to shoot for something like that this year. We're actually expecting it to be a little bit below 13% but, you know, we're going to be pushing everything we can to try to get us back up towards 13%. And if it falls, it's only because of the interest rate in our portfolio of assets that's bringing things down.
You'll notice that our growth in operating income over a four period of 18% compounded actually exceeds the growth in premiums by a considerable amount. Now, on an EPS basis, it's not quite so strong, but remember I said we were sitting on a little bit excess capital. And so if you just look at the earnings power of our core business, it's been producing very strong results over the last four year period and we'd like to believe that we're going to continue that and we don't really plan to hold as much excess capital going forward as we have been over the last couple of years.
Premiums for their part have grown 11% over this four year period. It actually was above trend in 2010 with something like a 16% growth rate. However, we must remind you that we did acquire the
So, we had a little bit of help to bolster the growth rate last year but nevertheless we believe that in 2011 that we can have premiums of 8% to 10% up, something like that and that's what we fully expect. If we miss that, it won't be by much or it's going to be likely because of currency. As I said, we have not the same growth dynamics we used to have but we do have several growth engines within the RGA mix of businesses.
Here's a slide we really like, the book value per share has grown very consistently and we often speak of the volatility inherent in taking mortality risk and from quarter to quarter you can see that volatility. But, when you look at the steady march upward of book value per share, it's very impressive. And this has been true since we went public in 1993 over any period of time except for a little bit of flattening in '08 and a little bit in '07.
The compound growth rate is more like 13% or 14% depending which period you take but it's very consistent and always strongly upward. We really don't expect any change in this pattern, we expect that the book values will continue to march forward as our business matures and as we continue to add to our overall base of capital. You notice the multiple on the bottom, we do expect that book value will continue to march forward and we look forward to the time when the market value approaches more historical levels.
Next two slides come from a consulting group called M&G which is based out in
And RGA and
It's clearly an area where we have scope. We don't have a long history of this sort of a roll up of market shares on a worldwide scale but my senses that the industry is getting just like you see it in another places. A little more concentrated as time goes along and that these market shares by the leading companies are increasing rather than decreasing.
One of the other things that M&G tries to measure is how customers perceive the capabilities of the reinsurers, not how they perceive, that is not how M&G perceives the capabilities but how customers through this extensive interview process perceive the capabilities of reinsurers. This is a global roll up so it's a composite of a lot of things. We have one of these by country as well.
And overall, RGA always comes out quite well in this. And when I say that RGA is well positioned to take advantage of the changing tides in terms of regulation and capital regime and accounting methodologies, I mean that we're very much present and very much respected in all the markets we deal in. We try to pay very close attention to what the customers say.
And in fact, later on,
Now, the life insurance industry -- the life reinsurance industry we think is one that will have plenty of opportunity going forward. We think this is actually a pretty good time to be a life reinsurer. And we say that because there's a lot of things going on that will provide stress and strain on some of our client companies, new capital requirements, new accounting regimes, changes in all sorts of things like that causing new product designs, new forces coming to bear on the balance sheets of these companies.
Reinsurers tend to react a lot quicker than direct companies do because we don't have the big processing plants, we don't have the staffs of tens of thousands of people, it's a big life insurance company. We don't have the extensive sale forces and marketing and distribution channels to manage at the same time we're trying to make other changes; we can react a lot quicker.
So, when changes like these happen in an industry, there's always opportunities for us to lead the way, find ways to be intermediaries, helping companies get to the place they want to be. And there certainly are a lot of pressures on our customers today. New capital requirements like Solvency II which will take place in 2013 and people are already well under way in building their capital models to deal with this will require some increased capital, in particular in a number of different categories.
And when capital requirements are strengthened, they tend to be over-strengthened in many places. So, that's where we find the opportunities for a company like RGA. To take advantage of places where regulators have gone too far in setting capital requirements and we get comfortable and the (seeding) company gets comfortable with essentially sharing that burden.
So, new capital requirements, Solvency II in particular which is a European initiative will provide a lot of opportunities. IFRS Phase 2, we don't even know the rules yet but we know it's coming and the early exposure graph pointed to a lot of opportunities where reinsurance can be effective in helping companies navigate through that. There's new capital regimes coming in parts of
At the same time there might be some tendency to decrease some of the Triple X regulations; we're seeing capital increase pressure on other fronts as well. In addition, we think consolidation in the primary industry always provides opportunities. The combined entities don't always want to keep all the businesses they acquire, there's opportunities to buy pieces, there's opportunities to help companies after an acquisition to transition so that they combine -- that the combined entity has less of an operational risk than they would have otherwise as they try to integrate.
And so there are a lot of opportunities for us to deal with a consolidating world. You might think that consolidation is a negative thing. Potentially it is because when there are fewer customers and the same number of reinsurers then you'd tend to think that maybe you're going to get less reinsurance.
In fact, more often than not, what's happened historically is that consolidation meant that there were fewer bigger companies as clients who tended to reinsure more rather than less than the combined reinsurance of the smaller companies that made them up. And part of that is because the surviving entity tends to be better reinsurance buyers and tends to be more active reinsurance buyers but it just has been a phenomenon, we've noticed in markets like
It happens very often that when there's consolidation in the industry, the reinsurance volumes actually go up. When I visit any company today, it seems like and I was just out visiting some companies earlier this week. The conversation always turns around and what can you do to help us with our ROEs or what can you do to help us with our growth.
One of the two, and sometimes it's both but it's very often one or the other and it's large companies, small companies, mutual companies, public companies, they're all feeling these pressures in one dimension or the other. There's very few companies that are happy with where they are today. And again, that's a reason for us to be very busy and we are.
And -- while it's not in the same category as an opportunity for growth, I'd be a little bit remiss if I didn't just mention the fact that we really like mortality risk business which is the predominant business we're in. We think that mortality will continue to improve, has continued to improve over time in a very steady way if you look at it over periods of time, not clear at any given year how much it's going to improve, it's just like the mortality risk. In general, it has its ups and downs but mortality is generally improving, there are a lot of things on the frontiers of medicine that we believe are going to be beneficial to improving longevity in the future and we like this business and we want to make sure we stay very active in it.
At the same time of course there's always some challenges for the life reinsurance industry. There's a long term trend for decreasing session rates in the US, the biggest reinsurance market in the world and we expect that 2010 when the numbers are actually finally tabulated that there will be another decrease in the session rate. We see this as a phenomenon that we'll probably continue more likely than not although it's not going down in a big way, it is continuing in its relentless march downward.
We have managed to keep RGA's market share on the increase during this period of time so our production has been fairly steady over -- relatively steady over the last several years. But, you know, eventually the new business will begin to fall off in the US market place unless this trend is reversed, and there doesn't seem to be a lot of things turning tide. There seems to be some stalling of the speed at which the companies are increasing their retention and decreasing their reinsurance but there's not a lot that's reversing.
The changing mosaic of regulations and rules, credit for reinsurance, the counterparty exposure concerns, all these are cause for us to be very careful in how we operate. We have to be mindful of all these changes that affect us just as they affect our customers. And we have to make sure that we don't take on a lot of business that's not going to work in a future regime.
And so, there's challenges inherent in things that are going on in the outside environment. At the capital requirements on us will increase just like they will increase on our customers, and to some extent we talk about the excess capital we hold and we're always a little bit big on that. And the reason is that the capital required is defined separately by the rating agencies, each rating agency has a different measure, the regulators have a different measure, we have our own internal economic capital model, which shows how much capital we should hold, that's a different measure, so it's necessarily vague when we talk about how much excess capital we have, because it depends on what measure you're talking about and who's measuring it.
But, it's clear that in all cases, everything is pointing in the same rate. The low interest rate environment is one that's caused life insurance companies to take a pause, especially at things looked last summer. It looks a little bit better today as we stand here than it did maybe six months ago but it's still something that we're concerned about and it cost us considerably in terms of bottom line over the last two years just on our portfolio. Our portfolio yield continues to fall and we expect that happen in 2011 as well. Consolidation in the primary life industry I've already talked about and the accounting changes are part of this regulatory swirling mosaic of impacts on the life reinsurance industry.
So, in balance, RGA is a company that's in transition. And by that, I don't mean to say that we're starting a transition today and we're going to do some big things. But what I'm really saying is that we've been in a transition for the last ten years and it's been slow and steady doing it as carefully and methodically and responsibly as we possibly can.
We have gone from a company where every business was a rapid growth business to a company where some businesses are growing rapidly and some businesses are more mature and are generating nice profits and we're trying to manage them for efficiency. We are also trying to diversify and have been diversifying for a number of years both geographically as is probably very apparent if you look at some of our reporting but also in terms of product mix. Things like annuities, a various different sorts, long term care, group insurance, group reinsurance I should say and some health coverages.
And while those are being carefully monitored and going slowly, the size is beginning to add up a bit and RGA is not the -- not quite the simple mortality-only company that it used to be. We've diversified our revenue sources and, over the last decade and that's produced a significant benefit in terms of stabilizing the bottom line. And so, you'll see some of the discussion of growth opportunities couched in product terms and both Paul and Gary will talk about that as well as some of the geography terms.
And -- investment portfolio, we have
So, it's not without its issues but the investment climate looks a lot better than it would have of course a couple years ago and even better than it did a year ago. So, we're very happy about that and you'll hear the basic message from Dave, I think, very well. With that, I'm going to turn it over to our CFO,
Then I'll talk a little bit about capital management; most of you probably have seen several announcements that have gone out the last couple of days in terms of refining the capital base, taking out a particular security. I will comment on what we're doing and why.
I'll comment a little bit on our liquidity situation as a holding company and more broadly enterprise-wide. And then I'll talk a little bit about how we see the differentiation of RGA as an investment compared to some of the companies with which we're compared, primarily direct life insurance companies.
Okay, start off with a 10-year look here in terms of net premiums. Greig presented a five-year look. The point here is that we've seen a steady march upward over this ten-year period. And if you've gone back into the prior years, you may recall we went public in 1993. But if you went back all the way to '93, you'd see a very consistent upward trend. You'll see about a 17% compound annual growth rate here over that 10-year period.
You see a fairly consistent pattern. A little bit of a jump in 2010, we did acquire the
In terms of operating income, this is on a gross dollar basis. You see, we are at a half a billion dollars in operating income in 2010. Likewise, you see a very consistent pattern here in terms of that march upward, 15% compound annual growth rate over that period of time.
Greig had commented you don't see the exact same pattern in terms of operating earnings per share which we reflect on the slide presented here. You see about a 10% compound annual growth rate in terms of that 10-year period.
You see a little bit of dislocation now and then that typically relates to either a year we had particularly difficult mortality or a year in which we raised capital. Best example there would have been 2009.
At the end of 2008, we raised equity capital so the share kind of increased. And you see a result and slight drop in the operating earnings per share as we didn't deploy that capital as quickly as we had hoped to.
In terms of return on equity, we presented here a 10-year look. It's been a very consistent pattern. You see it unlike, for instance, property and casualty reinsurance companies where you're hit with casualty losses that can really buffet earnings from year to year. You don't see that in a life reinsurance operation. The fact is you see a very consistent pattern there in terms of returns.
And particularly over the last five years, you can see it's been 13% or 14%. We gave up a little bit the last two years in terms of a little bit of downward pressure on the investment yield. We expect to see a little bit more of that in 2011. But for the most part, we expect to see a continuation of all of these in that 13% to 14% range for some period to come.
In terms of expectations, first, I'll comment on our premium growth rate. We expect to see a continued increase in life reinsurance in force and a resulting continued increase in that premium growth rate.
It may not be at historical levels in terms of year-to-year increases. A lot depends on new business production and whether we take some new business on a full risk basis versus more of financial reinsurance basis. Greig had commented on that. But the point is we do expect to see a continuation of this growth and the underlying base of business and the premium line on our P&L.
All these that I just mentioned should continue at current levels. They should or could show increases to the extent the investment yields tick up. And we would expect to see some of that. It's just hard to call when, but it's kind of we feel would -- we're getting to a low point with respect to investment yield.
Book value per share, you saw the graph earlier. We would expect to continue that very consistent growth rate. And it's been
And, you know, suddenly, RGA -- as Greig reflected in his graph -- is really one of a small cadre of very elite global reinsurers currently. And we certainly enjoy being in acquisition and plan to take advantage of it going forward -- I should say continue to take advantage of it going forward.
