Jan 27, 2009
Executives
Jack B. Lay – Senior Executive Vice President and Chief Financial Officer A.
Greig Woodring – President and Chief Executive Officer
Analysts
Nigel Daly – Morgan Stanley Jimmy Bhullar – J.P. Morgan John Nadel – Sterne, Agee & Leach Steven Schwartz – Raymond James Andrew Kligerman – UBS Eric Berg – Barclays Capital Jeffrey Schuman – Keefe, Bruyette & Woods Mark Finkelstein – Fox-Pitt Kelton James Boyd – Wachovia Securities
Operator
Welcome to the Reinsurance Group of America fourth quarter conference call. Today’s call is being recorded.
At this time, I would like to introduce the President and Chief Executive Officer, Mr. Greig Woodring, and Senior Executive Vice President and Chief Financial Officer, Mr.
Jack Lay. Please go ahead, Mr.
Lay.
Jack B. Lay
Good morning to everyone joining us for RGA’s fourth quarter 2008 conference call. I’ll turn the call over to our CEO, Greig Woodring, in just a minute.
Greig will comment on our results and provide guidance for 2009 and then we’ll respond to any questions from our participants. As a reminder, during the course of the call we plan to make certain statements and discuss certain subjects that will contain forward-looking information, including among other things, investment performance, statements related to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries.
You are cautioned that actual results could differ materially from expected results. The list of important factors that could cause those results to differ materially is included in the earnings release that we issued yesterday.
In addition, during the course of the call we’ll make comments about our results based upon operating income both on a pre-tax and after tax basis. Under SEC regulations, operating income is considered a non-GAAP financial measure.
We believe this measure better reflects the ongoing profitability and underlying trends of our continuing operations. Please refer to the tables in our press release for more information on this measure and reconciliations of operating income to net income for our various business segments.
With that, I’ll turn the call over to Greig.
A. Greig Woodring
I’ll make some brief comments on our results, provide guidance for 2009 and then we’ll open the line for questions. Overall, operating results for the quarter met our expectations.
We experienced a poor mortality in the U.S. but positive mortality results in almost all of our other markets.
The U.S. dollar strengthened considerably compared with many of the currencies important to RGA’s operations.
Excess capital from our November common stock offering as expected creates dilution in earnings per share until deployed. On a consolidated basis, operation income for the quarter increased 10% and totaled $100 million.
We estimate that foreign currency translation cost us approximately $11 million after tax or $0.16 per share when compared with last year’s fourth quarter. These translation adjustments are unrealized and are a result of the translation process required for our U.S.
GAAP financial statements. We typically do not hedge these unrealized fluctuations since we are long-term investors in our foreign markets and expect these fluctuations even out over time.
On a per share basis, operating income increased 2% to $1.45 per share for the quarter. Our November common stock offering was about $0.14 per share diluted.
Quarter results benefited from a reduction in incentive compensation [inaudible] accruals and the quarter also benefited from a slightly lower effective tax rate. For the year, our operating income per share increased 11% to $6.12 per share.
This result is within the guidance range we established at the beginning of 2008. That guidance, of course, did not contemplate the November common stock offering.
Reported net income for the quarter total totaled $9.4 million or $0.14 per diluted share compared to $63.6 million or $0.99 per share. Net income in the current quarter includes approximately $74.5 million in unrealized losses after DAC and after tax due to the decline in value of embedded derivatives associated with certain funds withheld annuity treaties Credit spread widening since September is the primary driver for the additional decline in value.
This is a non-cash unrealized loss that does not affect current treaty cash flows or profit spread performance. Any actual or realized losses including impairments in the underlying funds without portfolios are reflected in investment income and they’re including in our operating results.
Net income also includes approximately $16.1 million pre-tax and investment impairments during the quarter. We added $9 million in pretax liabilities for the final runoff of our discontinued accident and health business.
We don’t expect any disputes or arbitrations in the future and the claims flow has slowed to an insignificant amount. The additional reserves will allow us to essentially zero out the P&L impact of the operation during any final runoff.
Going forward, we will no longer report a discontinued operation. Our fixed material investment portfolio remains 97% investment grade.
Mature values are under pressure in the current spread environment. We have posted a quarterly financial supplement to our website, which contains detailed information on the portfolio as well as consolidated and segment results for the past five quarters.
