Oct 27, 2009
Executives
Jack B. Lay – Senior Executive Vice President and Chief Financial Officer A.
Greig Woodring – President and Chief Executive Officer
Analysts
John Nadel – Sterne, Agee & Leach Nigel Dally – Morgan Stanley Steven Schwartz – Raymond James Mark Finkelstein – Fox-Pitt Kelton Michael Zaremski – Credit Suisse Jeffrey Schuman – Keefe, Bruyette & Woods Eric Berg – Barclays Capital Andrew Kligerman – UBS
Operator
Good day everyone. Welcome to the Reinsurance Group of America third quarter conference call.
Just a reminder 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.
Mr. Lay, you may begin.
Jack B. Lay
Thank you. Good morning and welcome to everyone to RGA's third quarter 2009 conference call.
Greig Woodring, our Chief Executive Officer, will briefly comment on the results that we released yesterday and then we'll respond to questions from participants. I'll turn the call over to Greig, after a quick reminder related to forward-looking information and our use of non-GAAP financial measures.
We make certain statements and discuss certain subjects during this call 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 for RGA and its subsidiaries. You are cautioned that actual results could differ materially from expected results.
A list of important factors that could cause actual results to differ materially from expected results is included in the earnings release issued yesterday. In addition, during the course of the call, we will 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 the various business segments. With that, I'll turn the call over to Greig.
Greig Woodring
Good morning and thank you for joining us. I will provide some brief comments on our third quarter results and then we will open the line for your questions.
To begin, we are pleased to report a solid quarter, one in which we generated strong operating earnings and our investments and capital positions continue to strengthen. On a consolidated basis, operating income for the quarter was $114.6 million, down slightly from a remarkably strong $118.5 million in the prior year.
On a per share basis, our reported operating income for the quarter was $1.56 per diluted share versus $1.86 in the third quarter of 2008. Of course our share count is higher this year as a result of our November 2008 equity offering.
On a year-to-date basis compared to the prior year, operating income has been adversely affected by $0.20 per diluted share due to foreign currency fluctuations. Reported U.S.
GAAP net income for the quarter totaled $118.2 million or $1.61 per diluted share compared to $0.40 last year which, due to very unstable capital markets, reflected significant realized and unrealized losses from investments and derivatives. Consolidated net premiums totaled $1.4 billion during quarter, an increase of 11% on an original currency basis and of 8% on a reported U.S.
dollar basis. For the first nine months, net premiums increased $4.1 billion – $2.41 billion or 4% on a recorded basis, 12% on an original currency basis.
Our book value increased 22% from June 30, 2009 and our net unrealized position on investments improved from a loss of $332.7 million to a gain of $145.2 million after tax. Over the last two quarters, our book value has increased 53%.
Impairment losses totaled $25.7 million for the quarter. Net investment income totaled $299.5 million, up from the second quarter total of $284.6 million.
Similar to the second quarter, our funds withheld portfolios in the U.S. asset-intensive segment were responsible for a large part of the rise in investment income.
Our general account portfolio yield was 5.7% for the quarter as well as the first nine months of this year, trailing last year's yield by about 30 basis points, as we've held higher relative levels of cash and invested new money conservatively. Operating results also included a refinement of an estimate of existing U.S.
tax accruals associated with certain foreign operations resulting in an addition of $5.3 million to the company's tax provision. Turning to our operating segments, first in the U.S., pre-tax income totaled $107.1 million compared to $84.2 million last year, a 27% increase, due primarily to improved mortality and strong results in our asset-intensive segment relative to last year's third quarter.
Premiums were up 8% for the quarter and mortality experience was off by about $15 million pre-tax, an insignificant deviation relative to total claims. Quoting activity on traditional, organic business remains strong and we are seeing more capital and financially motivated inquiries as we approach year-end.
We're excited about our acquisition of ReliaStar's North American group reinsurance business, as it gives us a leading position in a new market for us in the U.S. Approximately 5% of the block is Canadian business and we hope to gain an addition footing in the Canadian group market where we have built a small book in recent years.
We'll take on a team of approximately 90 individuals with a solid track record and a strong reputation in the market. We expect to deploy about $115 million of capital towards this transaction, which is expected to be effective on January 1.
The business is expected to add about $300 million in premium in 2010 spread roughly equally over the four quarters, with a return in the mid to high teens. Our U.S.
asset-intensive business contributed $19.7 million in pre-tax operating income, up from $8.3 million last year primarily due to stronger underlying front performance associated with annuity co-insurance. The liability for B36 embedded derivatives associated with treaties structured on a modified co-insurance and funds withheld basis was further reduced during the quarter resulting in a pre-tax increase to net income of $51.4 million offset by a DAC adjustment of $1 million.