A little bit on capital management, our capital levels. You see here total capitalization, this is through 2010. You see about 5.5 billion of total capitalization made up of equity, some degree of hybrids -- and we'll talk more about that in just a second -- and some long-term debt.
We feel this mix is about what we like. You know, we may shift some of the hybrids into the debt column depending upon rates and rating agency treatment, that sort of thing. But certainly, debt and hybrids are in our view a permanent part of the capitalization so we won't expect to see that change dramatically.
We will see, as we go through the refinement of capital, the total capitalization come down likely about
In terms of current capital management, you know, currently, we've been saying this for a couple of years. The degree to which our ongoing base of business throws off cap earnings and capital essentially just about or does fund the capital needs as the business grows.
It's hard to be too precise for some of the reasons that were brought up earlier, you know. Each rating agency has a little different model. Our own model goes through changes as we continue to develop it and so on. But you can look at RGA's base of business currently as relatively self-sustaining in terms of capital generation which means we have been sitting on -- I should say which means we have been sitting on by the
We continually look at opportunities to deploy, but it's just -- as we said in the past, it's very difficult to call the timing on those opportunities. So, we felt it a good time to go through a capital refinement, we valuated, taking out the peer securities versus just a common share buyback. We ended up announcing this week a takeout of the peer securities through a call.
We like that options better because just a common share buyback, while it would have had a little bit more dramatic current effect in terms of ROEs and operating EPS, we still would have been saddled with a security that ultimately had 5.6 million common equity shares that would come out to the market when we took it out. So, we thought now is a good time. It becomes more and more expensive as our share price goes up. So, we pretty much defaulted to the retirement of the peers.
It doesn't mean that's the end of our capital refinement. It means at the end of the current capital refinement, we will continue to look at our equity base and our total capitalization base and try to run it prudently and as efficiently as makes sense under the circumstances.
To the extent that we do have an opportunity to take a look at a large acquisition, we feel that the capital we're taking out in this refinement probably wouldn't have much of an impact on that. We think we can raise capital if and when we need that capital.
So, we certainly don't feel any capital refinement activities block us out of any future acquisition opportunities. And as I said earlier, we'll continue to take a look at the capital base for any significant, or for the refinements.
Now, a few comments on the peer security. We issued that security 10 years ago, and when we issued it, we didn't really expect it to be outstanding for 10 years, but it was for a variety of reasons.
And it's becoming more and more expensive as we sit here, as the stock has run up. We're paying a 5-3/4% coupon on that security. And it just felt to us like it was an overhang in terms of potential dilution in the future.
There was some current dilution in terms of bleeding into the average share account, in terms of calculating EPS. And certainly, there's quite a bit more dilution ultimately when we take out the security because we have to issue 5.6 million shares. So, we thought now is a good time to take that security out.
Comment on the additional shares. Coming into the share count, they come in really consistently and at a fairly slow pace. It's where US GAAP recording doesn't really, in my view, reflect all the dilution that is out there associated with a particular security. But it would continue to grow as time went on.
By taking it out now, we think, on an annual basis, it would add to EPS. Probably
In terms of ROE, we think it will add around 40 basis points to ROE just having the security out of the calculation or out of the capitalization I should -- I should say.
We will have 5.6 million securities delivered as we take the peer securities out. We plan to mitigate that dilution through a buyback, likely an accelerated buyback, not for the whole 5.6.
We've already taken 3 million shares out as you may have seen in the announcement yesterday in terms of we negotiated a buyback of a large block of securities that were still held by
With the security out of the capitalization structure, that means
In terms of just our equity capital base, the transaction will take out about 200 million. I'm not talking about total capitalization, I'm just talking about equity when the dust settles, roughly
In terms of capital management going forward, we're committed to maintaining an efficient capital base in terms of running our business. We like to keep some degree of redundant capital on hand. And redundant, as I said earlier, is kind of in the eye of the beholder. But we think
I commented earlier on the capital generated by our businesses. They roughly are self-sustaining. And we have more of a focus, and some of these financial metrics take on more prominence in different cycles. But certainly ROE is a measure that we tend to focus on more than any other. And we will continue to have a strong focus on our return on equity.
A few comments about liquidity. I'll comment on some debt that we have coming due at the end of this year, our approach to managing leverage and also funding at the holding company.
First will reflect just kind of a laddering of our debt. This is our current debt outstanding. You can see
We have
So, we got in our view a pretty good laddering there. And you can expect us to kind of continue that sort of thing. We like 10-year maturities. We like to have them roll off every two to three years. And we view it to be pretty much a permanent part of the capital base. You see the peers mentioned here, those will be history in a short period of time, but that likewise was part of the capital base.
In terms of the 200 million that rolls off this year, that carries 6-3/4 coupon rate. It would not be a surprise to see us refinance that or pre-fund it maybe is a better way to put it -- before the end of the year. We constantly take a look at that sort of thing. So, a lot will depend on just when we think the time is right. But as I said, that would not be unusual.
We also have a
In terms of how RGA manages its leverage, I mentioned earlier, debt's really a permanent part of the capitalization. As a regulated financial institution, it's hard to lever up too much. From a management standpoint, we don't want to wake up and be overleveraged and sort of the rating agencies and other interested investors take a look at that so you'll never see us as a highly-leveraged company.
We've commented on the laddered maturities in terms of debt and the fact that we like that and the fact that we control the overall capitalization and relative leverage to maintain an appropriate capitalization for our business profile and our ratings requirements and so on.
In terms of holding company liquidity, we target liquidity at about
The liquidity has -- at the holding company level has historically come from securities offerings. And going forward, it would not be surprising to see more funding at that level from securities offerings.
But we are at a point where the overall growth rates are not the 25% that we saw ten years ago where you simply couldn't upstream any dividend. It just didn't make sense. We're now at the point where we have that flexibility because the growth rates moderated to some degree. So, as a result, we may be more compared to zero because in the past we haven't upstreamed dividends. But soon we will have that capability going forward.
Quick comment now just on how we're different. I think a lot of you understand this. Maybe those that are new to the story don't understand it quite as well. But RGA doesn't have a lot of comparable publicly-traded companies out there against which one could compare RGA's operation and stock performance and that sort of thing.
Our biggest competitors -- and Greig referred to this -- are the big Europeans that are typically multi-dimensional in that they are property and casualty reinsurers as well as life reinsurers, they have a number of different businesses. So, it's not particularly easy in terms of trying to compare the RGA operations to those enterprises.
As a result, we're typically grouped with life insurance companies in the US and for better or for worse, lots of times, we're compared in terms of operating performance to those direct writing companies and we're a little different from direct writing companies.
We've got very low equity sensitivity. We have reinsured some VA business, but not a dramatic amount. Right now we have no open VA [Trees], so we're not really taking on any additional equity-related risk in that respect.
We have relatively low-asset leverage. It's a little higher now than it was ten years ago because of our asset intensive business, but it's still lower than most of the primary companies against which we're compared. So, that's one differentiator.
We're primarily a mortality investment which is a more consistent risk than some of the other risks like interest risk and some of the market risks that we've seen that have sustained quite a bit of volatility over the last several years.
In our view, we would argue we have a relatively high ROE. You saw the graph earlier in terms of fairly consistent ROE. That's relatively high in the group against which we are typically compared.
We're well diversified and that we're primarily a mortality company, in fact, we're diversified with respect to the various mortality bases around the world. We're well-represented in virtually all the large life insurance markets around the world. And we've got a management team that's been together a long time, has delivered the sort of results that we've commented upon earlier and the consistent growth enterprise-wide.
Last point on RGA as a differentiator. We sit on a huge base of mortality business. And even if we don't write any more business going forward, that base just kicks off premiums and margin and operating earnings for years on end. It's a very long-term business and it will kick off profits on a very long-term basis.
So, that's a little bit different than some of the companies against which we're compared that maybe have shorter duration in their portfolios and that sort of thing. So, anyhow, that's the differentiation.
That concludes my comments. I'm going to turn it over to
Create optimal portfolios. Well, I'm setting myself up a little bit. You get ten smart people in a room, you got ten different opinions about what an optimal portfolio is. Around the halls of RGA, I get a lot of suggestions along those lines, too, all of which are appreciated.
But as Greig mentioned, there are risks out there that we are thinking about that are somewhat reminiscent of what we've recently been through. We live in an uncertain world with an uncertain future.
And when, the way we define the optimal portfolio is what is prudent for the reinsurance that we've written, we need obviously yield to meet our ROE goals. But we also need to make our commitments that we've made in our reinsurance treaties. So, the optimal portfolio for us is really balancing what I would call playing offense with playing defense.
When you look at the cash flows that we are trying to fund into the future, the re-insurance commitments we've made, they are longer duration but fairly easy to predict. So it really looks like a bond portfolio on our liability side, so it makes sense that our asset side is mostly bonds and fixed income which is consistent with other life insurance companies.
So we are a credit investor. That's what we focus on. We lend money to corporations, government against the different forms of commercial real estate, residential real estate and some consumer receivables.
Risk Management, one of the things that -- obviously, as a company we have appetites and limits for different risks, that includes investment risks. We have investment policies not only on a consolidated basis, but on a lot of different segments. But probably more important in my mind from risk management is just the culture of the team.
And as a credit investor, we are very focused on what we call the four Cs of credit. A lot of people use these phrases. Are the people that we lend to, do they have the capital? Do they have the cash flow? Do they have the collateral, and do they have the character such that we want to lend them money.
And that's often a very hard thing to discern. And there will be sometimes situations where you would lend money to the marginal situations because you think the yield justifies the risk. But as far as culture, I call it this credit intensive culture that we really need to have for our investment team to be successful.
And the person that runs our bond desk has, I think, the perfect mindset to be a credit investor. She approaches the world from a glass-half-empty-point of view, which is what can go wrong? And that is a perfect way to approach a credit lending environment. So that's part of our character and part of our culture.
Another thing that is important is we monitor the portfolio on a total return basis. Now, I know that there's a lot of difficulties in paying bonuses based upon total return and other aspects of managing an insurance company from a total return standpoint. But it's very important to monitor your portfolio that way because you understand that the risks you took last year, how are they being priced today?
It's a feedback loop on the decisions you made a year ago. It could be very helpful to the decisions you are making today. So that will remain something that we care about a lot, which is looking at the total return of the portfolio.
The last thing - is there a margin of safety? This is a phrase that was part of the Ben Graham book, Intelligent Investor. A lot of people use it. It's a phrase that we try to keep in mind as we think about going about our business. And back to this playing defense, if there's no margin of safety we're going to play a little bit defense in the portfolio.
These next three slides are particularly created to give our Board some visibility about our process because they were recently asking me about this. So I will go through this in more detail with them next week, but I just want to point out a couple of things from these slides to you.
You'll see that our asset liability management process, I described "new deal" here. And one of the things that is unique about RGA from my days working for a direct writer is the policies don't come in one at a time. There's often discrete blocks of policies in one treaty. And so you've really got to get asset liability management right at the time you do a larger treaty, which often is the way we do business.
So these first four chevrons here are this back and forth process that we have with our pricing actuaries and the [seeding] company is often involved, and our business development people is understanding the cash flows of the underlying policies that we're perhaps reinsuring.
We come back with some preliminary solutions, but it's an iterative process where there's a lot of feedback loops in the way or in the part of the process. Often it takes months. We even had one deal that took over a couple of years from initial discussions to getting the deal done.
You'll see that second to the right, pricing win deal. Well often we're doing analysis on transactions that never happened which is something you need to RGA from what was more my situation when I worked for a direct writer.
If we do get the deal though, we've got an asset strategy that we'll implement and then this block is added to some other business segment and that's really where we're trying to be smart about do we have the optimal portfolio at the business segment level?
And so, that's how we add it into a business segment. And then, the next chart just shows we've got, really, the consolidated portfolio's nothing more than this bottom up process of doing deal by deal and then adding them into business segments and the consolidated portfolio is there just because it's made sense from how we built there from a bottom up standpoint, but we do have this consolidated investment policy that we compare things to as a risk monitoring vehicle.
And all the way over to the right you'll see this consolidated investment policy gives us parameters on risk budgets. You'll see though that interest rate risk -- as a company we're not trying to take very much interest rate risk when you look at the assets and liabilities together. Now that's been a little bit of a challenge for us to measure is what is our value at risk when we look at the assets and the liabilities but we're trying to keep that close to zero and the same thing for currency risk.
