Feb 2, 2010
Executives
Jack Lay - Senior EVP and CFO Greig Woodring - President and CEO
Analysts
Steven Schwartz - Raymond James & Associates Andrew Kligerman - UBS Mark Finkelstein - Macquarie Jeff Schuman - KBW John Nadel - Sterne, Agee Sean Rourke - Dowling & Partners Eric Berg - Barclays Capital
Operator
Good day and 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.
Jack Lay
Okay. Thank you and good morning.
Welcome to RGA's fourth quarter 2009 conference call. Greig Woodring, our CEO, will briefly comment on the results we released yesterday and provide guidance for 2010 and then we'll respond to questions from our participants.
I'll turn the call over to Greig, after a quick reminder relative to forward-looking information and the use of non-GAAP financial measures. We will make certain statements and discuss certain subjects during the call that will contain forward-looking information including, among other things, investment performance, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries.
You are cautioned that actual results could differ materially from expected results. A list of important factors that could cause those actual results to differ materially from expected results is included in the earnings release issued yesterday.
In addition, during the course of this 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 our various business segments.
With that, I'll turn the call over to Greig.
Greig Woodring
Good morning. Thank you for joining us.
I will provide some brief comments on our fourth quarter results, provide some guidance for 2010 and then we’ll open the line for your questions. On a consolidate basis, operating income increased 26% for the quarter, $225.8 million on a per share basis, operating income for the quarter increased 17% to $1.70 per diluted share versus $1.45 in the fourth quarter of '08.
Foreign currency fluctuations helped the current period by about $0.12 per share compared with the fourth quarter of ’08. For the year, operating income increased 10% to $438 million, [$10] from $399 million in 2008.
On a per share basis, operating income decreased 2% in 2009 and totaled $598 per share, including an adverse impact for the year of approximately $0.09 from foreign currency. Operating ROE was 13% in 2009 is averaged 14% over the last three years.
Reported net income for the quarter totaled $112.4 million or $1.52 per diluted share compared to $0.14 last year, which due to very unstable capital markets reflected significant realized and unrealized losses from investments and derivatives. Consolidated net premiums totaled $1.6 billion during the quarter, an increase of 9% on an original currency basis and 15% on a reported U.S.
dollar basis. For the year, net premiums increased $5.7 billion or 11% on an original currency basis.
Net investment income totaled $315.2 million, up from the third quarter total of $299.5 million. Our average investment yield for the year was $5.7 million or 5%, down considerably from a little over 6% in 2008.
We expect to see the yield trend downward some more in 2010 as we continue to position our portfolio in a conservative manner. Impairment losses reflected an income totaled $43 million for the quarter, were largely offset by net gains from investments sales.
Our effective tax rate was 31.1% this quarter versus 33.6% last year and benefited from an adjustment related to the pending sale of our run-off operations in Argentina. Turning to our operating segments first in the U.S., our U.S.
traditional business reported pretax operating income of $82.1 million compared to $76.7 million last year, a 7% increase. Mortality experienced improved from last year of our claims in the third quarter we’re approximately $15 million above expectations.
Premiums were up 5% for the quarter and 7% year-over-year roughly at our expectations. The U.S.
marketplace remains relatively stable in terms of competition in the pricing; we expect business flow and growth in the near-term to be consistent with past couple of years. Our U.S.
asset intensive business continued its strong year by contributing $13.9 million in pretax operating income for the quarter versus a pretax operating loss of $2.8 million last year, the latter being driven primarily our realized losses in the funds with held portfolios. The current quarter reflects improved account values and favorable spread performance.
A high level of demand for financial reinsurance will likely continue into 2010. Turning to Canada, pretax operating income in Canada increased 32% for the quarter totaling $30.7 million compared to $23.3 million last year, excluding the effect of a stronger Canadian dollars, the increase was approximately 10%.
Premiums were up 33% in the U.S. dollars and 16% in Canadian dollars.