Turning to the top line, consolidated net premiums increased 3%, excluding the effect of foreign currency translation, the increase was 11%. With the year, net premiums increased 9% on the U.S.
dollar basis and 10%, excluding foreign currency translation. Turning in turn to our operating segments and first in the U.S., poor mortality experience and weak results in the asset-intensive segment hampered results.
Pre-tax operating income decreased to $77.5 million from $110.7 million last year, which was a strong quarter. An amount of large claims during the quarter led to the weaker results.
These claims were well spread across our portfolio by issue ages, issues years and ceding companies. We experienced good mortality results in 2006 and 2007 on this portfolio.
Fluctuations both positive and negative even out over time. The results for this quarter and for the year do not change our long-term profit expectations on our book.
Net premiums increased 11% for the quarter and 8% for the full year in line with our expectations. Our asset-intensive business reported a pre-tax operating loss of $2.8 million compared to operating income of $7.4 million last year.
Realized losses totaling $13.8 million in the funds withheld portfolios, which aren’t reflected in operating income, were the primary driver for the loss. Additionally, reserve increases for living benefits on variable annuity business also put pressure on net income.
We have approximately $1.1 billion in annuity comp values with living benefit riders. The fair value of the living benefit liability is $276 million, an increase of $230 million from September 30th.
We are hedging fund performance risk, Delta in other words, and interest rate grow, which has been effective in offsetting 90% to 95% of the associated liability increases for those risks. We do not hedge, however, implied volatility risk, which in the current environment has increased significantly.
To date DAC unlocking has absorbed the current period losses, however we expect to see margin pressure on the in force business going forward. We have the ability to terminate new business three existing [inaudible] if we feel pricing is no longer acceptable.
Turning to Canada, it was another strong quarter with good mortality experience as has been the case all year. Pre-tax operating income totaled $23.3 million up from $19.5 million last year.
On a Canadian dollar basis, the result was $6.2 million strong as the Canadian dollar depreciated significantly this quarter. The full year pre-tax operating income totaled $107.2 million compared to $75 million last year.
Net premiums decreased 10% for the quarter on a U.S. dollar basis and increased 11% on a Canadian dollar basis.
For the year, reported net premiums increased 10% in line with our guidance. Overall, it was a great year for us in Canada.
We’ve added a significant amount of good business over the last several years in Canada and our position is strong. Results were strong in our international operations.
Asia Pacific reported pre-tax operating income of $22.3 million compared to $17.5 million in the prior year, a 27% increase. The current quarter reflects favorable segment wide claims levels.
Weaker foreign currencies in several markets negatively effected earnings by approximately $2 million. Premiums increased 12% on an original currency basis for the quarter and 16% for the full year.
We exceeded $1 billion in premiums for the year, a nice milestone. Our strength in the Asian markets continues to show in our results.
Our European and South African segment reported pre-tax operating income of $26.4 million versus $3.3 million a year ago when we had some adverse mortality in our U.K. operation.
Foreign currency weakness notably the pound sterling hurt the current quarter results by approximately $7.8 million. Results have rebounded from a difficult first half such that we have achieved a solid full year result.
Net premiums for the quarter decreased on a U.S. dollar basis due to a significantly weaker pound sterling and our original currency basis premiums increased 14% for the quarter and 11% on a year-to-date basis.
We expect slightly stronger growth rates in 2009 as we take advantage of opportunities in the broader European market and the gradually improving competitor environment in the U.K. We are very pleased with the 2008 consolidated results.
Despite the worldwide economic and financial market turmoil, we posted full year operating result within the range of guidance we issued at the beginning of 2008. We head into 2009 with capital flexibility from our November common stock offering and strong liquidity with nearly $900 million of cash and equivalents on hand.
Although we believe our investment portfolio is well positioned, it is of course not immune from loses. However, we believe losses will be manageable with our current capital base.
Our position in the life reinsurance market stayed strong, and based on various industry customer surveys, RGA continues to be a recognized market leader in quality and capability in the life reinsurance industry. As we look to 2009, we have a standard operating income target of 5.75 to 6.25 per share and consolidated premium growth of approximately 10%.
This guidance reflects normalized earnings in premium growth rates on an original currency basis of between 6% to 8% in the U.S., 11% to 13% in Canada, 10% to 15% in Asia Pacific and 15% to 20% in Europe and South Africa. We estimate that the stronger U.S.
dollar and the dilution from our November stock offering will create headwind of approximately $0.85 per share. We continue to look at a large number and a number of large block transactions.