So you'll see our value of risk for assets and liabilities for both of those is supposed to be as close to zero as we can get it but what our investment is really doing is intermediating credit risk. And we have an economic capital budget for credit risk that we're managing around and that's primarily the investment risk we're taking.
We do have some equity risk in our portfolio and that's small and as we possibly face a little bit more inflationary future we might do a little bit more in equity investments as a hedge against that but we are, like I said earlier, substantially a credit investor.
Now I'm going to just show you some different views of the portfolio. Now our balance sheet presentation and what we have done in our QFS, our Quarterly Financial Supplement has been looking at the investment portfolio a little bit differently than I'm showing you this morning. But this is the way our investment team really looks at the portfolio.
This is including the asset intensive funds withheld but excluding the policy loans and the non-asset intensive funds withheld and that's
And let me just say that our book value is
But other things about the asset allocation, as opposed to other life insurance companies we probably have a higher percentage in agency, provincial, and other government bonds that would be largely though because of our
Like other investors though, life insurance companies, corporate bonds would be our largest asset class. So between investment grade public corporate bonds, 36.5% of the asset portfolio, less than investment grade or high-yield corporate bonds, 2.65%, and then corporate private placements of 4, though it is our largest asset class lending to corporations.
And this asset allocation hasn't really changed a lot over the last couple of years. One of the things I think I'm grateful for or maybe proud of is two years ago when obviously a lot of people thought the world was about to end, some of our either, you know, peer companies or often other clients, they were forced to do de-risking of their portfolios at close to the lows. And even though that was something that we were pondering whether we had to do that, we really didn't feel like we were in a position that we had to do a lot of de-risking of our portfolio, so that was a nice thing for RGA is to not sell a bunch of bonds at the low.
Now I'm going to give you a couple of other looks of our portfolio using the same denominator,
There has been some credit migration downward over the last couple of years with downgrades of CMBS and some corporates. So that's now 4.5%. I think it was maybe slightly over 5 a year ago maybe. But it was only in the 3s predating the crisis so we're still -- we had a little bit higher numbers there but most of the other public life companies would have more like 7%, so we're still conservative on that respect.
And frankly we are wishing spreads would have stayed wide for longer because maybe we could have increased our risk a little bit but there's been a very fast snapback of the credit spreads which has been faster than I would have thought two years ago.
The next one is looking at the portfolio by currency. The US dollar remains our largest class of investment currency but the Canadian portfolio is 18% of the total assets and the Australian dollar is about 5%. These other currencies I know that on a premium basis they're higher but they haven't accumulated a lot of investment balances for this point.
One of the things that I did here and I told you earlier where we lend to corporations and governments and against commercial real estates, and so, I'm just going to show you a few things related to the type of credit risk in the portfolio; 8.8 billion or 43% was the investment grade high yield and private corporates that I mentioned just a little bit ago.
Governments, well, we used to think that was the risk free part of the bond portfolio and I think we've all been learning that lending to government is maybe not as risk free as we used to think, and so, I'll have a little bit more on that 6.9 billion in just a second, but just to give you a foreshadowing a little bit, that 6.9 billion does include our investments in various forms of Fannie Mae and Freddie Mac and Ginnie Mae. And usually in that other asset class report they rolled up into mortgaged back securities but for the purpose of this slide it's in government.
Commercial real estate is CMBS and commercial mortgage loans together and I'll have more about that here in just a second.
Current heightened focus is a kind of this next section and I think both Greig and Jack made some comments about the low rate environment and the red is our historical earned yield that we have been reporting to you. And the dash off to the right is different projections of how that would play out based upon different reinvestment rates.
And four or five months ago we were looking at investment grade corporate bonds and other things that are kind of the bread and butter for our investing, that weighted average was less than 4%, maybe as low as 3.75%. So that would have meant a pretty substantial additional momentum towards the earned yield declining. As you see, the other numbers slightly higher reinvestment rates, but even the most optimistic, 5.25% is below the 5.5, so there's not one scenario there we show where the earned yield average is actually increasing.
I'll have a little bit more about interest rates in an outlook section here.
Obviously
We do have some bond investments in countries [domiciled] there with most of that being some banks in
The bottom panel is showing exposure more broadly to European-based banks and insurance companies. A lot of worry about their exposures to these countries and especially the sovereign debt of those countries.
And we have a fair amount of investment and, you know, well-known names in
Here's more visibility on that
Fannie, Freddie, I think they're really full faith and credit of the US government now even though there were some times we are wondering about how supported they would be by the US government. So they're money good but I guess we could say is we don't know how good the money will be that they'll pay you back with but time will tell on what happens with Mr. Bernanke's money printing.
Lending against commercial real estate is in two forms, CMBS, and commercial mortgage loans and we have
Here's some visibility on our commercial direct loan portfolio. And we're feeling pretty good about it. It's a season for the most part with reasonable loan to value ratios and debt service coverage ratios. We had a couple of work-outs that we've dealt with over the last 12 to 18 months and a couple that we're still working out but for the most part it's a clean commercial mortgage loan portfolio.
CMBS is the other way we lend against commercial real estate. And this is a slide out of our QFS and the total over here, this
But here's some visibility on the vintage year and the rating for CMBS. Obviously this market has had a lot of challenges with a fair amount of downgrades and BIG as the below investment grade portion. So we've had -- really most of that is credit migrations down over the last couple of years and we have taken some impairments there but we think most of the major impairments in this portfolio have already been made.
So a few things then about outlook. We went back to the
And the Fed is obviously keeping the short end at zero because like my next to last bullet point is the Fed is extremely worried about deflation, so much so that I think they're willing to risk an inflation number that might be a surprise to the markets, but that is their opinion, that any amount of deflation would be horrible. And as a credit lender I think we're very worried about deflation too. So if he's paranoid about it I'm going to be a little bit paranoid about it too.
You know, as a lender, if companies' topline shrinks because of deflation but their nominal obligations are still in old dollars, they're going to have a harder time paying us back, so deflation is a painful thing for a credit lender so we're very vigilant about that scenario. But I think Mr. Bernanke will get his way, which is he's going to stop deflation and he may end up with more inflation than he hopes for but I think that's a risk he's willing to take.
And I personally am of the opinion that we're going to have a couple of years of 5% inflation, it may be two, or three, or four years down the road, but I think the Fed is fine with that if it forestalls any risk of deflation, but clearly there's a lot of talk in the market about are they just blowing more bubbles and in addition to maybe getting some of the inflation engine cranked up.
Asset class outlook. On the upper right of this is the time series going back to before the financial crisis of CMBS and investment grade corporates but really an amazing ride especially for the CMBS market, how incredibly decimated it got in late '08 and early '09. You'll notice though that it's still a fair amount of additional spread over investment grade publics, and so, we make the statement that it's really our favorite of the public asset classes but we have it pretty full waiting to CMBS now so we're not making a whole lot of new investments in CMBS, but we are glad that that market appears to be healing and still offers more spread than most other public bond classes.
The lower right is just showing some of the improvement in corporate balance sheets over the last few years so the fact that we've still got spreads a fair amount wider than where we were three and a half years ago but corporations are in much sounder state in their balance sheet situations, so we still think there's decent attractiveness in the corporate bond market right now.
Commercial real estate. A lot of the negative headlines have dissipated dramatically so there's less concern, but hopefully it's not complacency but really it is very economically cyclical. So for the real estate, commercial real estate market to really recover we're going to have to have jobs improve.
And you can see that we're on the -- I guess on my last -- my next graph I'm going to have unemployment on there, well, that was two slides ago. We need job creation for the commercial real estate market really to heal, for occupancy rates to go up and vacancy rates to go down. So I think we're guardedly optimistic on commercial real estate.
So here is -- this is just our beginning of the year, thinking about where we will be at the end of the year on our asset allocation. And we don't know exactly what the portfolio growth is going to be but this does tie out to the plan that we put together for 2011. And you'll see there's very little percentage change in the different asset classes. So we're mostly just trying to keep approximately the same asset allocation we have, but put new money to work as the portfolio grows.
There is one slight inconsistency on this slide to the prior one. Now we said on the prior we wanted to grow our commercial mortgage loan portfolio by
So that is the investment portfolio, and I will be around later to answer questions and look forward to speaking with you.
Now I will be turning it over to Mr.
So here you go, Mike.
This slide shows me as the chief risk officer for the enterprise. In sum total I've been in that position for about a month. So don't ask me too much about the risk profile, but I can tell you something more about RGA's US mortality business.
I've been head of the US division's mortality business for the past six years. Before that I was the chief pricing actuary for that line of business as well. So I've RGA's biggest line go from growth to value. And it's been a fun ride.
In this presentation I'll be talking about some of the financial results that we've been seeing over the past few years and highlighting some of the stability that we've seen as well as talk a little bit about the volatility we've been experiencing. I'll talk about the current market conditions that Greig addressed earlier on and some of the growth limitations we're seeing because of the sheer size and scale of our US mortality business.
But I'll also focus on what makes RGA unique in the US mortality space. Most notably the things that differentiate us include our mortality research and expertise, as well as our underwriting, our [fact stated] underwriting and expertise.
In this first slide I'll be talking about the financial results for our US mortality business over the past five years or so. One thing worth highlighting is that this is just the US mortality business which represents the largest piece of our -- what we characterize as the US traditional business.
The US traditional business is one of our -- is our largest segment for external financial reporting. These pre-tax operating results that you see over the past five years include a little bit of volatility but mostly have been ranging between
If you look at 2010 results, they look a little bit down from 2009. And most of the other speakers have talked about the declining yield rates and the impact on our portfolio. If you adjust the 2010 yield rates to 2009 levels, I think you'd see our 2010 operating earnings would be more consistent and in effect slightly above the 2009.
They actually show here our revenue growth. This includes our investment income, so we've been growing at about 5% to 8% over this period of time. But we anticipate continued slowing growth because of our size and the declining market opportunities for US mortality business.
This next slide looks at our returns on economic capital. Our economic capital formulas are internal to RGA but help us to identify what sort of returns we can expect. We spent a fair bit of time trying to identify the amount of capital necessary to maintain each division. And these results show very consistent returns on our economic capital from one period to the next.
One metric you might be interested in is the anticipated volatility from just normal claims fluctuations. We've done a look at our -- at our experience and I found that in the course of a year, we might see one standard deviation of claims at about
It's also important to note that our experience is based on a number of factors. As Jack alluded to earlier, our business is built up over a number of years worth of issues specifically; no one year's issues is going to have a material impact on it. But over time, new business will tend to grow and have a bigger effect on our results. Furthermore, we can be impacted by changing yield rate as we've shown earlier.
This next slide looks at our quarterly volatility. Again, we expect some volatility will occur from one quarter to the next because of random changes in claim pattern. Coupling that with seasonal patterns, we can see some more volatility than one might expect.
And I turn your attention to the first quarter in 2010 when our results were somewhat less than we normally would have experienced. Again, in this quarter, we were hit by both seasonal patterns as well as some fluctuations in our results. By the fourth quarter, we saw some favorable results in our claim pattern. And we saw again, a much better return for the -- for our investors. It's worth pointing out that our quarterly volatility or one standard deviation of claims is about
Over the next two slides, I'll try and isolate some of the years worth -- years of business that we've been seeing. And some of the -- give you some highlights of what the expected returns and profit features might be from that business. In this first slide, we looked at as of 2010, the historical issued business for RGA, 2010 business isn't fully developed as we're have -- our clients haven't reported all their 2010 [issueds] yet.
But nonetheless, it's fairly well complete. A couple of things jump out on this slide. First of all, you'll see that 1999, we had an increase in co-insurance. Most of you remember that the industry saw a lot of term business written in that year in anticipation of guideline triple X. We also saw between 2002 and 2004 again continued increase in reinsurance and co-insurance to RGA.
The pricing of term co-insurance has its challenges as many of you might know. It's dependent on persistency, because during the latter period of the level premium period, claims will frequently be in excess of premiums less allowances. It's also dependent on interest rates. We've priced it at a -- at an interest rate environment at that time that's no -- that's not emerging. So we're seeing some drag in our results on the 2002 to 2004 issuer era.
We've also seen that term reinsurance can be sensitive to financing cost. We are fortunate in that we had taken a fairly conscious view of future financing cost. And we're seeing some favorable margins result because our financing costs ultimately were less than what we had priced for.