The competitive environment remains stable and we continue to be a leading player of the market. Regarding international operations, Asia-Pacific reported pretax operating income of $24.8 million compared with $22.3 million, an increase of 11% over a strong prior period.
Favorable mortality in Hong Kong and in Japan contributed to this growth along a $2.9 million boost from foreign currency. Net premiums increased 5% on an original currency basis for the quarter, 6% for the year.
In reported U.S. dollars premiums were flat for the year including adverse foreign currency effects of $58 million.
Current year premiums reflect a slow down or cessation in production on several large treaties in South Korea and Japan as the underlying products have reached their end of their lifecycle. This would continue to affect us in 2010 in the form of lower growth rates in those markets than in the recent past years, but pipeline of new business opportunities leads us to believe that these growth rates will pick up that for a brief [highness].
We are a leading reinsurer in many of the Asian markets and therefore well positioned to take advantage of our opportunities. Our Europe and South Africa segment reported pretax operating income of $23.9 million for the current quarter versus $26.4 million last year.
Claims were slightly higher than expected in the UK and South Africa during the fourth quarter of 2009; results for the quarter were helped by the recapture of one of our retrocession arrangement. On an original currency basis, net premium increased 33% for the quarter and 26% for the year, on a U.S.
dollar basis premiums were 10% for the year despite adverse foreign currency of $107 million. We experienced growth rates which increased as the year went along and expect that trend to continue into 2010.
Overall, our results met our expectations in 2009, despite various ups and downs experienced in our various operations. Shorter term mortality volatility is a fundamental part of our business and risk with which we are entirely comfortable over the long haul.
We continually monitor experience and adjust pricing when appropriate. We’ve achieved an operating return on equity that was averaged 14% over the last several years, expect that approximate level to continue.
We closed the acquisition of the ReliaStar Group reinsurance business and look forward to contributions from that business in 2010. We’re well positioned in terms of capital; we continue to evaluate opportunities to deploy that capital.
Finally, as announced yesterday, we’ve increased our quarterly dividend 33% to $0.12 per share. Looking ahead to 2010, we’ve set an operating income target of $6.30 to $6.90 per share and consolidated premium growth of approximately 15%.
We expect ROE to stay between 13% and 14%. We believe the life reinsurance environment is stable; we’re well positioned to capitalize on potential opportunities and continue to both increase the value of our franchise and achieve the returns we’ve exhibited in the past.
We have been moving toward a more neutral investment position recognizing that there is still a number of difficult economic scenarios that could play out over the next couple of years and I would characterize our investment philosophy is providing more than usual liquidity and reduced credit risk. We expect to give up some investment yield as a result of this positioning.
Although the environment may provide opportunities, our guidance assumes no significant deployment of capital for Large In-Force block transactions due to the unpredictable nature of these transactions. Our guidance reflects premium growth rates on an original currency basis between 15% and 17% in the U.S.
including the impact of ReliaStar acquisition, 7% to 12% in Canada, 5% to 10% in Asia Pacific and 12% to 17% in Europe and South Africa. We have provided additional premium guidance in our QFS, which is posted on our IR website.
We appreciate your support and interest in RGA and we’ll take any questions you may have.
Operator
(Operator Instructions). Your first question comes from Steven Schwartz with Raymond James & Associates.
Steven Schwartz - Raymond James & Associates
A couple of questions here, first, just on [clear], Greig, did you say that the claims you experience, the adverse claims experienced in U.S. spread was $15 million for the quarter?
Greig Woodring
It’s always hard to peg exactly, between $15 million and $20 million. If you look at actually the fourth quarter it looks a lot like the year as a whole and it looks lot like ’08 and it looks quite different then ’06 and ’07, now that difference between ’06 and ’07 and ’08 and ’09 is not due to all to ’08 and ’09 issues, it’s simply the same business exhibiting a little bit different characteristics over those time spans.
Steven Schwartz - Raymond James & Associates
Okay, the reason why I asked was that, the press release of (inaudible), I just wanted to get that straight. In the third quarter we discussed what was going on with the mortality and your thought was that you were seeing the worst than expected mortality and the higher face of value sell.