Progress can be expected to be slow on opportunities like these. Such potential transactions require a great deal of structuring and negotiation and as major transactions tend to move at their own pace.
Despite the broader markets turmoil and the considerable level of uncertainty, we believe we are well positioned both operationally and financially to have a successful 2009, and we appreciate you support and interest in RGA and are ready now to take any questions that you may have.
Operator
(Operator Instructions) Your first question comes for analyst Nigel Daly – Morgan Stanley.
Nigel Daly – Morgan Stanley
First question premium growth in the U.S., last year you guided towards 7% to 9% growth. This year you're guiding to 6% to 8%, which is a deceleration.
Given the increasing need for capital related solutions I would have expected an acceleration. So I thought maybe you could comment on that.
Second, with pricing trends perhaps if you can comment on whether we're beginning to see some firming in the marketplace on the growing demand. And last if you can provide an estimate on where you ended the year with respect to you risk-based capital ratio.
A. Greig Woodring
On the U.S. premium account, you notice it has been trending downward over the last several years and we see a slow continuation of that trend.
It's true that there is if anything a bias towards more reinsurance rather than less reinsurance in the marketplace now, at least we've seen the penetration rates bottom out we believe. However, there's always lags in reporting and we're not likely to see that immediately in the numbers.
So in addition the overall sales level in the market looks like it's down to us a lot in the last couple months of last year and the first month of this year. So putting all that together we are more comfortable dropping to about a 6% to 8% level in the U.S.
We hope to do better than that, of course, but that's our best guess at where we think it's going to be. Terms of pricing trends, the U.S.
market has been a pretty good environment for the last several years for us so we don’t see that changing much. There is a little bit more competition around the edges from time to time, but it really doesn’t look to us like it's fundamentally changed in anything, in anyway.
Jack B. Lay
In terms of the RBC ratio, we would expect that we're developing the statutory reporting as we speak here, but would expect something between 320 and 330 in terms of ratio year end.
Nigel Daly – Morgan Stanley
Perhaps if I could just follow up on the first question, the 6% to 8%, does that incorporate any closure of large block cells in the year or would that be in addition to or a 6% to 8% more organic growth.
Jack B. Lay
That's more organic growth. We don’t really know where the block deals will come from because as we look at the 50 or so opportunities or 50 plus opportunities we have in the house.
They're from all over the world some U.S. and of course some outside the U.S.
and we will take them however they fall.
Operator
Your next question comes from Jimmy Bhullar – J.P. Morgan.
Jimmy Bhullar – J.P. Morgan
I had a question on your variable annuity living benefits business, especially the exposure to guaranteed minimum withdrawal benefits has been rising, if you could just talk about your view on this business and outlook for growth here. Obviously, it's a new element of risks that it introduces and you have had losses the past few quarters, but if you could just talk about if you intend to grow that business.
If not, have you canceled any treaties and what the outlook is for that business in ‘09?
Jack B. Lay
We haven’t canceled any treaties at this point. We've renegotiated the terms of all of the treaties and we're taking a very close look at them obviously in this environment.
We really expect there's going to be a lot of decrease in the overall business flow on these treaties just because there’s going to be a big drop in the market for this business. So we don’t have a lot of growth expectations, as a matter of fact quite the opposite for this business at the moment.
Operator
Your next question comes from John Nadel – Sterne, Agee & Leach.
John Nadel – Sterne, Agee & Leach
Couple of quick questions for you, just following up real quick, Jack, on the 320 to 330 RBC estimate, is all of the capital that you guys raised in November, has all of that been down streamed. Is that in the numerator of that ratio?
Jack B. Lay
No. The predominant share of the capital is still holding company.
John Nadel – Sterne, Agee & Leach
I wanted to talk a little bit more about these embedded derivatives in the moves in the quarter. Can you walk us through how you think we should think about that?
I think as I understand it this has no impact on a statutory basis this is simply GAAP accounting noise, but do you view the moves, especially if it's driven by credit spread widening, as economic? Is that something that we should expect to reverse?
Will it depend exclusively on credit spreads tightening back in?
Jack B. Lay
Let's take it in pieces. The change in the embedded derivative is primarily driven by our B36 derivative and that, I'll remind everyone, relates to treaty structure in terms of any modco annuity reinsurance treaties that we have.