Nonetheless and probably most importantly during that era, the reinsurance marketplace was at its competitive height. And term co-insurance returns were never returning what we might have anticipated on yearly renewable term business. As a result of all these factors, I would suggest to you that that era is producing a bit of a drag on our results but its' important for me to point out that it's fully impacted our results for the last few years. And we don't anticipate any downward decline in our returns or operating earnings from this era's business.
Indeed, the market has transformed after 2006 and 2007. And I would suggest term co-insurance ahs been a favorable product line for us to be reinsuring. Unfortunately, reinsurance levels have declined on that segment.
Here we go; this next slide highlights our history as a YRT reinsurer. You'll see the first -- the first point in 1995 in our earlier business, RGA historically ahs been dominating -- our business mix has been dominated by yearly renewable term. In YRT the primary risk transferred is mortality. It doesn't have a lot of the elements about investment risk and persistency that you see on co-insurance.
YRT has had the opportunity, at least our YRT business, to have the benefits of mortality improvements and it's been a very profitable product line for us over the years.
One thing that emerged in the early 2000, between 2004 and 2005 was the introduction of older age issues. We've been asked the question time and again about how business we've seen that might be strange or originated. This slide tries to isolate that experience. You'll see in the white bar at the top the amount of business issued above age 70 and reinsured to RGA. It hit its peak in 2005.
We quickly became aware of this and began educating our clients about the pricing issues associated with older age business and helping them to underwrite this business most effectively. By 2006, we were able to turn our business around, at least for new business, and have that re-priced so that going forward 2000 -- after 2007 and later, we expect to all of the business above age 70 to have the same return levels as the rest of our YRT segment.
Nonetheless, that small segment of business will be underperforming. But once again, like I said for the co-insurance, it's in the most recent period's results and we don't expect any further decline in our returns as a result of that cohort of business.
This next slide shows some our growth history as it relates to US premium. As I said earlier, the revenues have been declining, the growth of revenues have been declining steadily over the past several years. Between 2006 and 2007, our premiums grew at 8%. Between '09 and 2010, there was a total growth of only 5%.
This slide tries to isolate some of the effects and some of the reasons why that growth pattern is declining. But one thing that I need to talk about first before I get in to that is that we've had a small segment of [GMGB] premiums within the US mortality division. Now this isn't some of the [GMD] premiums some of you might have heard about.
What this represents are premiums on a monthly renewable term paid under variable annuity contracts when there is a mortality exposure. So there will be a matching of our premiums to our claims. During 2009 when the equity markets declined, we saw a growth in that premium segment. And then during 2010 when that -- when equity markets largely recovered, that segment has fallen down. All told, that has had a modest impact on our growth rates between 2008, 2009, 2010.
One other thing worth pointing out, the gray bar shows the renewal premiums that we see based on the business in force coming in to the end of the year, while the gray plus the red are the total premiums. If you compare the gray bar for example, in 2010 versus some of the gray and the red bar in 2009, you'll see about a 1% growth.
Jack talked about this earlier and that just by the nature of our YRT premiums, we're going to be continuing to see premium growth even without the addition of new business. When you add new business to the mix, we expect about 4% to 5% growth for the next couple of years unless there's some change in market conditions.
This next slide tells a similar story but isn't changed, impacted by the changes in premium rates. This shows our in force year after year and the growth of our in force over this period of time. I had the good fortune of watching RGA grow during this period. And it's been a challenge to see the growth and to continue it.
But we now recognize that where we are is a very good position indeed. One thing you'll in 2003 is a large growth and that was as a result of the Alliance Re acquisition. But between 2007 to 2010 growth rates for our total in-force block have slowed and indeed, for the last couple of years, our in force has been growing at only 1% or 2%.
If you look at this slide a little bit closer, you'll see that the gray bar represents again, the amount of in force that was based on the business that was in force at the beginning of the year. One thing you'll see is that the decrement from one year to the next is about 8%.
The red bar is new volumes introduced during the course of the year. So we're barely, at this point, introducing more new business than it's being lapsed or terminated during the course of the year, not unreasonable to expect within the next few years, we'll reach a steady state.
This next slide shows what Greig had talked about earlier which is the declining session rates in the US mortality business. And it doesn't necessarily convey a bad picture. One thing that you'll see is that the total session rates have declined from about a high in 2002 of about 60-plus% down to about 35% in 2009.
The 2010 results will be out shortly within the next few weeks or a month. And we expect a bit of a decline again for 2010. What this slide is telling us is that our clients are deciding to keep more and reinsure less. Now, for most reinsurers, that might not be a good story to tell.
From my -- from my point of view, while we're seeing less business and -- I'll show you our next slide -- we're seeing less business as a market, RGA has increased market share and we haven't seen the same level of decline as the others. But what's happened also is companies are seeing less reinsurance as necessary to make their products work.
As we saw on the term co-insurance segments, companies were propping up their pricing by using reinsurance to help them finance their redundant reserves and also to produce products that were effective in the marketplace. They're no longer needing to do that. Reinsurance is less commoditized and value added services are becoming more and more important to our customers.
The next slide is a bit more colorful, if anything. But it does highlight what I was talking about a few moments ago which is where RGA ahs been able to grow its market share while others, in this case, the gray bar called the others, have declined. Through consolidation and other means, the four primary reinsurance -- reinsurers today,
RGA by itself has had a market share fairly consistently over the past four or five years of between 20% and 25%. In today's environment, most reinsurance pools are divided up three or four ways. So there's a high point that any reinsurer in the marketplace can expect and that's at about 30%. Hovering at about 25%, I would say we're in the lead position. And indeed, in four out of the last five years, RGA has been the leader -- leading reinsurer for new and recurring business.
As I pointed out earlier, as the market for reinsurance has declined in terms of recurring new business I think that opportunities for reinsuring profitable business has increased. In fact, over the past 12 years, I haven't seen a better environment for reinsurance pricing than I have over the past few years. So, our market share has increased at the best time, at least in my opinion.
The next slide talks about why our market share has increased. As Greig talked about earlier, Flaspohler,
We get great insights from the survey and I think all the reinsurers participate in the survey by providing a list of names of their clients or individuals that they'd like to be their clients. In fact, over 500 people are surveyed by Flaspohler every other year. Starting in 2005, Rick began asking the question, "Who do you feel is the best reinsurer?"
And since 2005 and every survey since then, RGA ahs been voted the best reinsurer from the level of satisfaction we've been providing our clients. In addition, Rick has asked the survey respondents to identify the 10 most important factors that they have for selecting a reinsurer. You can see these factors here.
In 2011, the most recent survey, RGA was ranked number one in their client's opinion about how well they service each of these factors. The only one we missed on was financial security which I suspect is largely driven by ratings. So we're hitting on all -- on all the factors that our clients are addressing. Again, that tails back to why we are the number one reinsurer for new business.
Turning to the next slide, Rick began asking a question related to net promoter score a couple of surveys ago. For those of you who aren't familiar with the net promoter score, it's a metric that's gaining more and more influence among marketing types and business types as accurate measurement of customer satisfaction. Its' been shown to correlate really well with company growth rates.
For those of you who aren't familiar with it, the net promoter score measures the question, "How likely are you to recommend a company to a colleague?" In the case -- in this case, on a scale of 0 to 10, if you rank it a nine or a 10 that you're likely to recommend this company to a colleague, you would be considered a promoter.
On the other hand, if you ranked it as a zero to six as your likelihood of recommending this company, you'd be considered a detractor. The net promoter score is simply the difference between the percentage of promoters over the number of detractors. A score above 40 is considered in most measurements as exceptional.
Indeed, some companies that are identified as having high net promoter scores include
RGA also gives
Now these elements show where RGA is in the marketplace. We pay a lot of attention to the things that our clients are most interested in and continue to work very hard to measure up. One of the things that I don't have here that we frequently see and over the last two surveys, we've seen this is. "Who do you feel is the most improved reinsurer?"
This one I take a lot of pride in because for the last couple of surveys RGA was among the most reinsurers; when we're already starting as the best, I think that's quite a record. Over the next few slides, I will be talking about the things that differentiate us and why we perform so well in the Flaspohler survey.
We've invested significantly in our systems over the past several years probably for the past decade in order to manage and understand our data as fast as possible. We believe it's a competitive it's a competitive advantage that we've accumulated as much data and as much experience as do.
As I showed earlier, we have over
In this slide, we show a little bit, at least a little taste of our most recent mortality study. Every year, we go through a five mortality experience study representing the five most recent years experience. The most recent study was as you might expect the most credible with over 83 million policy years exposed.
We have over 15 million policies reinsured with RGA, over 12 million lives reinsured with RGA. As I said earlier, we have over 1.2 trillion of exposure and our most recent study had over 5 trillion of exposure. All these data helps us to fully understand emerging trends as quickly as anybody.
There's overwhelming amount of data without having the necessary resources behind it to make sure that it's accurate and timely would be of no value. But we do spend the time and energy to make it work. We've been quick in identifying what old age, what expectations should be for older age mortality.
We've been quick to identify changing patterns in large base amount. Our clients appreciate these insights we give to them. And we've been notable in webcast and other industry presentations and on the lead and forefront in our expertise.
This next example of value added services to our clients is a survey and a study that we have performed at the request of the
RGA was selected by the Society as the company to prepare the study. Some of the insights we gathered from this were very consistent with the experience we've been seeing on our own book of data which was quite gratifying to see. We've seen a number of companies adopt some of the conclusions that we reached from this -- from this studies and we know that it's helping our clients price better term products today.
This third example is a little bit off of the common path for reinsurers but I think it helps to understand it's not just reinsurance business that we're looking at. It's our role to be experts in understanding and providing insights for mortality in general particularly as they relate to new underwriting characteristics. Over the past several years, the use of prescription drug histories is becoming more common in underwriting insurance.
One of the primary reasons why this is an exciting new technique in underwriting is because it's not invasive like blood testing might be. Nonetheless, there hasn't been any formal research done on the mortality and experience you might expect based on Rx history.
With Milliman -- who owns IntelliScript -- one of the largest providers of Rx history for insurance companies in the industry, we were able to identify over 1 million applicants under Rx history and trace them back to
As a result of some of this analysis, we've helped our clients understand the predictive value associated with Rx histories, and a number of companies have begun adopting it. In addition, we provided underwriting tools within the industry to help our clients underwrite based on Rx history; and it has become another value added service that RGA has been providing and helped further identify our brand with mortality expertise.
I can't end any presentation without discussion about our facultative underwriting leadership in the US mortality space. Since the beginning, RGA has focused on facultative underwriting as a value added service to our clients. It's important to our clients and it's important to us. It's not just an obligation that we have for our clients; it's a business for RGA, and we do it effectively.
For the past four years, we've underwritten more than 100,000 cases in the US As best as we can tell -- there's no formal study, but, as best as we can tell, our next near competitors only underwritten about half that many. Facultative support to our clients is critical for differentiating RGA. They view it as one of the most important factors in selecting a reinsurer.
RGA also views this as critical because without placing these more challenging cases, be it an impaired risk or high face amount risk, our clients will lose the business, so we're helping them generate additional business. We do this by offering best-in-class time service. Over 95% of the business that comes to RGA is evaluated and responded to within 24 hours.
We also offer some of the best capacity in the market place, with up to
Almost, I think, all the reinsurers now subscribe to RGA's FAC application console. This tool allows our clients to submit cases to all the reinsurers electronically as opposed to the old days when they had to make several photocopies of the cases, which could run into hundreds of pages, and mail them to each of the reinsurers for evaluation and wait for responses. These electronic submissions have afforded all of our clients the opportunity to get quicker answers on their facultative business. As we all know, quicker responses to their customers create better placement.
In total, RGA is able to achieve a placement ratio of an excess of 30% on our business, which is probably twice as good as the next best company, reinsurer out there. Us placing 30% represents our clients are placing the business and they see the value of all of that.
Furthermore, we've provided specialized solutions for our clients. One of them is a supplemental underwriting program which is something unique to the industry. As many of you can imagine, there are sales campaigns that go on with our customers from time to time which creates an enormous inflow of new business during -- for short periods of time.
RGA identifies and isolate underwriters that become available to our clients to help them during these peak periods so that they can get the business issued. Without this support, they may -- their agents who are focusing on this campaign may not get the business placed in time. But it also represents additional business for RGA because we accept that business to -- on a facultative basis.