Is that what you saw in the fourth quarter again?
Greig Woodring
That’s almost always the case, David, the mortality by client’s amount, by policy account with the book our size pretty rocket steady, the variation almost always comes about because of the large claims.
Steven Schwartz - Raymond James & Associates
Okay and then the assumption that you are using for mortality in the 2010 guidance, does that kind of assume where we’ve been or does that assume that things kind of returned to what you would consider to be normal?
Jack Lay
It’s a little between them.
Steven Schwartz - Raymond James & Associates
Little between them.
Jack Lay
It certainly reflects our experience over the last couple of years.
Operator
We will take our next question from Andrew Kligerman with UBS.
Andrew Kligerman - UBS
Just real quickly the tax rate, what is a good tax rate to you in your estimates going forward over the next year or two?
Jack Lay
Andrew, this is Jack. I think it’s going to bounce around from quarter-to-quarter, but if I were constructing a model I would use roughly 34%.
Andrew Kligerman - UBS
34%, okay. So the roughly 30% today that was shot of the benefit between 34% expectation, 30% that we roughly got today on operating earnings?
Jack Lay
Yeah, well, I'm talking about…
Andrew Kligerman - UBS
I know that’s, going forward, that would be kind of, that’s the second question just that be probably a way to estimate how much of tax benefit you got this quarter there?
Jack Lay
Yeah, fair.
Andrew Kligerman - UBS
Now just from a modeling standpoint, thinking about the fact that your $15 million to $20 million of I guess worse than expected mortality in the quarter in the U.S., as I look at the benefits ratios for what you provided, you come up with about an 86% benefits ratio in the quarter with just exactly the benefits ratio we’ve seen over the prior nine months and ’08 as well. On the flipside, the policy and other acquisition costs as a percent of revenue were probably elevated by a 100 basis points more than what I’ve historically seen, so may be you can help me deconstruct those numbers and think about where that $15 million, $20 million of adverse mortality might have shown up and I saw the same type thing in Asia Pacific.
Greig Woodring
Andrew, on the benefit side and the mortality side, like I said, the fourth quarter was a lot like the year. And it was a lot like ’08.
So basically we’ve been running a pretty consistent level of U.S. mortality for last two years.
With some ups and downs in there. But the fourth quarter looked a lot like it has been, your observation is correct.
Andrew Kligerman - UBS
But you are expecting some type of a drop-off, Greig?
Greig Woodring
Well, as I also mentioned, it’s quite different than the level of mortality same block of business essentially in ’06, ’07. So, we are still adjusting our size a bit from the ‘06, ‘07 level to what was actually experienced in ’08 and ’09, but essentially the same block of business.
Andrew Kligerman - UBS
I see. And in Asia Pacific, it was interesting again because you reported very favorable numbers, but the benefits ratio was 86% offset by again that policy and other acquisition cost line item being maybe a good 500 basis points or so lower than what historically that line item has been.
So were the benefits of it maybe reflected in the policy and other acquisition costs, is that where the benefit would have appeared in the accounting?
Jack Lay
Yes, Andrew, this is Jack. There’s always a lot (inaudible) between that policy acquisition cost line and the claims and reserve change lines.
So I would caution you to look at both of those together. And you’ll get a little better feel.
Andrew Kligerman - UBS
What was the net benefit in the quarter versus expectations in Asia Pacific, sort of better than what you thought?
Jack Lay
In terms of mortality experience?
Andrew Kligerman - UBS
Mortality, yes.
Jack Lay
Yes, I always hard to peg exactly, but you can think in terms of roughly 5 million bucks.
Andrew Kligerman - UBS
5 million, okay, great. And then lastly, could you throw out on excess capital figure, is there any cash that’s pretty much redeployable at any moment and if so what would that number be?
Jack Lay
Yes, we’ve got considerable amount of flexibility at this point. The excess capitalization available is a little bit north of $0.5 billion currently.