Because of the structure of the treaty there is an embedded derivative. The change in the value of that embedded derivative is driven primarily by credit spreads, and as the spreads have widened considerably over the last four quarters you've seen unrealized losses in our P&L.
To the extent that those and I guess we would certainly expect at some point the spreads to come in to the extent that they do, then you will see unrealized income going through the P&L. So we view that B36 derivative revaluation to be non-economic in the sense that it's driven primarily by credit spreads.
Now to the extent going forward, if we have realized losses within the modco portfolios then that would be economic, obviously. So much of that revaluation is driven by credit spreads that we don’t anticipate will result in actual realized losses.
That we would characterize the lions share virtually all of it is non-economic at this point.
A. Greig Woodring
Strictly GAAP it's not statutory.
Jack B. Lay
That's right it doesn’t affect our statutory reporting at all. There is also some GMxB embedded derivatives to a lesser extent going through that line as well, and we would characterize that as primarily non-economic.
We do have an embedded derivative that we value. As Greig had mentioned, we do try to hedge those risks to the extent we can other than the so called vega risk.
So that embedded derivative we would argue is for the most part non-economic. To the extent there is an economic, so far we have offset any of those impacts to a large part against DAC.
Not to the extent that you do offset some of that against DAC, it does have implications on the overall margins going forward. So we would expect to see depressed margins on that business going forward.
It's not a big part of our business so it shouldn’t in our estimation have a big impact on our overall earnings flow, but that’s where we are now.
John Nadel – Sterne, Agee & Leach
Maybe to just be specific on a couple of numbers here, I think from the supplement it looks like you had, from the embedded derivatives the B36 and GMxB, about $392 million in pre-tax losses in the quarter. Is that the number that relates to the $74.5 million after tax after DAC in the press release and that Greig mentioned?
Or does that $74.5 also include the benefit of the $160 million gains from the freestanding derivatives?
Jack B. Lay
Yes. The $74.5 is solely the impact of the B36 derivative.
John Nadel – Sterne, Agee & Leach
That’s only the B36? So then the GMxB is not part of the $74.5 million that was mentioned?
Jack B. Lay
That’s right. That’s correct.
John Nadel – Sterne, Agee & Leach
How much is the GMxB after tax and DAC?
Jack B. Lay
It was fairly insignificant, we didn’t –
John Nadel – Sterne, Agee & Leach
So that’s where you made the comment that most of it was offset in DAC.
Jack B. Lay
Yes.
John Nadel – Sterne, Agee & Leach
Last one, sorry to take so much time. So, in the press release I think you mentioned that you deployed a small portion of the capital that you raised.
Greig, you just gave us a little bit of info on the pipeline 50 plus opportunities, range of potential transactions. If you think about the small portion that you did already deploy, can you give us a sense for the type of transaction or transactions that it was deployed into, and the margin that was implied in the pricing?
Is there any way that we can gain some additional confidence on just how the pricing environment is looking as you deploy some of this capital?
A. Greig Woodring
Yes. We did three small transactions that used up in total somewhere around $20 to $25 million of capital.
They were all priced at a 20% plus return.
John Nadel – Sterne, Agee & Leach
Twenty plus percent ROE?
A. Greig Woodring
Yes, a 20% minimum return.
John Nadel – Sterne, Agee & Leach
Just any comments on Hanover Re taking over the old ING business from Scottish Re, I’d assume that you guys probably took a look at that. Is there anything that we sort of should take away from that transaction in so far as changing the be dative dynamics?
A. Greig Woodring
Well, I don’t know that it’s going to change competitive dynamics in the real short-term, but it could introduce another competitor into the marketplace, which has consolidated quite a bit over the last several years, as you know. I think they have been working hard on that transaction for some time is my understanding and so I wish them luck and we’ll see what happens.
Operator
Your next question comes from Steven Schwartz – Raymond James.
Steven Schwartz – Raymond James
I want to follow up a little bit on what John was asking on the asset-intensive, but before I do the loss in the funds withheld portfolio I think it was $13.8 billion or something like that pre DAC. Do you know what that would be after DAC and maybe you could touch on why you consider those operating or why they should be considered operating?
Jack B. Lay
Steve, first of it was about $14 million not billion. Typically roughly 75% of that would be offset via DAC adjustments so that should give you some feel there.