In addition, we're providing technological leadership in the industry. I mentioned the FAC APP console. We also offer a tool called AFAP, which is based on our AURA technology. This tool, which is a piece of software that resides on our clients' desktop, allows them without having to create facultative case, allows them to get an instant decision on an impaired risk, typically, a mild impairment be it build or blood pressure, but, in any event, without going through the ordeal of pulling together a facultative case, they get an immediate response. That immediate response again translates to a business for our customers and additional business for RGA.
I mentioned earlier that our mortality insights have been getting a lot of publicity and a lot of attention in the industry. But it's our underwriting insights that frequently capture the most attention among underwriters. We've had a number of webcasts. In fact, we've had over 20 webcasts over the past few years for our clients, many of them focusing on underwriting issues, some of them having attendance in excess of 1,000 participants.
But we don't stop there. As I said, we have mortality insights that are shared on our webcasts, but we also try to branch out and present information of general interest to our customers as well. Some might include a recent survey we had done with Prudential and others regarding bank assurance in
These webcasts and the variety of the webcasts keep our clients with RGA and continues to help us differentiate ourselves from the competition. So to summarize all of that, what RGA continues to offer are steady returns and operating income going into the future. Our base of in force is very good. We continue to expect solid premiums and returns for some time to come.
Indeed, the current pricing environment is very favorable for us. While premium growth opportunities are somewhat limited, we expect attractive returns on the new business opportunities that present themselves, and that those favorable returns over time will continue to build on the excellent portfolio of RGA's in force. And, finally, we'll be able to take advantage of those opportunities as they come along because our leading mortality and underwriting insights build up our brand loyalty and customer satisfaction.
00, if that's at all possible, when
Thank you very much.
(BREAK)
All right, as Mike said before the break, our next speaker is
Paul?
And let also say good morning to all of you. I'm very excited to be here. I've got 13 -- 12 to 13 slides in 15 minutes. I'm going to try to move through these as quickly as I can. There will be a few that I will stop on to highlight some points as we move through this.
The presentations today have been one, particularly
If you've looked for and had a chance where you're peeking at it now, you might be asking yourself a question. I'm up here to talk about the future and the growth opportunities, but you'll see a bunch of historic timelines in my slides. It would be very good question to ask.
I think I'm not going to go through those boxes to talk about important events in the last 30 years. You can look at those yourself. I will be highlighting some that mean something to me that -- watershed moments for
Number two, fairly important, we fought through these, and I think it highlights a very, very capable management team that is in place. And probably the most important item I want to be talking about as I wrap this up is again to highlight what I think is our phenomenal positioning world wide and the opportunities that are out there that will fuel our growth in the years to come.
This first slide is sort of an alpha and omega with nothing in between. It highlights the first three -- the geographic diversification of RGA and then we end with some important events in last few years that -- with more product diversification and a statement that we are now operating in 65 countries around the world.
This is our diversification model. We use deliberate right up front. I would use words like focus and discipline. And I believe that applies not just in the core US business that
We are focused on mortality -- Mike talked about that -- and underwriting. If you scratch this and say what makes you different, we will all say that same thing -- underwriting and, number two, insight and the data. The charts, the symbols there talk about the next geographic expansion.
This is the first of three timelines. The highlighted boxes focus on our foundation. They talk about the first reinsurance treaty. It talks about the creation of our facultative underwriting department and some modest growth during our early years. This is the US focused only.
This is what I wanted to spend a little bit of time on. This -- Mike had --
A very important element for me and one that I want to spend some time on, if you look at 2003, you will note a significant jump in the in force. That represents the first significant acquisition which RGA completed. And that was Allianz 3, a competitor in
As a mathematician, if you look at these curves, you'll see 2003 in many ways. It looks like a point of inflection. We had some fairly dramatic growth leading up 2003 and then the growth patterns changed. And I think Mike has commented on that.
It was at that point in time that I was looking at what our business looked like in
This chart talks about our first financial transaction in support of Triple X term portfolios. We were doing some work on the development of facultative underwriting tools to continue to strengthen the differentiator in our core business. We were pursuing co-insurance transactions of annuities, both the first transaction on deferred fixed annuities as well as equity index annuities.
You'll see there, in 2003, the item I'm going to spend a little bit of time on, which is the acquisition of Allianz 3; 2006 brought us favorable annuities, which Jack has commented -- excuse me -- that all those transactions -- and there are only three -- are now closed and have been for a year and a half or so, closed in terms of new business growth; and, in 2007, an expansion into support of long-term care reinsurance here in
I will spend some time on this slide. How am I doing on time? In 2003, we put on this large block of business in
As we continued to focus actively on strengthening our facultative underwriting, Mike has talked about that supplemental underwriting program is one that I think is just terrific. We parachute people into our clients' offices at busy times of the year and are able to really help them with placement. It supports the 30% placement rate which, candidly, I never thought I'd see when I started almost 20 years ago.
We also began to do some work with our data that resulted in the product development work for our clients with material core of share percentages heading towards RGA. And we actually decided that it would be an interesting time to begin exploring conversations directly with agents to see if there was a way we could improve the delivery process, perhaps expand into the distribution of more life insurance for the middle class, which has largely been abandoned by professional life agents.
Some of those worked and some of them didn't, but it shows a pattern that even in our core business, we realized that there was a constant need to be focusing and developing new approaches. At the same time, I had some conversations with Gregg around 2004, 2005 and we began to think about expanding the businesses that we were in in
We'd looked at long-term care probably twice if not three times prior to 2007. There were things we did not like when we were looking at them at those periods of time. I think we saw that the market had corrected. The direct market had corrected with reasonable assumptions moving forward in terms of new products, and we felt that it was time for us to enter that marketplace.
My comments here show that at the end of -- well, the next slide. Well, no, it is there. There are about a dozen active accounts today at the end of 2010,
I want to point out an important item. This is all new business written since 2007. There's a lot of material in the press, companies talking about problems with their existing long-term care block. Those problems are associated with a business that was written a decade ago or five years ago, perhaps, older designs. That's where the problems have been in this line of business.
In addition, we took a serious look at our -- at the group reinsurance market in
But in our research, we identified a couple of very attractive existing reinsurers in the marketplace. We hoped that one or two, whatever it may be, would come into the market. Luckily, one did in 2009. We acquired it. And that is the
Those teams were put together in October of last year. They had a fabulous 2010 closing the year. Gregg commented. I think he mentioned 20 different new transactions. Most of those closed in the four quarter, I might add. And we see terrific potential for that business worldwide.
I would point out as well we now do these financial transactions in eight different countries around the world. We added three in 2010. Those are
The next step, here are several slides on RGA Canada. We entered into our first reinsurance transaction in 1989 and a few years later a part of a small existing Canadian life reinsurer. Subsequently, we referred to it as RGA Canada. That was 1992. Our IPO occurred a year later in 1993. And this has been nothing but a story of great success, capable management and superior opportunities going forward.
Same story that I related about the US business, early in the prior decade, it was almost exclusively -- exclusively 100% conventional, ordinary mortality. Done very well, focused on underwriting, gathering data, using that to our advantage in the marketplace, it's very effectively servicing our clients' needs in that marketplace.
Alain, who is in the back of the room, became very clear that we needed to be expanding that business as well. And you can see the timeline as RGA entered into support creditor business in
Moving back, just to highlight -- yes, these buttons. As we start 2011, our Canadian distribution is that that conventional, ordinary business which has continued to grow and produce wonderful results. We have a 35% market share in
I think we ended at about 2 billion of premium at the end of 2010. As
We see positioning for growth and we closed a number of longevity transactions in 2010 in the UK I commented on the three new countries that -- with our financial -- our global financial solutions business, we closed in 2010. We see further opportunities there. In
I really believe it is an exceptional management team both in terms of depth and breadth and our ability to address issues wherever they may be. We understand markets extremely well. We understand life reinsurance, health reinsurance, annuity reinsurance extremely well. We've been around together for a long time. We work well together. Maybe not everyday, but we work well together. I think it's just an outstanding group. I'm proud to be a part of it.
As a wrap up, I do want to spend a little bit more time on this. I've commented upon a couple of the product lines which we have. Our global financial solutions business is poised for some dramatic growth -- I feel. We closed 2010, as has been mentioned, with 20 new transactions, three new countries, growth in our longevity support, some interesting new work with financial reinsurance in health products and then, of course, our asset-intensive business where there is demand around the world. I am very excited about where we can take that business both in
I want to comment that Gregg spent some time talking to you all in his first slides about the opportunities. These are profound. I've never seen an environment in my 35 years in the reinsurance business where regulations and other issues are changing so fast. And there's so many coming at us. He called some of them challenges. And that's certainly true, but from my point of view, where these issues are impacting us, they are terrific opportunities for financial reinsurance solution. Whether it's M&A support around the world, whether it's capital needs, whether it's opportunities to improve our customer's ROEs, the opportunities really are exceptional.
Our group operation,
And, lastly, I haven't spent a lot of time talking about health and maybe today I'm two years early. To give a little hint on this, last week I was in
They talk about protection and it's providing health reinsurance to this emerging middle class. The middle class in many of these countries in
The goal of all these people is to provide for themselves and their families and to provide to provide adequate medical care. That's emerging. And those companies -- our clients, where we have terrific relationships with many of them all ready, are distributing these products through banks if you can believe it.
A US person, bank insurance -- bank-produced insurance in
And with that, I'm going to let
And you'll see that I run the US Group Reinsurance operation. That's what we branded it here at RGA. I've essentially been running it since 2002. And within the last month or two, I've also undertaken some responsibilities for the international group business, so my presentation will be talking a bit about both the US business as well as group reinsurance elsewhere throughout RGA.
So the things on my agenda today, first, is to talk a little about group reinsurance in general and identify some of the key differences between individual reinsurance and group reinsurance. Those differences are pretty important because they've gone a long ways in defining our strategy in the group marketplace.
Second, I'm going to talk a little bit about the size of the direct market. Obviously, the size of the direct market and organic growth within the direct market has a direct correlation to our reinsurance opportunities. There's not a lot of data available on the group side as there is on the individual side. So I'll talk about a couple of big pieces that make up the group business.
And then I'll translate that to the reinsurance market, the size of the market that we see, what we think our share is, and where RGA's exposure comes today. And then, finally, I want to talk a little bit about the business model in our more mature group reinsurance markets with the intent that, as we develop this business throughout the world, we hope to bring some of those capabilities from these mature markets to the developing markets.
So a couple of important considerations about the group insurance market, obviously, most of this business comes from the employee benefits market -- so the kind of coverage you guys have in the workplace, whether it's life insurance or LTD or health insurance. It's very possible that that business is making its way to us through your insurance company, to us through a reinsurance arrangement, so behave yourself out there please.
There are other sources of group insurance business, whether it comes from affinity groups or creditor business. I'm not going to talk so much about that. But the real key differentiator I think between the individual business and the group insurance business, key for our business model is that we're dealing with one-year contracts. And that on one hand is the absolute greatest risk mitigant that we can have because if something is going wrong, we can either get on ---- get off the risk or we can correct what's not going so well in just a one-year period.
It's also our greatest challenge because, every year, our customers get an opportunity to rethink their relationship with their group reinsurer and determine whether or not they want to take the business out to bid. So, we have to perform year in and year out and try to give our clients every reason to stay with us.
And then another big difference is that, as Paul suggested, generally speaking, this is a winner-takes-all marketplace. So it's not universal across all the territories, but second place is --you know, there's no reward in finishing second.
This slide depicts the size of the life and disability direct markets in a few jurisdictions to give you some sense to just how big the premium volume is. And a major thing to note here is that the group markets tend to go as employment and as wage growth goes. This is directly related to employment base and, oftentimes, benefits, our function and salaries. If those two things increase, the organic growth rate in the group business would naturally follow.
If you remove the effects of currency, the prior slide was in US dollars, and look at the organic growth rate over the last several years in those countries, you know, normally, I think in terms of organic growth rate in the group market of about 5% to 10%, again, you know, adding a few more groups, adding employees and adding to the wage base.