The BA business continued to improve during the third quarter as well. The fair value of liabilities associated with GMxB benefit riders decreased from $80 million to $70 million during the quarter; a benefit $10 million, which was mostly offset during derivative activity used to hedge the liabilities.
On an operating basis, the business reported a pre-tax gain of $8.1 million for the quarter. Turning now to Canada, pre-tax operating income totaled $21.8 million down from the prior year total of $32 million, when mortality experience was exceptionally good.
Mortality experience this quarter was more or less in line with expectations. Premiums were up 19% in U.S.
dollars, 25% in Canadian dollars, primarily due to an increase in creditor business. Regarding our international operations, Asia-Pacific recorded an excellent quarter with pre-tax operating income of $28 million compared with $25 million in the third quarter of '08, which was also a strong quarter.
Earnings this quarter were driven by strong operating results in Hong Kong, Australia and Japan. Premium flows in original currencies were down slightly for the quarter, up 6% for the first nine months.
In reported U.S. dollars, premiums were down 7% for the year, largely due to adverse foreign currency effects of about $103 million.
Client reporting patterns can cause volatility in the quarterly comparison, but so far we're behind our expected premium growth in 2009. Our Asia Pacific segment has performed very well over the past couple of years and we remain optimistic about opportunities for continuing growth.
RGA is a recognized leader in this region. Europe and South Africa had a difficult quarter.
Claims experience was mixed this quarter, including adverse results in our largest markets here, in the U.K. and South Africa.
Pre-tax operating income decreased from $25.5 million to $6.7 million this quarter. Mortality experience was approximately $15 million worse than at last year's third quarter when mortality experience was much better than expected.
Net premiums increased 16% on a U.S. dollar basis and 30% on original currency basis.
Year-to-date, premiums are up 23% on an original currency basis. We continue our expansion into continental Europe having recently opened a representative office in the Netherlands.
We continue to see non-correlated results across our global book of business. Shorter-term mortality volatility is an inherent part of our risk portfolio, one that we accept and will continue to expect going forward.
Our capital position continues to improve along with the strengthening credit markets and our ratings remain strong with stable outlooks. Our appetite for additional block transactions is also strong, but we will continue to be selective as we go forward.
In conclusion, we had a solid quarter overall. We're excited about our entry into the North American group reinsurance market.
We believe the current life reinsurance environment is promising and are well-positioned and, in many respects, better positioned than our competition to take advantage of current opportunities. Pricing characteristics across most of our markets remain favorable.
We are well positioned to assist our clients in these markets. Our expertise and proven track record of pricing mortality risks continues to be revealed over long periods of time.
We appreciate your support and interest in RGA and now we're ready for any questions you have.
Operator
(Operator Instructions). Your first question comes from John Nadel – Sterne, Agee & Leach.
John Nadel – Sterne, Agee & Leach
A couple of questions for you, one, obviously asset-intensive has been rebounded very nicely. It was under a lot of pressure earlier in the year and maybe even late last year.
I was just wondering if you could give us a little bit of help on what a more normalized environment level of earnings from that segment might look like if we had a more typical sort of 2% S&P quarterly market appreciation, which I think is what we generally tend to model for most of the equity-sensitive businesses across the space. I was wondering if you could give us a little bit of help in that regard.
Jack B. Lay
Yes, we obviously had a very strong result in asset-intensive and in financial reinsurance in the third quarter. If you combine the two, that is look at all of non-traditional U.S.
operations, the third quarter result was roughly double a typical run rate. And maybe another way to look at it is if you look at it on a year-to-date basis, we're roughly at our annual expectations, if you combine those two, through three quarters, so you could do the math where essentially you're out running ahead by a third or so.
John Nadel – Sterne, Agee & Leach
And then my next question for you is on the tax item. I think we've been accustomed to a 35% or so tax rate, I guess on both operating income and on net income, and this quarter's was only about 50 basis points higher than that.
But if I X out the $5 million-plus little one-time item, the tax rate would have been more like 32.5%. Just wondering if is the 32.5% a better expectation as we look forward or is 35% still the right way to think about your overall consolidated tax rate?
Jack B. Lay
If you take a look at, typically the third quarter we do have a reduced effective tax rate and it relates to FIN 48 and the fact that we're filing returns and essentially cancelling off a year in terms of uncertain tax positions. So, I would suggest that you probably should expect something 32% or 33% in terms of an effective rate in the third quarter.
And I think if you look back historically, at least since FIN 48 has been part of the reporting landscape, you'll see something similar to that.
John Nadel – Sterne, Agee & Leach
But otherwise, no meaningful change, okay. And then the last question really for you and then I'll get back in the queue is, as credit spreads have clearly improved pretty remarkably from the lows of course and your book value obviously reflects that, and AOCI has turned positive on both the foreign currency as well as on credit.