In terms of why we report it the way we do, it really relates, and I can understand why it becomes confusing, it really relates to the treaty structure and the way the income flows through the treaty under U.S. GAAP.
We made a determination that that has to flow through investment income, and as a result we don’t try to pull that out and call it a non-operating item.
Steven Schwartz – Raymond James
Staying on asset-intensive and looking at the claims and other policy benefits, that picked up, I’m assuming from the dialogue that the increase from $2 million in the first quarter to $8.2 million in the fourth quarter was reflective of the variable annuity issue?
Jack B. Lay
Well, there’s a lot of things affecting that line, in particular any kind of DAC offsets from a variety of origins, particularly any of the embedded derivatives. So really to kind of flush that it would almost take an off line discussion because there is a lot of influences there.
Steven Schwartz – Raymond James
I am more than willing to do that. I think that’s all I had.
I wanted to talk about Hanover Re but that’s been asked and answered.
Operator
Our next question will come from Andrew Kligerman – UBS.
Andrew Kligerman – UBS
Couple of questions, first on that $0.50 of dilution this year, what does that assume in terms of capital deployment with respect to transactions? How much of a capital would be put to work under that $0.50 scenario of dilution?
Jack B. Lay
Andrew, I think you can think of it as that presumes on average we would have less than half of the capital deployed, or maybe an easier way to express it is that we would deploy all of the capital roughly two-thirds of the way through the year. So you can kind of think of that however you want in terms of the buildup of deployment, but I think maybe that’s the easiest way to express it that we would deploy it at all some point roughly two-thirds the way through the year.
Andrew Kligerman – UBS
Greig, you think that these 20% plus returns that you generated on these smaller deals that you’ve initially done, you think that’s feasible going forward on the many deals that you’re seeing right now?
A. Greig Woodring
Well, we think so Andrew. That’s what we’re going to hold to until we’re proven wrong, but we believe that’s the case.
The cost of capital is up all over the place and our capital still for the affect the bang for the buck for what it has is still pretty cheap at a 20% pricing level to us.
Andrew Kligerman – UBS
During your commentary, I think it was in the Q&A on the sales growth in the U.S., Greig, you mentioned a little bit of pressure on underlying sales, could you give a little color on what you’re seeing in the primary markets in the United States in term of life sales and if you could actually in the other regions where you operate as well.
A. Greig Woodring
Well, just looking at the MIB hits, the Medical Information Bureau hits on new policy applications in November and December you saw a market drop off in that rate. Our facultative book, remember we’re very large on the facultative scene and it basically is a proxy for how the industry is doing, has been kind of slow in the last three months or so.
And putting those things together we think that overall there is probably a drop off with the primary level of sales. Now we’re not the ones who rollup those number and you should look for Limerick to do that in retrospect, but we’re expecting what we’re looking at the situation that looks a lot like a slowdown in growth in the primary business.
In other markets, I think you can probably expect the economies to have the same effect all around the world. That is to say that there will be a drop-off to some extent in the economic activity and the issuance of new policies.
In places like Asia that might be masked by just the underlying growth is still traveling at a pretty good speed and it might just slow down a bit.
Andrew Kligerman – UBS
It sounds like in the U.S. a double-digit might be a way to think about the declines then?
A. Greig Woodring
Yes. I don’t remember actually the decrease in MIB but I think it was double-digit in November and December, Andrew.
Operator
Your next question comes from Eric Berg – Barclays Capital
Eric Berg – Barclays Capital
Greig, I think like other analyst on the call I’m intrigued by I can’t help noticing the very significant difference between your pre-tax book income as reported under GAAP and your operating income. So I have just a couple of questions, as did the others, on all of these reconciling items.
My first one is, you report out down on page five of the supplement pre-tax nearly $150 million of derivative gains that are just sort of freestanding derivatives, I think that’s what page 25 calls them. What is the purpose of all this derivatives, for example the interest rates swaps, which seem to be dominating?
Jack B. Lay
Perhaps I can take that. If you think of our reinsurance of GMxBs the riders there is an embedded derivative there that would relate to changes in the overall perceived value of those guarantees and what we do is we go into the market then and try to hedge those risks and so you can think of it as there’s a reserve increase or decrease associated with the embedded derivative and then we also have investment income or negative income associated with the actual hedging instruments that we go out and buy and what you’re referring to relates to the hedging instruments that we went out –
A. Greig Woodring
Hedging gains right now.