But, obviously, the economic crisis over the last few years has diminished the growth rate. In fact there's been a declining growth rate in many other the countries. There's been some notable exceptions to that, principally, in
Though superannuation funds actually deliver group insurance products through them and the market has enjoyed extraordinary growth and penetration into the employee marketplace. So in the outlook for
A few words about this slide, I'm trying to now move from the direct market to the size of the reinsurance market. And, again, I'm just dealing with life and disability business. The group business that comes to us comes from other places. For example, in
And this comes from NMG, a consulting firm. And they, essentially, when they survey and find out how companies feel about their reinsurer, they also ask how much business they seed. So, predominantly, this is based on their work. And a simple question of how much do you seed builds the size of these markets.
I have made a couple of adjustments though. NMG hasn't exhaustively analyzed the group market in the US They're doing that now. So, I've overlaid my perspective of the US market into this data. And then, second, they omitted a bit of the creditor business in
I think the big takeaway from this slide though is RGA's market share of 19%. Now, on the surface, that actually sounds like, well, it's not too bad. You know, there's not much room for growth. But I think you got to peel back the onion and think about this on a country by country basis.
We started with
We were a non core part of
This is the picture of the actual volume that RGA has experienced over the last several years, group reinsurance volume. And, again, this is kind of what we consider group reinsurance. So these numbers are going to be a little bigger than the prior slide if you were to-and, again, the prior slide just dealing with the life and disability market.
The gray bar reflects what I'd consider the organic growth rate of RGA. This is the business that they've put on the books over the last several years. And they've enjoyed a really nice compound growth rate and a revenue of or premium growth of 33%. The red bar is the business that was acquired and brought to RGA beginning of last year. So we added about 50% again on to the volume business that RGA had previously done.
If you take that premium volume and distribute it amongst the major markets, you'll see that we do see a big share of that coming from
In the US, as I said, you see the three major pillars of our group business would be life, disability and our health line of business. And then you'll see a relatively small sliver if you apply those percentages of the pie to the hundred million or so of international office group business in all of our other markets.
So now I want to spend just a little bit of time talking about our business model in our more mature market, essentially
So there's lots of reasons that reinsurers actually send their -- or, excuse me, insurers send their business to us. But, frankly, because of the one-year nature of our business, the fact that we're out there selling and reselling that book of business every year, we have to figure out a way to return some value to our premiums. Something other than just providing them the cheapest price, that is not a sustainable strategy. So that bottom bullet there, value-added services, much like the business model that
This is a depiction of some of the services we provide. And if you start at the bottom, it's very, very key for us to provide some of the underwriting services that are important to our client. Now, this is group business, so, underwriting takes on a different -- different sense. But it does converge with the individual market when you're dealing with underwriting a facultative basis for individual, either late entrants or people who want amounts in excess of the guarantee issue limits.
And it's really important to get that underwriting right because those highly compensated people are often the ones that are making decisions about where their insurance is placed. So you want to do everything you can to get that underwriting absolutely right. And we help our clients out with that. We help them through the product development process as you work your way up this chart and some of the tools to help manage their business.
And, really, I think, one of our flagship services, the one I'm most proud about -- and we've been doing this for years and years and years -- is our ROSE and ROSEBUD Claims Management Service. We bring that to both the disability market and the health market. And this is the type of service that we really think we can return a lot of value to our client by way of something other than a cheap premium. And I'll talk a little more about a few of these services on the next slide.
So we brought some of these claims management services to the reinsurance market nearly 30 years ago in ROSE and ROSEBUD. And it's an outcomes-based claims management service. And if you think about -- I'll talk about our health side of the business -- if you think about our health reinsurance portfolio, you'd understand the important of these services.
There's a big chunk of our business that is done on an excess loss basis. And our client don't send the claim to us unless they incur expenses sometimes in excess of
And while our clients are really good at managing day in and day out that kind of care that they always see, they don't -- they don't tend to see these catastrophic cases that often. So because of our purchasing power and the breadth of our business across
Wingman, that's an electronic underwriting service we provide for one of our specialty lines of business, this is a case where a few years ago we thought we did a fantastic job in providing less than 24-hour turnaround and some of the cases associated with this line of business. But we've invested in some technology. We parked it in the client's office. They entered the data. And, instantaneously, for this line of business they get a quote and they're getting an opportunity to make a binding decision at that point. So we took a good customer service standard and made it an exceptional one and we have lessened our administrative burden in the meantime.
Concentration management services is one that I highlight and talk a little more on the next slide, but, certainly post-9/11, the paradigm in group insurance changed dramatically and the need to understand where life and accidental death exposures were at any point in time became absolutely critical in the underwriting process and retention management process.
So this map -- it may be a little difficult to see -- is a picture of the
So what we built after 9/11 is the capability to manage our data and our client's data to the extent that they want, understand the concentration as well as the risk on a building-by-building basis. We can plot those exposures against natural disasters like this or terrorism events, anything that you'd like to construct, and we can develop probable maximum loss scenarios as a result of it. So it's a very clever tool that we use from some of our own risk management purposes as well as for the risk management purposes of our clients.
And then the last bar there represents our commitment to providing research and educational services to our clients. This is an example of a periodic e-newsletter we send, pulling out some of the more significant group-related news to have it in one handy place for our clients. But we also do a lot of research on behalf of our -- on behalf of our clients as well as investigation in the market trends and things like that.
I mentioned a little about 9/11 and, frankly, 9/11 was kind of a watershed event for group insurance and group reinsurance. And since 9/11, we've made significant investments in our own risk management program. And the key takeaway here -- there's a couple. And I'd like to talk about, oftentimes, if we're thinking about managing risk in our own portfolio, given our clients are dealing with the same types of risks, it's really beneficial to think about leveraging what we do for ourselves and the services that we provide our clients.
So this concentration of risk, this mapping and modeling service we provide for ourselves, is a perfect extension in a value-added service that our clients really have grown to respect. Second -- and back to the business difference between individual and group -- we're dealing in a one-year business model. And those with data and the group reinsurance market win. So if we don't have a very solid understanding of the performance of our business on a real-time basis, we're going to be in trouble.
The year's going to be gone and we're going to be binding coverage for the next year without a full understanding of how the prior year is performing. So while you normally don't hear of administrative systems as a competitive advantage in our market space, I truly think we have a competitive advantage in some of the administrative capabilities we've built.
We installed this system just a few years ago. They really don't have any legacy I.T. issues or whatsoever in our business. And one of the key element of this system is an ability to close our books on a contract-by-contract basis. So at any moment, for any period of time, for anyway you want to slice the business, we can tell you exactly the performance on a fully allocated basis just how profitable each of our accounts are, which is again entirely important if you're dealing with the one-year renewals and opportunity to correct accounts that may be veering a little off course on an annual basis.
I just wanted to say a word or two about the acquisition of the ING Reinsurance business and how we've integrated into RGA and separated from -- from
Though we had some work to defend our position back in the -- this would be the fall of 2009 -- but, by and large, we came through the acquisition in a really, really good shape with the majority of our business intact. All of our employees certainly were thrilled with the acquisition.
And from a technology standpoint, we're 100% integrated into RGA, no looking back. Most of our clients back upwards of 80% or so have already [innovated] their business from
Now, on the forward-looking side, the left side, the synergy side, I think there's a couple of places where we've had some pretty significant wins over the last year. First, while we didn't have a very big market share in
We're quite hopeful that the combination of the two staffs that worked in
We've obviously introduced ourselves throughout all of RGA. We feel really good about working with our colleagues throughout the entire organization. So there's a lot of cross referrals opportunities going on. In fact, we've seen some pretty significant opportunities and a big win last year with the financial services -- excuse me -- financial solutions area.
This is a deal that was done in the health space, capital motivated deal. And it's one that I think without the ING Reacquisition that perhaps the financial solutions guys would've seen it. I'm not sure if they would have been interested in it or had the ability to analyze it. And certainly as part of ING Reinsurance, we would have never ever considered it. But with the opportunity to work together, we were able to write a nice deal for a health client. And we're hoping to make a market out of that.
And then, finally, as I mentioned a little earlier, the opportunities that leverage some of our administrative capabilities, our risk management services and the things we do for our clients in
So let me just wrap up with a few observations here and summarize. In
The basic principle there is that 30-plus million or more people will be insured. There'll be insured through health care delivery systems that seek reinsurance. And we're positioned pretty well to serve, depending on where they land or regardless of where they land. I think we're positioned pretty well to serve them.
And, additionally, within the Health Care Reform Legislation, there's been changes to benefit sets. So the US moved to an unlimited mandated lifetime health care benefit set for everybody that's insured. There's a grading to that over the next few years where reasonable annual maximum limits may be applied. But come 2014, there's no longer going to be policy limits.
So our clients are obviously concerned about that. That upper layer exposure is something that we like. We feel we got great competency in managing. And besides buying that very upper layer exposure, our clients are going to have to buy coverage all the way up to that exposure. So we've seen some opportunities all ready with regards to that.
And then, finally, in the US, I think there are some markets as I mentioned that
In
I've discussed a bit about the combination of RGA Canada staff with the old ING Reinsurance staff. And there's definitely a situation where the combination of the two I think will be able to do much more than we were able to do as separate organizations. And as I've said as well, throughout the rest of the world, our market penetration on the group side just isn't very big. So the opportunities to grow there is significant.
So I'm certainly optimistic. There is some need for employment to recover, but I think growth rates for this line of business all in excess of 10% up to 15% is certainly something that we should expect in the near to medium term.
So thanks. It is my pleasure to introduce
So good morning, everybody. It's been a -- it's been a long morning. It's been a great morning. What's happened over the last couple of hours is that a number of executives from RGA have been up here explaining the path and talking about the foundation that it has built around financial security, around executive knowledge and, more importantly, around their ability understand the market which we play in each and every day.
For over 34 years I've been in the world of financial services, and the one thing that I've learned is that when you're doing international expansion, which I spent half my life doing, it is incredibly important that the foundation from which you do any international expansion be solid and be well thought out and be disciplined.
And I think we just saw this morning is a history of RGA looking at its international opportunities, first in
If you look in 2001, RGA was a significant international company, but, in many respects, our presence was kind of around the world and we had, in some respects, independent offices working independently and becoming very, very successful. We had approximately
But if you look at where we are today, in December of 2010, you can see a very significant growth that is taking place. Now, it's
We're looking for the future and we're saying, "Where is it that we can deliver growth?" And we identified that being geographically well-positioned is essential. Well, we believe we are very well-positioned geographically. By and large, our footprint is complete.
I'll go into a few other areas where we see opportunity from a geographic nature. But by and large, we have a great footprint. As you heard Paul allude to, that we're doing business in 65 countries around the world, and as a result, we're able to, from our offices, that are now strategically located around the world, expand our presence just like getting on an airplane and doing just a two-hour ride.
We also see significant opportunities for product line extension.
But I want to emphasize is that we choose our opportunities very carefully. We are looking for only superior opportunities. We are not looking to fill a portfolio a products. We are not necessary looking exactly what our competition are doing and automatically going in. We do our own assessment based on our own skills and our own history which we think is very important.
And a core value that just permeates RGA all the way through as we do international expansion -- is the managing of risk. If you're going to survive in a financial services world, if you're going to survive well in the reinsurance world, risk management is critical to your success and to your future.
So what do we think of as we go forward and we look at our growth? Well, we look at the obvious things, we investigate population trend. When we look at a new market, when we look -- do we expand? Do we look to deploy extra capital in these areas through the population? But we look at demographics.
We look at the emerging markets. You look at
We look at environmental factors, we're looking, we're looking at where is it that opportunities are going to emerge, maybe not in the traditional way. More and more governments around the world and particularly in emerging markets, cannot afford to have the social infrastructure, the social net that many of us have in
We at RGA design products and has the capability of helping to manage that risk as we go through. We identify the client needs -- very, very important. What is it that our clients need and often very specific for the very specific market that we're in. And also, we're looking for significant long-term premium opportunities. We don't want to get into plethora businesses where we end up having many, many product lines with marginal results. We are looking for significant.
And another point of what we do and we pay a lot of attention to this is we follow our multinational clients. Where these clients of ours that are the retail companies are selling around the world. If they're going into the
I was having lunch yesterday with one of the major life insurance companies of the world, one of the individuals in there. And he was saying very, very clearly more and more, they're looking at their reinsurer from a world platform. They're centralizing decision-making to the point where it's being reflected as to what is the activity worldwide. So our footprint, our product breadth is very important to taking that in consideration.