I just wondered if you could give any thoughts to whether you're positioned now or thinking about some portfolio reallocation where you really wouldn't take any meaningful hits to capital if you were to reduce exposures to things like commercial real estate or residential real estate. And then I guess similarly along the same path of thinking, whether there's any thoughts in regards to some hedging activity on foreign currency to lock in the now $186 million of foreign currency gain?
Jack B. Lay
In terms of the investment portfolio, we spent the better part of this year going through I guess what I'd characterize as a strategic analysis to determine whether we're appropriately positioned to handle any sort of any number of different economic outcomes in connection with the capital markets and what we've seen over the last 18 months or so. And it's interesting, and I'm not telling you anything that you didn't already know, when we started this process back in the first quarter, there was depreciation built into pricing such that it was very difficult to reposition a portfolio and lock in a lot of losses that at that point one would suspect weren't real, at least in some respects, and it's kind of tuned out that way as credit spreads have come in.
We're in a much better position now if we so decide to reposition the portfolio. I will tell you, we haven't made any dramatic decisions on that front.
We're continuing to look at the opportunities to reposition it, whether it has merit to move in and out of certain asset classes, but as I said, we haven't come to any conclusions in that respect. In terms of foreign currency, from time-to-time, we hedge positions where we have fairly significant exposure and historically that's been the Canadian dollar and the Aussie dollar and for the most part, we will continue that same process.
I don't think we'll take a step back and try and lock in an entire position, a balance sheet position, at this point, but we do from time to time, based upon our expected going forward cash flows and that sort of thing, do hedge certain positions.
Operator
Your next question comes from Nigel Dally – Morgan Stanley.
Nigel Dally – Morgan Stanley
First one, having signed the ReliaStar transaction are you still in the market for additional block transactions and, if so, how much excess capital do you estimate that you have for additional potential transactions?
A. Greig Woodring
Yes Nigel, we're still looking for additional [enforced] block transactions and I would guess we have say $200 million to $400 million of excess capital.
Nigel Dally – Morgan Stanley
Second, perhaps you could also comment on swine flu and whether investors should be concerned about a bit higher in mortality rates as a result of the pandemic?
A. Greig Woodring
I think we have now at this point worldwide had three claims from swine flu, which is not noteworthy in particular because there's always deaths from flu and that doesn't seem out of line with what we would normally get. It doesn't seem to be anything to overly worry us about, Nigel.
We've been obviously watching it very closely since the first indications that there was a new strain of flu out there, but it doesn't look like this is a deadly event or anything that's going to cause us any financial problems.
Nigel Dally – Morgan Stanley
And then last one, just an update on the overall competitive landscape. You commented on extensive quoting activity.
Does that reflect a change in the competitive landscape at all such as certain competitors pulling back from the market or is it just a reflection of the additional demand for capital related solutions from the pharma companies?
A. Greig Woodring
I think it's the later, Nigel. I think the companies are beginning to look toward their position at year-end and are beginning to think about where they want to be and what things that are in their control that they can do to put themselves into the right position.
And some of that may involve talking about reinsurance transactions, especially financial reinsurance transactions these days. So we have a lot of those types of inquiries, probably more than we can handle.
We'll see what happens with them in terms of the sort of in-force lot transactions, a real risk transfer, we don't see a lot of those popping up between now and the end of the year, but you never know on that front as well. In terms of the overall competitive landscape, it still remains very favorable for us.
We had been of the opinion that in the U.S. market that companies would actually increase the amount of business they reinsured because of the fact that they don't want to hold risk in this environment and that the markets – their capital positions were relatively strained.
But you know those are the result of a lot of individual decisions and we've just seen a couple in this quarter where a couple companies have decided to actually retain more business, and that should take about 4% out of the market, that as we see it going forward. So we can't always predict what's going to happen.
Those numbers probably don't flow through on anybody's books for a while, but, you know, those things do happen and companies are always making that decision whether to retain or reinsure. We don't particularly participate with, in any great way, with these particular companies so we're not much affected by this one, but we can see things go both ways.
And our general thought is that companies are going to be reinsuring more, retaining less, but that may not be true in individual circumstances.
Operator
Your next question comes from Steven Schwartz – Raymond James & Associates.
Steven Schwartz – Raymond James & Associates
Hey good morning everybody. I've got a few, first Greig or Jack.
This is the fifth quarter in a row we've seen the [trad] mortality above expectations. I don't know if you've ever seen it going on for that long or not.
Maybe you can comment on that and then I've got a couple of numbers questions for Jack.
A. Greig Woodring
Steve, I think the mortality is – let's go back and look where there was five quarters. At least a couple of those might be pretty good, reasonably close anyway.
Part of what we saw was extraordinarily good mortality in 2006 and 2007, and so you're comparing it to those sorts of numbers. If you compare it to a more normal lives expected, I think that you'd probably find that we have some good quarters and some bad quarters.