Greig Woodring
And we would love to deploy that in the business and opportunities, Andrew, and we expect to try to do that all year along. We see some opportunities, but we really didn't have much success in deploying significant chunks of capital in 2009.
So we’re not making any predictions on that front. But there are opportunities out there and hopefully the M&A environment picks up a bit and we can successfully deploy that capital in 2010.
Andrew Kligerman - UBS
And the 630 to 690 estimate doesn't encompass any block deployment, I think you said that a little earlier, Greg, right?
Greig Woodring
Yes, almost none yes.
Operator
Moving on to Mark Finkelstein with Macquarie.
Mark Finkelstein - Macquarie
I just want to go back to the U.S. again and just taking the comment of I guess three out of four quarters where you have had some elevated mortality expedience.
For 2010, you’re assuming something between what you’ve experienced and kind of what you would characterize as a normalized loss ratio. I guess the question I’m asking is there anything that you have seen specific in the blocks that leads you to believe that there is any pricing issues anywhere and that’s partly contributing to the higher than expected, I should say the higher mortality assumption for 2010 or is it more a factor, you have had these three quarters out of four and we want to be conservative in that assumption?
Greig Woodring
Mark, remember a lot of this business was priced in the early part of this decade in the 90s and even in the 80s and before. And the business is performing in total better than price, because pricing a long time ago envisioned quite different mortality than we're experiencing today.
I think the way you can think of the way we set expectations for the coming year is sort of an average of our experience over the prior periods. And so if you sort of think about 2010, best guess is being something that takes the experience of 2005 through 2009 into account, you get a mixture of quite different experience on this block of business.
The experience in 2008 and 2009 is quite sharply different than '06 and '07 for whatever reason that maybe, it's something we'll probably never understand.
Mark Finkelstein - Macquarie
Okay, but essentially there is nothing that you’ve seen that leads you to believe that structurally it is okay, that’s what (inaudible) out there?
Jack Lay
No, we get the large claims from policies issued 20 years ago.
Mark Finkelstein - Macquarie
Okay.
Jack Lay
And they have been [die] in a particular time and that spikes the mortality rate in that particular time, but it doesn’t necessarily mean anything about the long term experience on that business.
Mark Finkelstein - Macquarie
Okay. Fair enough.
Can we just go to Canada real quick, obviously strong result for the creditor business appears and that's where the lot of growth is, loss ratios were extraordinary this quarter, half of what they were the prior quarter. Can you just kind of give us more color on, one, what exactly you're seeing in terms of the opportunities in that particular business; and two, is there anything that’s specific about the experience that you showed this quarter?
Were there any kind of reserve adjustments or anything that benefited that loss ratio?
Greig Woodring
Well, there is always a few things like that. I wouldn't pick out any particular significant items there.
Yeah, the growth rates on the creditor business has been something that has bumped up the premium levels, because that tends to have higher premiums lower profit margins, but more stable profit margins and because of lot of small policies in that. And overall it just helped our Canadian operations to be part of that business as well.
Experience in Canada has been running pretty good over the last several years and 2009 was no exception.
Operator
Next question will come from Jeff Schuman with KBW
Jeff Schuman - KBW
I was wondering if you could give us a little more perspective on the changes in the investment portfolio, I think most of us think of you as having a pretty normal investment portfolio, fairly conservative and not a portfolio that’s been burned with a lot of problems so. Are there certain types of securities that you are trying to [settle] down little bit or what exactly is motivating the change in the investment portfolio and what exactly have you changed?
Jack Lay
Jeff, this is Jack, let me take a crack at that. We are certainly not overhauling the portfolio, it’s more a continuation of a migration that started this year, started in 2009, I should say early in the year.
And it’s designed to take a little more neutral position and that we continued our concerns as a number of people do on just the potential for somewhat negative economic outcomes over the next couple of years that could help significant impacts on investment portfolio. So I think if you wanted to take a step back, you can think of it as mildly reducing credit risk in certain asset classes and also sitting on a little bit of additional liquidity that better positions the portfolio.