Jack B. Lay
Exactly.
Eric Berg – Barclays Capital
So you have in fact anticipated my second question, which is the GMxB derivatives hit to earnings $231 million pre-tax is offset by the derivative gains that you just preferneced?
Jack B. Lay
Offset in part as well as from DAC adjustments, that’s right.
Eric Berg – Barclays Capital
And my second and final question just really returns us to the point that John was discussing. If these investments that are, I guess they’re still sitting because they’re modified co-insurance related on your cedants balance sheets.
If they were owned by say a bank or a broker the decline in value would absolutely be considered economic. It would be considered a mark.
It would go right through net income. The widening of credit spreads presumably reflects the markets expectation or the markets view whether correct or incorrect that credit on these assets has deteriorated.
Help me understand why you characterize this as non-economic?
Jack B. Lay
Maybe to take it closer to home in terms of our industry, if they were on our balance sheet, if wrote those treaties on a pure co-insurance basis instead of a modco basis, those asset portfolios would be on our balance sheet and we would mark those to market through AOCI. So I think that’s probably the best way to think of it and you can I guess draw your own determination in terms of when spreads go out and impact on capital through AOCI whether you consider that economic or non-economic or something in between.
Operator
Our next question will come from Jeff Schuman – KBW.
Jeffrey Schuman – Keefe, Bruyette & Woods
A few questions on the variable annuity business, looking at the disclosures on page nine, I was interested to see that a lot of your variable annuity exposure does not have any riders associated with it and I guess I’d appreciate kind of a refresher in exactly what reinsurance you’re providing into some of these situations. I would have thought basically the demand was for protection against some of the rider exposure so can you remind us maybe of the types of capacity you’re actually providing?
Jack B. Lay
Yes we started off when we entered that line first just reinsuring the base and so we were essentially reinsuring the expense recovery of the upfront fees.
Jeffrey Schuman – Keefe, Bruyette & Woods
Okay so it’s more financial.
Jack B. Lay
Just the base I mean there were riders on that but they were retained for the ceding company and ultimately about a year later actually we started reinsuring some of the riders.
Jeffrey Schuman – Keefe, Bruyette & Woods
So, the initial base exercise is more of a capital exercise than a risk exercise, and then just make sure I’m connecting the dots between the numbers here, so if I look once again on that page nine, the share value of living benefit riders over the course of the year increased from 9 to 276 so that’s a delta of 267. So it looks like that maps to page eight where for the full year we see the GMxB embedded derivatives result of 267 is that a correct mapping?
Jack B. Lay
That’s right, Jeff.
Jeffrey Schuman – Keefe, Bruyette & Woods
So once again the two offsets against that would be your hedging offset, which I assume runs through the investment and derivative losses and gains lines, there’s a couple of lines above is that correct then also the DAC offset line?
Jack B. Lay
That’s right.
Jeffrey Schuman – Keefe, Bruyette & Woods
So for the year the spread between the increase in the benefit liability of 267 and the hedge of 171 was about rough numbers I guess a $100 million spread is that correct?
Jack B. Lay
Yes roughly.
Jeffrey Schuman – Keefe, Bruyette & Woods
I guess I’m curious philosophically and I would think that the changes in those benefits and your hedges against that, I mean that would seem to be central to what that coverage is about. I’m curious as to the classification of that as being non-operating first of all.
And then secondly I’m wondering as we roll forward, if markets continue to be challenging, is there an inexhaustible supply of DAC offsets or at some point do you get maxed out on how much you can take DAC up there?
Jack B. Lay
That’s a good point. The DAC offset is not inexhaustible.
We have a little remaining but not a great deal. So if we had continued horrendous capital market performance at some point you would see we would be at the point where we would have no DAC offset, and so you’d see much more of it going through straight to the bottom line.
Jeffrey Schuman – Keefe, Bruyette & Woods
And in terms of the philosophical classification of all this is being non-operating?
Jack B. Lay
Well, I think we’re following for the most part how the industry reports this and people can draw their own conclusion in terms of how much of the embedded derivative will come back and that sort of thing over time. Keep in mind on this sort of product we don’t anticipate paying out any cash on any of these guarantees for at least 9 or 10 years, so a lot can happen between now and 2018 in terms of investment performance and so on.
Jeffrey Schuman – Keefe, Bruyette & Woods
What is the current DAC balance specific to variable annuities?