We have seen that mortality on large cases is deteriorated a bit over, say, the past seven or eight years, or compared to where it was seven or eight years ago in our estimation. And wow, these things happen slowly and gradually.
That differential has kind of disappeared.
Steve Schwartz – Raymond James & Associates
I certainly don't want to be a jerk but the numbers that I've got in my model are the numbers that you've basically quoted in the past.
A. Greig Woodring
Yes and it could –
Steve Schwartz – Raymond James & Associates
Which would be you're estimate of what would be normal versus what actually occurred.
A. Greig Woodring
Yes and I'm sure you're correct, and what I'm saying though is that our estimation of what expected is is tempered by the experience of the most recent past as well. And '06 and '07 where probably better years than we reckoned at the time.
Steve Schwartz – Raymond James & Associates
Jack just a numbers question, what was the amount of the interest expense reversal in corporate in other for the quarter?
Jack B. Lay
Related to FIN 48?
Steve Schwartz – Raymond James & Associates
Yes, exactly.
Jack B. Lay
It was around $11 million.
Steve Schwartz – Raymond James & Associates
Around $11 million, okay and then – so from the November 2008 offering, what's left?
Jack B. Lay
Well, I think if you consider the fact the we will deploy some little over $100 million of that offering in connection with the ING acquisition, it's roughly a little less than $200 million.
Steve Schwartz – Raymond James & Associates
Less than $200 million, okay that's what I had. Thank you very much, guys.
Operator
Up next we'll hear from Mark Finkelstein – Fox-Pitt Kelton.
Mark Finkelstein – Fox-Pitt Kelton
Couple questions, can we go back to the asset-intensive segment? I guess just to clarify it, obviously $19.7 million this quarter, call it $16 million last quarter.
But if I heard you correctly, the thought is that the normalized was closer to the $10 million? Did I hear that correctly or did I mishear that?
Jack B. Lay
No pre-tax, you did hear it correctly. Let me tick stuff back.
Normalized may not – because we have put on some additional business – I think I'm referring more to beginning of the year expectations of about $10 million per quarter pre-tax.
Mark Finkelstein – Fox—Pitt Kelton
Okay, so if we kind of just think about kind of growth in AUM from beginning of the year, kind of trend margins against that with a $10 million baseline we kind of get to it, kind of a number that makes sense going forward.
Jack B. Lay
That's right. It would be up a little, not a lot, just a little from there.
Mark Finkelstein – Fox-Pitt Kelton
Okay, I guess just a detailed question on the FIN 48. I guess what surprised me a little bit is the interest expense reversal was $11 million, but what it sounds like is the tax expense reversal was closer to $5 million if I kind of use a 32%, 33% tax rate X the $5 million foreign ops adjustments.
Why would the interest expense reversal be so much higher than the actual tax amount that we're releasing?
Jack B. Lay
Well – okay, make sure I'm not confused on your question. You're not talking about the $5 million tax adjustment, are you?
Mark Finkelstein – Fox-Pitt Kelton
No, I mean I think it goes back to Nadel's question. But if you – or somebody's question – if you go back – kind of took the 35% normalized you had the $5 million of kind of accrual related to the foreign ops and then you adjust for that, you kind of suggested that a normalized third quarter numbers in the 32%, 33% range.
And what I'm trying to figure out is why would the tax adjustment be so different than the interest expense reversal?
Jack B. Lay
Well, the interest expense reversal relates to – think of it as your balance sheet position so to speak and your accruing interest on those positions until the returns are filed, until the position is settled. So there isn't a direct – you shouldn't expect a direct correlation between that particular interest rate, or interest adjustment every year and the actual amount of the tax provision adjustment.
Mark Finkelstein – Fox-Pitt Kelton
Okay.
Jack B. Lay
It gets rather involved. We probably almost have to take it offline.
Mark Finkelstein – Fox-Pitt Kelton
I'll follow up on that. One thing that I noticed on the U.S.
business, the in-force is kind of growing relatively moderately, whether it's year-over-year, sequentially, etc. The net premium is kind of going up 8%.
Can you just help reconcile the change in the in-force relative to the change in the net premium? I mean are you doing something different on the kind of the outwards reinsurance, or why is premium going so much faster than my in-force?
A. Greig Woodring
There is no change on the outward reinsurance. Mark, the – first of all a lot of this business that the overwhelming majority of it is wire [teeth] business, and so we have premiums going up each year as policies cross their anniversary.
So there is some built in increase from that and that's a predominant effect actually.
Mark Finkelstein – Fox-Pitt Kelton
Okay and then just finally, last question is can you maybe just talk about – I mean Canada had pretty extraordinary growth in the quarter with the creditor business, can you just maybe just walk through what is driving that growth in Canada and I guess how we should think about that?