What we hope is a fairly broad array of outcomes that could transpire and that we are trying to protecting against.
Jeff Schuman - KBW
So the decision to hold more liquidity, is that partly kind of a call on market timing, I mean would you hope to deploy some of the liquidity into a higher interest rate environment a year from now, is that part of what you are thinking?
Jack Lay
Yeah, it’s quite possible. We probably should have mentioned, this is a fairly dynamic process, so if we get more comfortable with the economy or see things changing in terms of relative new money rates and that sort of thing then certainly we would continually rethink the level of conservatives that we would be building into the portfolio
Jeff Schuman - KBW
Okay that’s helpful. With regard to Asia-Pacific, Greig, I think you talked about South Korea and Japan, I think that’s really is still the biggest piece of that segment.
Can you give you a little color on kind of what the growth outlook is in Australia, please?
Greig Woodring
Well, we’re continually amazed by our production in Australia, considering that the population is only 20 million people or so in that country. We’ve got very good string of results and we expect that to continue, frankly, of the strong team and a strong market position as a leading reinsure in the Australia market.
And we expect that we should continue growth in the 10% range, I believe in Australia to take a bit, that's been a good market for us.
Jeff Schuman - KBW
Okay. And then lastly, just coming back to the capital position and the potential opportunities to do some block transactions, if you look over the last year, there was probably loss activity that we all expected and I think in recent calls you’ve said that your lower level of activity was attributable primarily just to the fact that things didn’t so much come to market, it wasn't the things came to the market and that you lost out competitively.
Is that still the case, just less businesses in the market or what's going on?
Greig Woodring
Yes, I think so. There was a huge amount of activity on the financial reinsurance side, which we participated towards year-end.
There was also a lot of course companies issuing surplus notes and doing other things, but there was very little true risk transfer in big-block In-Force transactions, which we expected going into the year there might be more expected to be a reasonable amount of it actually based on what we were seeing at that time. So we're really not sure that 2010 brings, we do believe that there is good reasons for some of that In-Force block activity to happen, but we’re not into predicting game anymore in that arena.
Jeff Schuman - KBW
Well, given that there was less than expected activity in 2009, which is obviously a year when balance sheets were under pressure, I guess it seems possible that there still to be more activity this year and you would seem that your core growth plan is one that you can sort of finance without having your excess capital. So what is kind of your time frame for thinking about some of that excess capital capacity and what you might do with it if some of these transactions don't emerge?
Greig Woodring
Well, I would say as time goes along, we’ll have to begin to think about that. We're not particularly worried about that nor we're really concerned ourselves too much with it in the 2010 operating plan.
We have deployed no capital and are still sitting on a lot excess capital at the end of 2010. That's a different story, we’ll have to begin to think about what to do with it, but we’re haven’t got to the point where we’re concerned yet about that.
Operator
We’ll take our next from John Nadel with Sterne, Agee.
John Nadel - Sterne, Agee
One on guidance and then one on capital, I guess I’m trying to understand the lower end of your 2010 guidance, Greig. 2009 you reported 598, I guess it sort of just for us know as may be mortality FX in the few other things and quarter looks a little bit higher than that may 615 to 620, if I go back to last year and compare your 2009 guidance to 2008 quarter, you’re looking about 10% to 20% EPS growth?
You know this year, I think your guidance is implying about two to 11, I mean that’s substantial drop and I understand your comments on, may be an outlook for lower yield on the net investment income side, but your top line growth rates haven’t really changed, you get a bump from the ReliaStar deal. I guess I’m trying to understand what could go wrong that gets you all the way down the 630, which is essentially no growth.
And I guess conversely what could go right, that get to the upper end you or above?
Greig Woodring
Yeah, remember we have to deal with currency fluctuation, which can have a substantial impact. You could easily see that number swinging $0.20 or $0.30 per share on an annual basis one way or the other.