Jack B. Lay
I don’t have that handy but if what you’re getting at is how much additional DAC offset could we take it’s not a great deal that’s why we made the comment that the margins on that business have been diminished at this point.
Jeffrey Schuman – Keefe, Bruyette & Woods
Then lastly just a clarification, you talked about looking at ’09 consolidated premium growth of 10%, is that assuming currencies are constant. In other words, just kind of rolling up your constant currency premium guidance that you gave by market or is that net of the effect of some of the negative currency comparisons you’re likely to have?
Jack B. Lay
It’s our estimate of U.S. dollar performance so it would include our own estimate on what the foreign currencies on average will be trading at, so to speak.
Jeffrey Schuman – Keefe, Bruyette & Woods
So in other words, on a constant currency basis you would expect consolidated premium growth to be well above 10%?
Jack B. Lay
Certainly above it that’s right.
Operator
Our next question will come from Mark Finkelstein – FPK.
Mark Finkelstein – Fox-Pitt Kelton
Just a couple of follow ups to I guess prior questions, what was the DAC offset on the GMxB that you recorded in the quarter?
A. Greig Woodring
A little over $200 million for the quarter.
Mark Finkelstein – Fox-Pitt Kelton
That was the DAC offset against the-
A. Greig Woodring
That’s right, against the embedded derivative.
Mark Finkelstein – Fox-Pitt Kelton
Then just within the asset-intensive segment, what was the actual, which I believe does flow through operating, the impact on death benefits, GMDB, what was the impact on earnings of that?
A. Greig Woodring
It was very minimal.
Mark Finkelstein – Fox-Pitt Kelton
Then just on deployment of the offering proceeds, I’m trying to understand the point. Is it fair to say that the deals you are seeing are as robust as what you’ve always thought and that the returns are there it’s just taking longer to deploy that capital, or how should we think about that?
A. Greig Woodring
Yes I think that’s a good way to think about it. We don’t have any idea when some of these deals are going to land, although we do know that they take a long time to structure and to put in place.
As companies have gotten through the year end crush they have breathed a sigh of relief and I think that things will go at their own pace. I think we have adjusted our thinking a little bit in the light or reality of seeing how slowly some of these are moving, but the truth of the matter is we really don’t know how fast they’ll go and whether we will do something significant in the next quarter or the quarter after that or the quarter after that.
Mark Finkelstein – Fox-Pitt Kelton
Then I guess just in terms of thinking about the credit environment and where the rating agencies are, do you still believe that you can use the full deal proceeds of 330 on these types of deals or do you need to hold a little bit back in terms of other factors?
A. Greig Woodring
No we think we will use these proceeds for these deals.
Mark Finkelstein – Fox-Pitt Kelton
Then just a follow-up back to capital, RBC 320 to 330 I understand but what is your margin above rating agency minimums. And I know that you are split rated but what do you characterize as the margin over rating agency minimums right now?
Jack B. Lay
Mark, this is Jack, I’d say it’s several hundred million dollars right now. I’ll kind of remind everyone that before the capital raise our best estimate was that we had somewhere in the vicinity of $200, $300 million of excess capital.
Obviously, we have a little bit more than that given the capital raise but as Greig said we plan to deploy that. So we don’t think we’re capital pinched right now, even after deployment we think we have some level of cushion and we’ll just continue any discussions with rating agencies to the extent they think otherwise, but we certainly don’t anticipate that.
Operator
(Operator Instructions) Our next question comes from James Boyd – Wachovia Securities.
James Boyd – Wachovia Securities
You said hedge effectiveness on the GMxB was running 90% to 95%. How do you measure hedge effectiveness?
Jack B. Lay
Well, it’s really the extent to which the instruments that we purchase offset any change in value of the embedded derivative.
James Boyd – Wachovia Securities
Is it model based?
Jack B. Lay
Yes.
James Boyd – Wachovia Securities
And the credit derivative marks were those calibrated against CDS?
Jack Lay
Yes.
Operator
Our next question comes from Eric Berg – Barclays Capital.
Eric Berg – Barclays Capital
A couple of quick follow-ups, either Greig Jack mentioned that you anticipate deploying this capital, if I understand your point, less instead of ongoing flow business and more in block type transactions. In addition to coinsurance of existing blocks of business, what forms in theory might these transactions take [inaudible] business to facilitate M&A?