A. Greig Woodring
Well, it's a bit opportunistic I suppose, and I wouldn't expect it to continue. Creditor business in Canada is nicely stable and has large premiums associated with it – lower profit margins because of this stability.
This is basically credit business that the banks have a good firm grip on. They reinsure out some of it for their own reasons and we participate in that from time to time, and have done a pretty good job of actually becoming the go-to source for the banks when they want to lay off some of this creditor business.
We like the business, it does not produce the same long-term margins that the other business does, but it's a lot steadier.
Operator
Your next question will come from Michael Zaremski – Credit Suisse
Michael Zaremski – Credit Suisse
Quick follow-up to Mark's question, can you guys be more granular on what percentage of premium growth in Canada has come from creditor and what are your margin expectations, assuming that the growth has been pretty robust?
A. Greig Woodring
That I don't know off the top of my head – we'll have to get back to on that. In terms of the profit margin, expect something, say, 5% in the profit margin for that business.
Michael Zaremski – Credit Suisse
Okay, regarding competitors, I've read that Swiss Re is I guess putting a Taiwanese unit into runoff. I think – I believe you guys are number one in Taiwan in terms of new business.
Do you guys expect to pick up more markets over there, or you guys are already kind of number one, so people are – maybe will look to see premiums to other competitors?
A. Greig Woodring
Yes, we are leaders in that market. It's been a very nice market for us, both in recent years from a growth perspective and for a long time on the profit side, in terms of margin our main competition there has been Gen Re Cologne, and Swiss Re has been a little bit farther down the line.
They have – they're not putting their business in what – they're closing their office. I think they would still – as far as I know entertain the business side of Taiwan, but they have no presence locally.
And so it's going to be difficult for them to become a major or change their position in any way but downward in that market from this point. So yes, that's generally beneficial to us because we do have a good position in that market.
Michael Zaremski – Credit Suisse
Okay, and lastly, I think last quarter you talked about working on some solutions for the AXXX and XXX markets, considering that they're kind of closed right now. Any update on any progress in that arena, given that demand's probably still high?
A. Greig Woodring
No, we think we have – it turned up a couple good possibilities, but that's all they – all that I can say at this point. We have a string of quite a few good possibilities of different types of organizations that might be funding this, but it's going to take some while to work through.
And we expect to continue to push on that, and hopefully we'll get some capacity into the marketplace, for XXX. AXXX is a little more difficult on top of that, so let's start with the XXX side.
Operator
Next up we'll hear from Jeff Schuman – Keefe, Bruyette & Woods.
Jeffrey Schuman – Keefe, Bruyette & Woods
Couple areas I wanted to ask about. You mentioned three claims worldwide so far from the swine flu, so I was wondering were those recent claims, or did some of those date back to the first wave last winter?
And then I'm wondering just generally given client reporting challenges, I mean do you have a pretty sort of real-time read on the situation, or is there likely to be a considerable lag in terms of the information flow as this develops?
A. Greig Woodring
Those claims are fairly recent. I'd say it's certainly in the last quarter.
One of them is New Zealand. I don't know remember exactly where the other two are.
I think one of them is – at least one of them is the U.S. You're right that we do in different parts of the world have different claim lags.
Certainly in the U.S. we would hear about it within a week or so, probably, from the time the company was notified but we may not get cause of death right away.
We may or we may not. And in other parts of world, the chain is a little bit slower than that.
So I'm not sure of the date the death of these cases, Jeff, but they're fairly recently reported to us.
Jeffrey Schuman – Keefe, Bruyette & Woods
And following up an earlier question, I think you said to Nigel that excess capital may be within the range of $200 million to $400 million. I was wondering is that kind of relative to your own economic capital modeling, or is that relative to rating agency expectations, or how should we kind of view that?
Jack B. Lay
Yes, Jeff. This is Jack.
It's really, kind of interestingly, it's kind of a combination of all those things. We can give you a definite in terms of how it relates to our capital model.
It'd be a little bit more than the stated $200 million to $400 million, but that estimate really kind of takes into account, effective with that at least – well we've got three agencies that rate the company and all of them have a different capital model. So I think you should take that as kind of our best impression of almost – I wouldn't call it a mean estimate, but kind of an average of, based upon all the various models floating around and expectation of what kind of redundant capital we have.
Jeffrey Schuman – Keefe, Bruyette & Woods
So that's the average, which is a good perspective to have. Is there an outlier on the downside?
I mean is the least common denominator a number that would be considerably less than that that we should be concerned about or is it not that much different?
Jack B. Lay
Well the way the math works, yes, there'd be a number that would be less than that, but not dramatically less than that. And I could give you a guess as to which agency has the tightest model now, but it'd be nothing more than a guess right now.