You could see impacts from mortality fluctuations, which we always have, business activity, we are pretty confident. In terms of premium growth rates, we might be off by 1% or 2%, we are going to be pretty strong again in 2010 and generally speaking, that range that we gave is a pretty small range considering the variability and experienced results in our business over a four quarter period.
Jack Lay
Hi, John this is Jack, just a quick comment. I think we need to be a little bit careful when we try to normalize and I guess to be a never ending processes as you know, but I think we had some things break our way and some things work against us in 2009 and we did have some tax reserve adjustments that worked to our benefit that is certainly, at least to the extent that they were exhibited in 2009 we wouldn’t expect that to repeat itself in 2010.
So you really have to look at all that sort of thing as you normalize the year.
John Nadel - Sterne, Agee
Okay, all right. I’ll follow up with you guys offline and may be go through that in more detail.
The second question is just come back to excess capital and opportunities, not to be the dead horse here, but last quarter I think you guys mentioned excess capital stood after the ReliaStar dealer at $200 million to $400 million, I guess I'm trying to understand why you tapped the debt markets for $400 million this quarter, which [all of equal], what’s your excess capital today just rolling forward at $600 million to $800 million if nothing else has significantly changed and certainty doesn't look like it has. So I guess I’d like you to square that with the $500 million excess capital comment in response to Andrew.
And then just sort of, can you give us a sense for why the $400 million debt raise, I know you originally targeted 300 upsized, so I guess I'm trying to understand why you did that?
Jack Lay
John this is Jack, let me take a crack at that. I think, we saw capital markets moving sideways and up-and-down and every which direction over the prior 18 months or so prior to our debt offering.
So we probably were more aggressive than we normally would be in terms of reinserting some debt into our long-term capitalization once rates get moderated to a point where we got an $0.08 in terms of our long-term cost of capital. And as you mentioned we did upsize that offering a little bit.
So, think of that more as a long-term adjustment of our capitalization and certainly we’re always optimistic that we can deploy over time some additional amount of capitalization. In terms of trying to square previous comments about excess capital versus where we are now, I think, maybe I've contributed to some of the confusion there in terms of capital versus capitalization that obviously that debt offering did increase the capitalization and what we view as excess capital available for deployment.
So a number a little north of $0.5 billion is fairly accurate number in terms of our view on the excess capital at this point.
John Nadel - Sterne, Agee
Maybe this is more for offline, but if you took today's excess capital levels plus your earnings capacity and put that against your organic growth outlook, let's assume that there is no opportunities for sort of the one-time deals, I mean how long is it a factor like three to five years of growth with that that you would be able to support even more than that, I mean it seems to me that [excellent] opportunity to deploy the capital either into a deal or buybacks or a special dividend or some other use, it appears to me that you are in the position of support the organic growth for the foreseeable future.
Greig Woodring
This is Greig. Let me have Jack answer that question, but I wanted to answer one thing first.
We are in an environment where the whole life insurance industry capital requirements may be strengthened and there is a lot of push to that effect not only here, but in other parts of the world as well. So we are facing an uncertain capital requirements future, but we can rest assure that it wont be a lighter capital requirements, it will be of anything higher capital requirements and they are uncertain at this point so we’re baring that in mind as we go long here as well.
John Nadel - Sterne, Agee
Okay.
Jack Lay
Yeah, John, just a quick comment. We certainly do as we’ve been discussing, we have a fairly significant amount of available excess capital at this point and I think we look at and perhaps you look at it as well as we’ve got some flexibility to the extent we do have some opportunities that come our way.
Worst cause we’ve got couple of $100 million of debt to be refinanced next year and one could think of the 400 million we raised, if we don’t have other opportunities we’d simply [advanced] refinanced some debt that was coming to us. So there is some things that are happening along that way that we’ll take care of some of the excess capital if in fact we don’t have opportunities to continue to deploy it.
Operator
We’ll move on to Steven Schwartz with Raymond James & Associates.