But, we are at RGA also provide tremendous support from the central whether it be out of
And we also deploy local expertise to complement the international expertise of RGA. So if you mention that we're in whether it'd be at the
So this is just kind of a refresher. Where's the business coming from with RGA today? Well, approximately 31% is coming from international, 12% from
Well, there're protocols, there's mandates, there's ways of doing business that we have honed to a fine art in
It takes a long time in many respects to establish the flow of premium that we -- that an appropriate world that we would want. But it's slow. It's deliberate. And then, all of a sudden, as the market develops, as it catches fire, we're positioned to take advantage of it at the same time.
And we also -- I'll talk a little bit now about our emerging markets and the importance of those. This is just a point of reference for you. And it really just shows -- if I look at our major markets kind of outside the US and
Now, where do we see superior opportunities that are developing? We -- of course, we see them in the -- everywhere that is discussed in articles on international expansion and that, of course, is
These markets are going to be very significant, particularly in the mortality business where we have a tremendous expertise. So then we ask ourselves and I refer to the same slide or a similar slide that Greig showed to you in his presentation. Is it enough just to have good products? Is it enough just to have a geographic representation?
No. You have to have the feet on the street that people respect. Now, do we take the same reputation that we have at
We look at these NMG surveys very carefully by country. When they come out, they're very explicit. And if there're areas if it's the turnaround of our [acultative] underwriting and we are not perceived to be the best, we immediately address that. These are tools that we use and to ensure that we are at the top of our game.
Now, what are the skills that we have taken, again, from the base of
Our actuarial skills, the ability for actuaries at these companies that we're dealing with; to phone, to have a rapport with, to do joint work at times in order to ensure that the products that they are developing are the top of the game and that we as a reinsurer will get our fair share of that particular business.
The risk management capabilities -- part of it is education. We bring opportunities to these countries, to these local actuaries where they had not thought of a particular financial transaction. It's our job to point out what they could do to help manage their financial situation and their risk management and we do an excellent job at that.
Product development -- you'll be surprised, it is very, very core. Through systems that we have, through our customer relationship management system, through other computerized databases -- we spend a lot of time, in a disciplined way, documenting a product development idea and enhancement that we've helped the customers around the world or all our offices can share in them. And that effectively, is the global knowledge. And, of course, we have to pay a lot of attention to our market needs, to our clients' needs and market trends which we think we do.
Now, this is just an example of some product line extensions. So, as the history goes, do we have the capability? Yes, whether it be preferred term that we started in
Now, here's a chart we put together and it was actually a lot of fun doing with the management team. And the question was, "All right, we are we playing?" which we all knew. Where have we been successful? But more importantly, what are the opportunities and how are they going forward?
I won't go through these in detail, but what it says is there are significant opportunities for RGA worldwide in many product lines. And we will choose very deliberately which of these products and which of these countries we will to turn to nurture at a particular time. It is not all products. We do not say we want to be in the group business worldwide and we will do it as a mandate. No, we look at specific markets, specific needs, specific customers, and to ensure that we can get the margins that are required.
We deliver exceptional service. Again, facultative underwriting, a skill that was honed in
Our E-Underwriting programs -- and that is the [aura] technology that RGA has spent over a decade developing. Late last spring, we had a survey done, independent, to determine this technology against other underwriting technologies in the world and it was rated as one of the best.
Right now, we have a pipeline of activities for our E-Underwriting which is designed to support our customers in their underwriting activity and the writing of mortality business that we've never had as large -- a pipeline. Again, product development expertise around the world, part of it is sophisticated modeling and the actuarial expertise that we bring to the business.
Now, looking forward, all right? We say, "Well,
I want to emphasize that in markets like
We look at
I fly to
We look at the
And
Now, what's important for our success in the future? Well, very simple, it's the people, that at the end of the day, we are a people business. We are a people business that brings extraordinary knowledge in the underwriting and the actuarial world and that's very, very important to our customers. But we have people with local expertise and we have people with wonderful expertise back in the home office.
Our processes, and I want to emphasize this, that in the 60 countries where we do business, no one is allowed to write business in a country without an approved mandate. We have pre-proved mandates that are very disciplined. They are well vetted. We understand the business. And when we go into a market, we watch it very carefully, and with the restrictions and everything else. And again, this has been a key to our success because it's very important that we have measured growth, not growth at all costs.
And certainly, technology and that is the world platform that international -- that RGA is building internationally whether it be I.T., whether it be our marketing systems, whatever it is, we ensure that we have the resources in place in order to do that.
In conclusion, what is it that separates RGA kind of from the other reinsurers as we go? Well, first of all, we have a proven track record. I think, the story that you've heard this morning is one of consistent, deliberate growth on a very measured basis. We do it in the businesses that we know. We do it in the businesses that we believe have the greatest potential and we're very, very methodical and careful as we move into this.
Consistent growth -- while it's always nice to get homeruns in huge cases, at the end of the day, in our business, success is measured one case at a time, one treaty at a time and as we build that and as it grows, that's what gives us success. And as you saw from the list of management, we have a very seasoned management.
Now, seasoned management is a euphemism from old management you can say, but at the end of the day, we're not -- if you could get on an airplane with us and you could see the bright, shiny pennies that are located in RGA around the world. These young professionals that are in their 30s and 40s, that are taking leadership roles within the company, this is very, very nice to see.
And as I say, I want to kind of end with that entrepreneurial spirit. It's really hard to describe, but it's the "Can do" attitude. It's the attitude that they do show up to work and they're really, really enthused about being part of a company that has had the growth and the future prospects that we do.
I'm a
So, I'd like to thank you for your time. Right now, what we'd like to do is open up for the questioning. I'll turn the podium back to Greig. And if I would ask my colleagues to come and we'll just be all seated here at the front.
UNIDENTIFIED AUDIENCE MEMBER: Two questions -- the first one around the interest rate. I'd like to get an idea of sensitivities that
UNIDENTIFIED COMPANY REPRESENTATIVE: Okay. For the interest rate, maybe we'll let Jack comment first and then David as well.
Jack Lay Yes. I guess, you could probably do your own math on it. But in terms of -- just a change in interest rates as it would affect the bottom line. And, I guess, what I'm doing is I'm pulling out the spread business I answer that.
We probably got about
But, obviously, it really depends on what happens. And I believe that reinvestment rates are probably going to be trending up over the next year or two. So maybe this will be not the issue we're worried about so much, but obviously, deflation worries could happen again and rates could do down again.
UNIDENTIFIED COMPANY REPRESENTATIVE: On the long-term care front, we are one of the only reinsurers that are looking at it. So when we do, actually, enter into a reinsurance agreement, it's at our price and the effects on a direct writer and on a reinsurer might be different at the times because we don't have the distribution support. We can take decisions that would adversely affect the distribution function.
But we've gotten fairly comfortable with the assumptions that we need to use to make the long-term care work for us. And we see it as a product that's not maybe fulfill the growth expectations that the industry had ten years ago, but it's still an important product. And we think there's a nice opportunity for us in that field. And now, I'll let Paul add anything that he would like to add to that as well (inaudible - multiple speakers).
We know that the initial assumptions Greg referred to it. It probably won't misestimate. And there's been a series of adjustments in retail pricing in the market over the last ten years or more. I think, I mean, sometimes you laugh and are we the greater fool? I don't think so, but we're very confident that the assumptions that are used in building up our pricing are based upon actual emerging experience from business from -- in terms of termination rates, morbidity rates, long-term interest rates.
We support individual long-term care. We don't support group. Again, I think, you need to take a closer look at some of their announcements. And one issue that is fundamental to -- actually, I did hear [
I mean, your returns have been in excess of your growth rate by a number of points and I appreciate there are issues, gaps that, net operating, a lot of things, but as the general proposition, I guess, we would expect somewhat that kind of a spread to maybe be pretty clearly generating some excess capital on a current basis. Can you help us maybe understand why that's not the case?
But over time, our own view on the cap -- our economic capital model, the rating agencies use and so on and so forth tend to change and typically, they change upward and not downward in terms of capital requirement. And that's why I'm a little reluctant to say we are going to have a consistent pattern of capital generation that will be in excess of the capital needs of the enterprise. I think for a period of time we will, but it just feels like there's a movement to require more capital in our businesses by the agencies and by investors at large.
So it's -- I don't want to paint a picture that we think will have the systematic roll off for the capital.
So, I guess, if there's an opportunity going forward, that would imply that somehow there's an arbitrage, that you're going to have capital at a lower cost, that you can play to clients at a spread. Are you optimistic that that's going to be case and what's going to drive that?
But you're right. We're always looking for what are the leverage points. And in many ways, it's the fact that we're taking a fresh look at modeling a block of business. So we're putting the current price to generate return behind the capital. Somebody else may be holding that asset at quite a different price.
In addition, the capital requirements we have and the capital requirements the seeding company has will be different, just because we have different mixes of business or in different regimes. If it's a European in particular that's looking at an add scenario under Solvency II which creates a spike in capital requirements for a certain scenario, you may be able to soften that completely.
So, yes, the capital requirements that we have and that the seeding company have will invariably be different. They'll never be exactly the same. And how far different they are gives us a sense of what arbitrage we do have. But there's always something that we can -- when a company is looking for capital, reinsurance as opposed to capital markets tends to be quicker and more flexible.
It's less public at times. It doesn't generate the big capital markets numbers always, but there are a lot of advantages to using reinsurance as opposed to going to capital markets. And we hope to take advantage of that going forward. And we do believe that there will opportunities to transact in the coming years.
UNIDENTIFIED AUDIENCE MEMBER: (inaudible) I want to go back to the transaction you announced yesterday. It's my first question. When you kind of cut through it, Jack, it has the elements of a deleveraging transaction. You're basically taking out the peers and you're doing it through kind of cash a few months out.
I guess, why -- given your debt-to-cap, given that rates are relatively low, you're in a position now where you're generating some capital. Why is that the right answer to delever right now?
And that dilution is real. It's real economic dilution of 5.6 million shares. And it just feels to us like it's going to be a better capital structure with that security out of the portfolio and it gets more expensive over time. So now it's the time to do that.
UNIDENTIFIED AUDIENCE MEMBER: And I guess just -- to follow up on that, I mean, you could have refi'd that security -- maybe not with an exact security, maybe that doesn't make sense -- but with something. I mean your debt-to-cap is 16, hybrid was 8%. I mean, why -- what was the alternative in not doing some other form of debt security?
UNIDENTIFIED AUDIENCE MEMBER: Okay. And then, Greig, earlier in your comments, I think you talked a little bit about the financial reinsurance market and I think you said that there were opportunities that in terms of transactions being done. It's not necessarily being done with kind of capital, it's being done on the financial reinsurance side.
Can you just elaborate on exactly what you're seeing and what the prospects are on the financial reinsurance side? And maybe just, you know, what is the opportunity there?
And there's usually not a lot of risk transferred. So we're not buying a block business. It typically has a limited lifetime. And our profit is basically fee income, nice transactions, high ROE because there's not much [E] and that it's based on our ability to deliver capital in the right way to companies.
The fact that, as we alluded to, there were 20 transactions -- which is a big number because these take a while to work on -- it was a big number last year. It shows that there's that many people in the -- and this is global -- in the world looking for capital that are willing to do some sort of a transaction to actually pull the trigger on making a move in the direction of doing something to improve their balance sheet.
And if anything, that, the number of people who are engaging in discussion is going up continuously from the bottom of the financial crisis where there was a lot of people -- in the sense that people are going to need capital, not a lot of people wanted to talk about anything because they were very unclear as to where things were going and how bad it was going to get.
So at this point, the fact of the matter is the number of discussions is increasing, ramping up very nicely. Some of these will turn out to be in my opinion, ultimately, sort of transactions we were looking for in the fall of '08 when we raised debt capital. But we will see about that. At least there's a lot of discussion on the table right now. And those are nice transactions. They will add a lot to RGA's value over the next few years.
UNIDENTIFIED AUDIENCE MEMBER: Thank you, sir.
UNIDENTIFIED COMPANY REPRESENTATIVE: That is correct.
UNIDENTIFIED COMPANY REPRESENTATIVE: We have portfolios of assets that match liabilities associated with annuities. Those are very well matched. And we always pay a lot of attention to keeping the matching as appropriate as possible so any effect of inflation is minimized on that front.
On the portfolio that Jack talked about where we look at the assets backing our mortality risk business and the other businesses where we're not really expecting a lot of cash flow in and out, we would expect that incremental investment portfolio yields would flow right to the bottom line.