Jeffrey Schuman – Keefe, Bruyette & Woods
Okay, but is it safe to say that even relative to the highest hurdle that you still have, $100 million or $200 million to deploy even relative to that expectation?
Jack B. Lay
Yes, it is safe to say that.
Jeffrey Schuman – Keefe, Bruyette & Woods
And then lastly, Greig, you talked a little bit about growth in Asia-Pacific. You made a comment about maybe reporting lags or something being a factor in the growth there.
But you also said something about being a little bit behind in 2009. Could you just give us a little more color – is there a slowdown in certain markets?
Is this kind of reflecting primary company activity or kind of how should we think about the Asian growth going forward?
A. Greig Woodring
Yes, I guess I was trying to say more of the fact that while it does vary from quarter to quarter, that's not what we're pinning this on. We actually have a slowdown, predominantly in Korea and Japan, as a couple big treaties have essentially wound their way to conclusion, so there's no growth coming from them at all.
And so the pipeline looks – the pipeline will replenish and we'll get back on track. So we've just sort of hit a plateau in those markets and we expect to get back on it.
And it may take a little while, I mean, we would not be surprised to see Asian premiums be a little bit less than they have been historically through the remainder of this year and next year before they really start back up again. Other parts of Asia, of course, are doing quite well, and that part of the world is experiencing pretty good economics and good growth in the insurance businesses.
On the overall international picture though, we're seeing a substantial increase in the premium activity in Europe in particular, both the U.K. and continental Europe from the basis we were at, at this point.
So some markets ebb and flow and imbalance we're sort of holding in that low double-digit range.
Jeffrey Schuman – Keefe, Bruyette & Woods
That's great, and just one last follow-up. You mentioned the strength in Europe, is that kind of a market share gain or is there also demand being given by capital and some of the other factors that you're seeing in the U.S.?
A. Greig Woodring
It's more of a market a share gain, but there's a little bit of both in that.
Operator
Your next question comes from Eric Berg – Barclays Capital.
Eric Berg – Barclays Capital
I wanted to return to the asset-intensive business. It would seem like the – not seem, it is the case that the fixed related annuity business is no larger than it was a year ago.
The stock market clearly hasn't doubled from a year ago. I think it's pretty about the same on average, or roughly the same, approximately.
Why would net investment income compared to a year ago – a line item that I normally associated with coupon income on fixed income investments in the fixed annuity business, why would that be triple what it was a year, $160 million versus $44 million in the year ago quarter in your asset-intensive business.
Jack B. Lay
I think you need to be a little bit careful there because included in investment income in that business are income fluctuations associated with derivative positions that we take to offset risk in the equity index annuity portfolio.
Eric Berg – Barclays Capital
Yes.
Jack B. Lay
And that can move by tens of millions of dollars per quarter.
Eric Berg – Barclays Capital
Yes.
Jack B. Lay
So that's not a good metric, simply to look at total investment income in that sub-segment.
Eric Berg – Barclays Capital
But that's going to be offset elsewhere in the income statement. I guess I still – the foundation to my question, what's underlying my question is that I don't really understand what's driving this doubling of earnings compared to a year ago.
I mean you're not a major player in the variable annuity business. The stock market is not double what it was a year ago.
When we talk about the capital markets driving the earnings, what exactly are we talking about here, and why would the capital markets lead to it? I mean I'm not expecting a doubling of variable annuity companies' earnings compared to a year ago.
I guess I just don't understand the accounting in this business as well as I thought I did.
Jack B. Lay
Well first of all, the variable annuity business has rebounded to a healthy state I suppose is the best way to put it. But spreads on the fixed business are very nice for us right now, and that is what really drives the performance of that business in the longer term, is the spreads you earned on the portfolio of assets you have.
Eric Berg – Barclays Capital
You mean the net interest in –
Jack B. Lay
We're in a very favorable position right now. The difference between our rates and credited rates is really pretty positive.
Eric Berg – Barclays Capital
Last question, on page eight of your supplement where you're reporting out the fair value of the living benefit riders, is that just that by itself, namely the fair value of the rider, or is that the fair value of the rider net of the value of the associated hedge?
Jack B. Lay
It's the former. That's simply the fair value of that embedded derivative.
Operator
(Operator instructions.) Your next question comes from Andrew Kligerman – UBS.
Andrew Kligerman – UBS
Good morning. Just quickly on net premium growth, I think the question prior to Eric, you were saying overall we should see growth in the double-digit range, so are you talking about across all businesses?
You're looking at double digit –
A. Greig Woodring
No, I'm talking about international, Andrew.
Andrew Kligerman – UBS
International, okay, I wanted to make sure I was clear on that. Shifting over to net premium growth on Canada and the U.S., I mean, you saw terrific 25% growth in Canada, largely due to the creditor reinsurance.