Steven Schwartz - Raymond James & Associates
A few more, it wouldn’t be a quarterly earnings conference call without some discussion what was going on in asset-intensive and may be what is a normalized number there? I’d also like to go back to the guidance, I'm just wondering about, if you’ve assumed a similar type of tax settlement activity in the third quarter as you saw this year and then may be discussion of new business trends in U.S.
trade it looked like it was up a lot in the quarter, Greig, I think you said that it was going to be a up a lot, I'm wondering what’s going on in that area, right now?
Greig Woodring
On the new business in the U.S.?
Steven Schwartz - Raymond James & Associates
Yeah.
Greig Woodring
The new business in the U.S. outlook for 2010 is about the same level as 2009, when you put the whole year together and in fact if anything it might be marginally up in our pipeline right now.
So we feel pretty good about the level of production in U.S. mortality business.
The asset-intensive business had a very strong 2009, the first quarter was as you might imagine somewhat challenging, but the rebound and the subsequent business was very strong. Having said that, we did not do any new asset in terms of transactions during the course of the years, because we could never close the sort of bid ask spread on those sorts of transactions, given our caution on the investment front many of the direct writers are stretching to make spreads right now, because of the low level of yields and may be that’s little bit of the strong statement, but we are certainly on the other end of that.
We are trying to keep a very conservative business stage, so that we have flexibility as we see what develops whether we get into an inflation scenario, or something else that is in the future.
Steven Schwartz - Raymond James & Associates
Okay. I think in the past, Jack, you’ve said that normalized earnings, or asset-intensive we would be about around $12 million per quarter is that still good?
Jack Lay
Going forward on a pretax basis, I think we would expect something a little higher that that
Steven Schwartz - Raymond James & Associates
Something higher that that. Okay, and then the third quarter tax settlement activity, do you expect that to continue?
Jack Lay
Yeah, in terms of the impact of FIN 48 and that sort of thing. Unless we change in connection with when the IRS is reviewing and clearing our returns, unless that changes, but we wouldn’t necessarily expect that.
Operator
We will move on to Sean Rourke with Dowling & Partners.
Sean Rourke - Dowling & Partners
Could you guys refresh us on your international growth objectives and update us where you are in expanding in Europe as far as in the upcoming new office openings. And secondly, just back in the U.S.
business, what kind of behavior are you seeing now from the life companies as far as session rates and what factors are driving that?
Greig Woodring
The U.S. session rates, we have seen actually a little bit of pull back of companies are retaining more and reinsuring less.
Put that together my prior statement though, we expect our business in 2010 to be about the same level or maybe very slightly a head of 2009 levels, so it is the case that companies are retaining bigger retentions in the direct market and putting less business into the market than they had been. In terms of our European offices, we opened quite a few offices that are still at a fairly fledgling stage, offices in France, Italy and Netherlands and Germany for example and Poland, I guess you could throw in there as well.
We expect those offices to exhibit pretty good growth because they are starting from a low base and we have that baked into our expectations for next year, that Europe, as you can see the expectations for Europe are fairly strong in terms of growth rate next year. Did that answer your question?
Sean Rourke - Dowling & Partners
Yeah, that’s great.
Operator
(Operator Instructions). We’ll move on to Eric Berg with Barclays Capital.
Eric Berg - Barclays Capital
Greig, may be you could build on your (inaudible), why in such an improved environment would you continue to be hopeful about block transactions and putting this money to work. In other words, I would think that your optimizing have been great as last year and would be less now that insurers are in better shape than they were?
Greig Woodring
Well, for a couple of reasons, first of all we think there is a need for companies to access this type of transaction. Secondly, we are working on a few.
We don’t know where they have come to fruition or not. But there is plenty of opportunities and lots of capital deployment and things that we are working on, that’s sort of been the case for a lot of last year too and a lot of companies into that growing financial reinsurance routes or something less risk transfer oriented.
But nevertheless we continue to believe that the risk transfer transactions actually involve a little bit better outcome in some cases for some of the companies. So, we’ve not, certainly far from giving up on that activity and have reason to believe that we will be able to deploy capital over time, but it’s hard to make those predictions in terms of specific times.