How should we think these big tickets that you’re looking at?
A. Greig Woodring
Some of it is to support M&A. A lot of it is blocks that companies wish to essentially monetize in order to improve their balance sheet, but all of this capital we’re looking at this as capital not for organic growth but capital for these opportunities.
So they’re almost all in a block form one way or another.
Eric Berg – Barclays Capital
Second, and I don’t think you mentioned this and if you did I’ll apologize, can you explain the decision not to hedge vega and what is your thought prospectively about hedging vega?
A. Greig Woodring
Well, I think our thought process is that volatility it costs money to hedge it, it tends to even out pretty well and it seemed like extra drag on it. We do look at it all the time, whether we should or not and at this point have decided so far not to and have lived with that.
Operator
Next question comes from John Nadel – Sterne, Agee & Leach.
John Nadel – Sterne, Agee & Leach
When we think about the currency assumptions that are embedded in your guidance, I assume you guys are not making a call on currencies, is it based on year end foreign exchange rates or something more recent, something that we can sort of pay closer attention to?
Jack B. Lay
John, this is Jack. Well, essentially we have to make some sort of a call in order to come up with a plan and it –
John Nadel – Sterne, Agee & Leach
Well, I guess so, but whether it’s using current foreign exchange rates or something different.
Jack B. Lay
Yes, well, we take a look at what most the economist are predicting in terms of what the potential exchange rates will be, so we don’t do it as we’re making any kind of a call that’s not kind of resident in the economic community right now.
John Nadel – Sterne, Agee & Leach
Okay.
A. Greig Woodring
We’re not making a bet on those calls either.
John Nadel – Sterne, Agee & Leach
Right, not turning in the buffet over there I guess. So we should just essentially think about some consensus view on dollar versus British pound or dollar versus yen.
Jack B. Lay
Yes, John, and the cue with us, we’ve kind of laid out our expected premium levels by the major currencies too –
John Nadel – Sterne, Agee & Leach
Yes, I know, but we don’t have your ‘08 levels.
Jack B. Lay
Yes, that’s true.
John Nadel – Sterne, Agee & Leach
So, and maybe that would be simple enough if you guys could provide that in an update to the supplement or something that would be helpful.
Jack Lay
Okay.
John Nadel – Sterne, Agee & Leach
Just thinking about the risk space capital ratio again, so what’s your estimated statutory capital that goes along with that 320 to 330? Maybe just better put total adjusted capital.
Jack B. Lay
It’s between $1.2 and $1.3 billion right now.
Operator
Next question comes form Steven Schwartz – Raymond James.
Steven Schwartz – Raymond James
One follow-up going back to the GMxB and the hedging, if I understood the discussion with Jeff Schumann correctly, the fair value of the living benefit riders from 9 to 276, that was reflected on page eight in the 267. For the fourth quarter we saw that go up by $230 million and we see that reflected as well on page eight, meanwhile you said, I believe, that the DAC offset for the quarter, maybe I miss heard, but for the quarter was $200 million.
Wouldn’t that necessarily imply then that the hedge asset rose only 30 some odd billion and how does that fit in with the statement that hedging has been 95% effect. And also on the fair value of the living benefit riders, I assume that you’re hedging to some economic target, you’re not hedging to some GAAP estimate or even the statutory reserving requirements.
Jack B. Lay
Yes. There’s also, and this gets rather involved, I mentioned over $200 million, about $225 million was the offset, the GMxB DAC offset associated with the roughly $231 million of change in the embedded derivative.
There’s also a DAC offset associated with the actual GMxB hedging instrument performance. So I think that may be what you’re missing as you try to kind of run through the numbers in your head.
Steven Schwartz – Raymond James
Jack, do you know what that was off the top of your head?
Jack B. Lay
For the quarter it was about $145 million.
Steven Schwartz – Raymond James
What are you hedging to, what’s your target? Are you targeting statutory reserving or are you targeting GAAP or are you targeting some economic estimate?
Jack B. Lay
Well, it’s the latter. We’re actually targeting an economic performance.
Operator
It appears at this point that we have no further questions.
Jack B. Lay
I guess then, I think we’re an hour in so it's time to end the call. We thank everybody for their interest and to the extent other questions come up feel free to give us a call here in St.
Louis. With that we’ll end the call.
Operator
Once again, that does conclude today’s conference. Thank you for your participation and have a wonderful day.