If I take a step back and – it's my understanding that Canadian regulators may now allow life insurers to factor future mortality improvement into reserve requirements, and as a result they may not see it as much reinsurance as they've done in the past. So looking at that terrific 25% net premium growth in Canada, what are your thoughts looking out one and two years on what kind of net premium growth we can expect there?
A. Greig Woodring
Yes, Andrew, there's not only the movement that you described, but there's a couple other things too that might lead companies to retain more business rather than reinsure as much. And of course the Canadian companies reinsure a lot of business into the marketplace.
And we've been saying for some time that we don't expect the session rates to hold forever, that the Canadian market will start to migrate down toward levels approaching where the U.S. market is.
And that has not really happened yet. It could start sometime in the future, as early as next year, I suppose, beginning to see companies retaining more and reinsuring less.
It's been minor movements in that direction, but nothing major. We expect that next year we'll write about the same amount of business that we did this year, and this year was pretty close to the same amount as we did last year, give or take a bit.
And after that, though, all bets are off as to what happens, in the sense that companies negotiate new contracts on new products and change their reinsurance practices. But you're absolutely right, that it's been a good run in Canada but we don't know how long it's going to last.
Andrew Kligerman – UBS
And U.S. session rates are currently what and Canadian rates are in what range?
A. Greig Woodring
Canadian rates are between 70% and 80%, and the U.S. rates are between 30% and 40%.
Andrew Kligerman – UBS
Okay, and then shifting over to the U.S., you've got NAIC recently adopting changes to model Reg. 380, and that likely will reduce the XXX reserve requirements and eventually lower the demand for new XXX co-insurance treaties.
Again, in the U.S., net premiums were up 8%, a very respectable number. Where do you think that goes a few years out?
A. Greig Woodring
Well, it's always hard to predict a few years, but we have a certain amount of growth built into that. It can be expected to wind down slowly to something smaller, but it might be very gradual.
But we have built in increases.
Andrew Kligerman – UBS
So you still think that there's growth out there for you. Would it be via just share or, you know?
A. Greig Woodring
Yes, well, if we wrote no new business we would probably see some growth in premium, just due, in the overall in-force block, just because premium increases exceed the lapses. But we're certainly not going to zero new business and so we would expect a gradual fall in that rate as time goes on.
Andrew Kligerman – UBS
And just in terms of market share actually, do you think that there are some opportunities to gain share, or are you at a pretty established level in the United States?
A. Greig Woodring
It's hard to see us increasing market share much from where we are. We've been a little over 20% for the last several years, and it's hard to get more than that.
It's hard to see wanting to get more than that, because the price you'd have to pay to get more than that. So we're very comfortable with that market share.
Operator
We'll now take a follow-up from John Nadel – Sterne, Agee & Leach.
John Nadel – Sterne, Agee & Leach
Just wanted to go back to the U.S. traditional and this level of higher face amount death claims, I know when we met a little over a month, month-and-a-half ago, we talked about some pricing changes that you guys had implemented, I guess back to the beginning of 2009, to deal with some of this.
Maybe you could just refresh me on how to think about how quickly some of those pricing actions that you've taken on a forward basis would have some positive impact in offsetting this sort of trend, modest trend, but trend up, in higher face amount death claims?
A. Greig Woodring
First of all, John, we're always tweaking our pricing based on the results of the latest data that come out, and mortality's always evolving, generally improving. And so we're always evolving our pricing.
So you would really count these as minor tweaks and regular tweaks in the pricing that just reflected the more recent information. We're not saying that mortality on large cases is bad or inappropriate.
We're just saying it's changed a bit compared to policies that are, say, $250,000 to $1 million, [exhibiting] a little bit better mortality than the cases over $1 million. A million to two or three has been a little bit worse recently, so those changes always happen.
Now, current pricing that we do when the new quotes are placed into the market, you probably don't see the reported business from new quotes for anywhere from six months to 18 months, depending on how long it takes the company to get a product on the street and where we are when they actually got to the reinsurance market for pricing. But six months to, say, a little bit plus is typical and then the early claims you don't expect too much in the way of that, so the meaningful changes occur three or four or five years out.
John Nadel – Sterne, Agee & Leach
So as we look out, let's say the next year or two, if this trend were to hold, is it fair to assume that if we looked back over the last, I don't know, three to five years of mortality, just claims as a percentage of premiums in the U.S. traditional business, we might expect that that's going to be a little bit higher, that ratio?
A. Greig Woodring
No, I wouldn't say that, necessarily. It's hard to predict where those kind of things are going to be.
John Nadel – Sterne, Agee & Leach
Yes, I know on a quarterly basis that's impossible, but I'm just wondering over a little bit longer period of time.