Eric Berg - Barclays Capital
My second and final question relates to your Asia-Pacific region, you’ve laid out why business is slowing down there, products reaching their natural sort of sunset, but why have the new products replace them? In other words or to put the question differently, is this slowdown consistent with what you’ve seen in the past in that region or is this something new?
Greig Woodring
No, this is something new. In the case of South Korea for example, it’s sort of the first wave of products that we dealt with.
Now there has been a slowdown in the regulatory authorities in both Korea and Japan in approving new products, approving new arrangements. Japan is a little bit different, there was a transition from associations being regulated in one way to different way and there‘s just particularities about our business in our exact arrangements that are affected right now.
We don’t really expect that that this is anything, but just a gap that we need to look through, because there is lots of opportunities and good growth in Asia as a whole.
Operator
We’ll take a follow up question from John Nadel with Sterne, Agee.
John Nadel - Sterne, Agee
Just two quick ones for modeling, one in Canada, can you disclose to us how much your premiums there is true mortality business versus the creditor reinsurance business, I know you gave us the loss ratios, but it’s pretty difficult to figure out exactly how much one business or the other is driving without the premiums?
Jack Lay
John this is Jack. If you look at our Qs, as I recall, we do breakout each quarter the extent to which that premium is made up of creditor business.
John Nadel - Sterne, Agee
In the 10-Q, not the supplement.
Jack Lay
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John Nadel - Sterne, Agee
Okay, that’s helpful. And then last one is just in the corporate and other, I think your interest expense line this quarter reflects a full quarter of the new debts, but I might be wrong on that.
Okay, so it will be a little bit higher as we move forward. And is investment income there in the quarter a reasonable run rate or you still have a little bit more to do there?
Jack Lay
I think it’s reasonable.
Operator
We’ll take another follow up from Jeff Schuman with KBW
Jeff Schuman - KBW
Where do the proceeds from the debt rates reside and how are those funds invested at this point?
Greig Woodring
Jeff, ultimately any kind of proceeds from securities that we issue in terms of our reporting end up in corporate and then as we deploy the capital or as the various business segments grow then we allocate some of that investment income out to those segments. So you can think of that, right now the most recent capital rates is primarily being housed in corporate in terms of how it’s invested ...
Jeff Schuman - KBW
From the legal entity perspective, is it as the holding company?
Greig Woodring
Yeah, that’s right.
Jeff Schuman - KBW
I'm sorry, that interrupted you.
Greig Woodring
Yeah that’s quite right. And then in terms of how it’s invested, we’ve used those proceeds to help in those kind of portfolio repositioning that we addressed earlier, so you could think of those proceeds as being invested relatively short-term and relatively on the near side of any credit quality sort of issue as we gradually rebalance the entire investment portfolio.
Jeff Schuman - KBW
So when you talk about wanting to maintain a higher level liquidity, would this represent the bulk of that or is that number, is that target even bigger then this $400 million?
Greig Woodring
No it’s not bigger and it’s not even the bulk of that, it’s some portion of that proceeds.
Jeff Schuman - KBW
Okay. So even barring a large transaction or anything of that nature, at some point there could be accretion just from sort of terming that money out into more traditional investment, I guess?
Greig Woodring
Yeah there could be, to the extent that we’re more aggressive than we anticipate as we put our projection together.
Operator
We have no further questions. (Operator Instructions).
Mr. Lay, we have no further questions at this time.
Jack Lay
Let me comment on one question that came up from Steven Schwartz related to asset-intensive that I think, I unfortunately miss interrupted, because I mentioned that roughly $12 million run rate would be a little higher. I was manually including financial reinsurance in that.
I don’t think that was Steven’s question, I think it was totally related to asset-intensive. So the response should have been that run rate that he quoted is roughly what we expect.
So I just want to make sure there is no miss communication there. I guess with that we’ll end the call.
Thanks everybody who participated today. And you can certainly give us a call here in St.
Louis, if any other questions come up.
Operator
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.