So inflation is in that sense good. Obviously, it's not good if it goes too fast and has an impact on direct companies or on our ability to manage that whole process. But I'll let
UNIDENTIFIED COMPANY REPRESENTATIVE: And if I could just -- I'm sorry, go ahead.
UNIDENTIFIED COMPANY REPRESENTATIVE: The GAAP accounting would be problematic if we go to 7% or 8% of reinvestment rates because then our portfolio would be underwater from that sense. But from an economic standpoint, we feel like a little bit of escalating inflation would probably be good for us -- but not too much.
UNIDENTIFIED COMPANY REPRESENTATIVE: Okay. Okay. And just to clarify back to Jack, in your comment I think in response to
UNIDENTIFIED AUDIENCE MEMBER: Okay, got it. So that's just straight margin. Got it. Thank you.
I was just wondering, do you guys do stop-loss? Do you reinsure stop-loss? And is this where this will come from -- because a lot of people think stop-loss has a very good future in front of it due to the ACA. So I'm just wondering about that.
Mike?
And oftentimes, that excess coverage could be in excess of 500,000 up to the policy maximum that they've provided. And, obviously, if that policy maximum goes up and, let's say, it was a
Now, you're -- the second part of your question is stop-loss in general. And one of the principal benefits of the health care reform for the stop-loss market is they're not subjected to minimum loss ratio requirements. And there is a segment of our business where we actually reinsure stop-loss business on a quota share basis, a little different business.
You have to be concerned about other things in that marketplace, but I do believe that the stop-loss self-funded business that purchases stop-loss cover has a good chance to grow in
UNIDENTIFIED AUDIENCE MEMBER: (Inaudible) quarter share is that the [MLR Regulations] are some how going to drive that? I wasn't quite clear on that.
UNIDENTIFIED AUDIENCE MEMBER: Okay, I'll think about that. Thank you.
How much of the 5.6 million shares from the peer securities are already in the share account today? The second one, what specific lines of business, do you think Solvency II is going to impact the most, whether it's annuities, traditional life insurance, et cetera?
And I guess just the third question is a more general question. How do you think about your own risk tolerance looking at 1.2 trillion of in force on a
UNIDENTIFIED COMPANY REPRESENTATIVE: Okay, I'll take the question on the number of shares in the share account associated with the peer security. It is about 1.8 million right now out of the 5.6 million.
UNIDENTIFIED COMPANY REPRESENTATIVE: On the Solvency II front, anything with long-term guarantees is problematic under Solvency II. Anything with assets in significant quantities has a leverage is problematic. So those will be the places that companies will want to layoff risk, either very long term guarantees or on asset heavily involved products.
And we're analyzing it. When a company runs into Solvency II issues, it may or may not be the case that we actually reinsurance the product that's causing the problem, too, where we can do a lot of different things. In terms of -- in terms of overall risk management, we have a -- we have actually 2.5 trillion of mortality risk in force.
The 1.2 is US number. Worldwide it's 2.5 trillion. So it's a big number. And if you think about that as the number of claims we'll ultimately going to pay, it is a big number. The amount of fluctuation we have that's statistically driven is something -- I think, as Mike said, is
We don't see statistical fluctuations swinging us wildly from profit to loss, but rather -- rather volatile within a band. And we think there's a lot of upside to mortality. But we have to acknowledge that there is downside in the event of a pandemic or a meteor landing in
And that's why we have in the past couple of years been progressively putting on some longevity risk business, which will cover on tales of extreme events with a fair amount of basis risk. But still it's a good hedge. And we've been encouraging that business, but we have a certain appetite for it. We don't want to flip and become a longevity company.
And there's a lot of longevity risk out there. But we want to take on enough longevity risk to mitigate any of the disaster scenarios on mortality. And we have a very active risk management program.
UNIDENTIFIED AUDIENCE MEMBER: All right, what does that represent?
Do you want to take it Mike or do you want me to?
When companies want to -- want to offload that mortality risk piece from their variable annuities, not coinsured the living benefits, but just month by month, how much risk do we have with by a one month coverage for that? And that's what they do.
Now, what happened is, in the crisis, a lot of those guarantees were in the money, so the amounts suddenly got big and we collect a lot of premium and pay some claims. And then when -- when the market recovered, the amounts go down, we don't get as much money, but we don't pay the claims either.
So all in all, Mike could probably have a better idea of the exact profitability of that business, but I don't think we've been unhappy with it.
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes. We really can't comment on any specific situation.
UNIDENTIFIED AUDIENCE MEMBER: Hi. Thanks for the day. And thanks for the backpack, the two pens and the mints. I have two questions. One was -- I believe that the Obama budget covers or touches on the life settlements area on the degree of taxation applied to life settlements. Could you describe your understanding of where it addresses life settlements?
UNIDENTIFIED SPEAKER: I'll have to depend on somebody else because I haven't seen anything about the life settlements and the budget that he submitted. Life settlement is not a place where we've done anything. We've looked at a couple of situations, but we have not done any -- any work in the life settlements area. We certainly don't want to do any direct life settlements, but we've looked at some situations where we were carving out specific longevity risks.
But, Mike or Paul, have you seen anything in the budget that you can comment on?
UNIDENTIFIED SPEAKER: I guess, we're drawing a blank here.
UNIDENTIFIED SPEAKER: (inaudible - multiple speakers)
UNIDENTIFIED AUDIENCE MEMBER: Okay. Solvency II, and I was wondering if it's going to impose any increase capital requirements for you to hold more capital at whatever it might be, a European sub or whatever subs you might use to write in -- to write business in
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes, the Solvency II, if you're a European company and own an American sub, it's not likely that the US will get equivalency, so you will roll off the full enterprise-wide model is the best way that these companies will handle it.
And because Solvency II is a lot friendly with the European type products than it is to US type products, some of the company's that have European based but have operations here have been looking to reinsure some of these products away, and especially some of the annuities and some of the asset products.
UNIDENTIFIED AUDIENCE MEMBER: I had a couple of questions. First, on -- with the announcement yesterday, it seems like you've exhausted most of your GAAP flexibilities, so is it reasonable to assume that in the next several quarters or at least the next few quarters, there wont' be any additional buybacks?
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes, outside of what was contemplated in the announcements, it would -- it would likely have to be an unusual situation before we would feel a need to further refine the capital base via buyback this year.
UNIDENTIFIED AUDIENCE MEMBER: And then in the fourth quarter, you had high claims in your disability book in the Australian market I think. And I just wanted to get an idea, as you've looked at that, was it more of an employment issue or is it a pricing issue? And if you can talk about how soon it is that you could actually go in and rewrite that business? Is it a one-year business, two-year business and if you've been able to get some more details on that following the quarter?
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes. I think the answer is June, and Paul is just there. It's the June timeframe roughly is the next pricing date. That is a one treaty. It's group of LTD lump-sum payment in other words. And it's on one particular group that had had great experience up until suddenly a cluster of claims came in. And they're all the same type.
So we are looking very hard at it as the direct carrier who has an important stake in this, too. And so those all occurred in December and we've been watching things very carefully. And there'll be more developments as we continue to watch it. But at this point, it's just one isolated incident, so we do have the ability to re-price. I believe it's June. It's sometime in that timeframe.
UNIDENTIFIED AUDIENCE MEMBER: I guess no-one else has one, I'll come back. A couple of things. First of all, one of the major level term writers who's had problems with their ten-year level terms as it's come out of the level term period, is this -- I guess the issue is really on persistency. Is this something you've observed at other companies across the industry? And is it an issue that's a problem for you?
UNIDENTIFIED COMPANY REPRESENTATIVE: Mike do you want to -- Mike or Paul?
UNIDENTIFIED COMPANY REPRESENTATIVE: I'll give it a go. A lot of companies have been surprised I think with the persistency that's emerging after the level period. And we're starting to see more and more of that develop. Notably, the 1999 cohort where there was more business solvent than years past now running into the 10th year.
We said earlier we had participated in a survey for the
So some products we've seen lapse rates over 90% after the 11th period where their sizable rate increases while we've seen more modest lapse rates on other products. One of the things that's told us -- and I think company's are reacting, too -- is taking a closer look at their ultimate scale and changing their perspective on what to expect.
From RGA's point of view, it's not -- it's not having any material impact on us. We were never bullish as I would say on post level premium profits. In fact, we amortized our acquisition cost before that period emerge to avoid some of the problems others might be experiencing.
UNIDENTIFIED AUDIENCE MEMBER: Okay, thanks.
Greig, you're the only CEO the company's ever had. A lot of your team members have been with you for decades and that continuity has been a great strength and it's been associated with a great track record. As we look over towards the next few years, do we expect that same level of continuity or is there a time that when we just start to think about sort of transition and succession?
UNIDENTIFIED AUDIENCE MEMBER: Great. Thanks.
UNIDENTIFIED AUDIENCE MEMBER: You've given us a lot of vintage in your data, premiums and the amount of risk, et cetera. I think the one interesting thing which we haven't seen is kind of the performance across vintages from an operating earnings or kind of an actual (inaudible) standpoint. I guess what I'm interested in is when you look back at your history and you look at the performance relative to your pricing expectations, I assume that it's overall been favorable. But are there trends in that level of favorability over time that we should be paying attention to?
UNIDENTIFIED COMPANY REPRESENTATIVE: Sure. I think that was one of the points of Mike's slide that showed the issue of cohorts. That period from, let's say, '90, '98 or so to 2003, was the most competitive period of time. That's the time when our margins were squeezed the tightest.
Overall, you're right. Our experience is better than priced, especially with some of the old business and mortality improvements that have occurred since that was written to make that wonderful business. But those years were the most difficult. And those are moving through the snake as time goes on and becoming less of a fact. So that's why we say the current business is priced very well and, going forward, you see the bottoming out and improvement of performance going forward -- and the bottoming out at not so bad a level and actually going up from here.
UNIDENTIFIED AUDIENCE MEMBER: I guess just on '90 to 2003 is the development actually worst than you priced for? Or did you just know that it was thinly priced and it's kind of coming in in line?
UNIDENTIFIED COMPANY REPRESENTATIVE: It's probably worse than -- than we had priced for. I look to Mike to give a good answer to that. But we're certainly not getting the investment returns and the yield that we thought. Generally speaking, I think we were trying to stretch ourselves pretty hard to get small shares in those days. That's when our market share wasn't -- it was falling because we weren't willing to meet the market in every situation.
And to some extent you can convince yourself to do things that you probably in retrospect feel like you were stretching. But compared to I think others in the market we did very well in that period. And when I talked about stretching, I don't -- I don't mean to say that's -- that's totally lost making business either.
Mike, what's your --?
We have had some favorable margins resulting from our cautious assumptions related to financing. And we've put together some financing programs in the past that have been much better than what we priced for. That doesn't necessarily translates to the returns within as -- that I was showing up there simply because the -- our corporate segments have seen some of those differences. But it's been helpful.
Furthermore, what we've seen is with better persistency, you get better mortality. So while the business is persisting into the latter stages of the level of premium period, we've been seeing a recent firm experience emerging pretty well. So that's -- that's been effective. It's all setting in.
And even when you look at these segments, it's not just the issue here. There are certain companies that are doing better than others and certain duration products, 20-year term products remain to be seen how those will play out. But in general, it's not getting what we would have hoped for. But it is -- it certainly not losing money.
UNIDENTIFIED AUDIENCE MEMBER: Two questions probably for David. One, you talked about your exposure to banks and the GIPS countries. Could you give us a sense of where that exposure is generally? Is it in the capital structure? And then, number two, on your last slide, it looks like you're allocation to high yield corporate is going to increase pretty significantly in 2011.
Given where all in yields are and high yields right now, that looks a little scary. Spreads to high grades corporates, that might look a little -- a little more reasonable. Could you give us a little color on your thinking there?
The increase in the less investment-grade bonds for 2011, we decided to give a little bit more money to our bank loan manager so it's the senior most capital structure of the high yield market. And that market is kind of a LIBOR plus 500 kind of market right now. So it seems reasonable to us given the other opportunities.
UNIDENTIFIED COMPANY REPRESENTATIVE: One last question if we have time for one more. I think the well is running dry. Okay. Well, we certainly, in behalf of RGA, I want to thank everybody for attending. We've enjoyed it. I hope you have, too. And feel free to call, Joe or John, or any of us with any follow-up questions you may have.
Thank you.
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