A. Greig Woodring
Yes, even on, say, a five-year period, you drop off an old year and pick up a new year you can make a change – if you take a running five months or five years, something like that, you're probably a lot smoother. As you drop off discrete years and add years, you're probably going to pick up a discount annuity a bit one way or the other, but nothing really changes very fast in mortality when you look at it over those kind of periods.
It changes very slowly.
John Nadel – Sterne, Agee & Leach
And then one last clarification on the ReliaStar transaction, you mentioned mid- to high-teens return. Is that immediate – 2010 should see that sort of return, or is that a gradual build to it?
And then I guess the second part of that question is, is that mid- to high-teens is that a pre-tax or an after-tax return?
Jack B. Lay
John, this is Jack. That's an after-tax return and that – we'll see that relatively quickly, although my guess would be in 2010 it may be just slightly below that, just because of some transfer costs and administration costs and that sort of thing, but –
John Nadel – Sterne, Agee & Leach
Okay.
Jack B. Lay
– that's not a transaction where it takes years and years to build to that sort of return. It will happen relatively quickly.
John Nadel – Sterne, Agee & Leach
And is there any expectation around that deal for any sort of one-time costs, you know, lease buy-outs or some sort of severance or restructuring or anything like that?
Jack B. Lay
Minor.
Operator
And we have a follow-up question from Eric Berg – Barclays Capital.
Eric Berg – Barclays Capital
Thanks. Just one.
You had an extremely strong, as you cited, premium growth in Europe and South Africa, including the U.K., but you also cited adverse mortality in those markets in the U.K. and I think in South Africa.
What has been the experience – can you remind us, what has been the experience in recent quarters, in recent years in Europe and South Africa? And in particular, how are you feeling about how mortality is trending in those markets relative to your expectations?
A. Greig Woodring
Eric, the – almost take them separately. South Africa has bounced around quite a bit.
It's a market where there's a lot of violent deaths and it – we do some group business there, so there's just some tendency for those numbers to be a little bit more volatile than elsewhere. Overall, I would say South Africa has behaved reasonably well for us.
We have had a reasonably good return on the small amounts of capital that we've put into that country over time. We have been working hard to improve our operation.
We've been a little dissatisfied with our penetration, market position and maturity. We think we've got the right notes hit now and are looking forward to a pretty good future in that marketplace as far as the parts we can control.
In the U.K. we do not only mortality business but we do various shades of critical illness businesses and we have to look at all of those individually but we are generally okay on the long term trend line with mortality.
It's had some ups and downs. As you may remember last year was an awfully good year for the [quality] in that market.
In the past, in other years, we've had difficult quarters here and there but it is the sort of market we see some volatility as well as some good overall long-term results. Of course, the premium growth is nice because we expect that to produce good results in the future.
We are always looking to improve our returns but we're happy with the returns on a long term basis we've been getting out of the U.K. and continental Europe so far.
It's too early to get a firm read on it but the returns have been good there and we're happy with that, too.
Operator
And we have a follow-up from Steven Schwartz – Raymond James.
Steven Schwartz – Raymond James & Associates
Hey again, everybody. I'd like to follow up on Eric's question earlier about asset-intensive.
You have – I'm just trying to figure out why it was so up, and I think that's what everybody's trying to get to. You have three businesses in there.
You have the fixed annuity business, the assets there are down. No surprise, although spread was up a bit.
You've got the VA business which is up, and I believe that affects – I thought that that affected your fees. And then you've got the index annuity business, and as you pointed out to Eric the interest income is so high because of the value of the options going up, which is in your general account.
On the other hand, the index credits that are being credited to the holders of these things goes up as well. Obviously there's some basis risk but those two should basically offset in index annuities.
That's grown a bit, but not usually. So I guess there's this 8 million, 9 million one-time effect that I just can't figure out what is explaining that.
Is that something to do with the variable annuity, some type of DAC adjustment, something like that, Jack, maybe we could delve in a little bit further?
Jack B. Lay
Yes, we're talking about – it's not a DAC adjustment. We're talking about operating earnings here.
So there is a fairly large contribution from VAs. We probably need to pull it apart better, because that's kind of what your question is getting to in terms of relative contributions from the various components there but it's – it may be a little bit larger than you expect on the VA side.
I think that may causing part of the confusion, so it's probably not for this call, but to disaggregate all that. Maybe we have to do it offline.
Steven Schwartz – Raymond James & Associates
Okay, but my thought process is correct, though?
Jack B. Lay
Yes. I think so.
Operator
And gentlemen, at this time there are no further questions. I'll turn the conference back over to you for any additional or closing remarks.
Jack B. Lay
Okay, well thank you to everyone who joined us for the call today. To the extent any other questions or issues arise, you certainly know where to find us.
And with that we will end the third quarter conference call. Thank you very much.
Operator
Once again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.