Jul 26, 2011
Executives
Greig Woodring - President and CEO Jack Lay - SEVP and CFO
Analysts
Jeffrey Schuman - KBW Jimmy Bhullar - JPMorgan John Nadel - Sterne Agee Andrew Kligerman - UBS Steven Schwartz - Raymond James Thomas Gallagher - Credit Suisse Colin Devine - Citi
Operator
Good day, and welcome to the Reinsurance Group of America Second Quarter 2011 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
This is Jack, thanks to everyone for joining us this mornings for RGA's second quarter 2011 conference call. With me this morning is Greig, our CEO.
I’ll turn the call over to Greig after a quick reminder of our forward-looking information and non-GAAP financial measures. Following Greig’s prepared comments, we’ll open the line for your questions.
To help you better understand RGA’s business, we will make certain statements and discuss certain subjects during this call that will contain forward-looking information, including among other things, comments about investment performance, statements relating to projections of revenue or earnings, and future financial performance and growth potential of RGA and its subsidiaries. Please keep in mind that actual results could differ materially from the expected results.
A list of important factors that could cause actual results to differ materially from expected results is included in the earnings release we issued yesterday. In addition, during the course of this call, we will make comments on a pre-tax and after tax operating income, which is considered a non-GAAP financial measure under SEC regulations.
We believe this measure better reflects the ongoing profitability and underlying trends of our business. Please refer to the tables in our press release and quarterly financial supplements for more information on this measure and reconciliations of operating income to net income for our various business segments.
These documents and additional financial information may be found on our investor relations website at www.rgare.com. With that I will turn the call over to Greig for his comments.
Greig Woodring
The consolidated results for the quarter were in line with our expectations. We had mixed underwriting results, including better than expected performance in Canada and some adverse results in some of our international operations.
US operations our largest segment performed in line with expectations including solid contributions from Asset Intensive business. On the whole, we met our expectations in terms of reported operating income which totaled a $128 million or $1.72 per diluted share, up from last years 122 million or $1.63.
Foreign currency fluctuations helped operating income by $3.8 million or about $0.05 share. Annualized operating ROE was 12% this quarter and was 13% over the last 12 months.
Consolidated net income totaled a 133 million or a $1.78 per diluted share, up from a $127 million or a $1.70 per share last year. Reported premiums were 1.8 billion, up 13% quarter-over-quarter.
Ignoring the look from currency fluctuations, premiums rose 8%, a little off our expected pace perhaps. Investment income increased 16% this quarter, totaling $337 million with the yield of 5.35%.
Yield was down compared to last years’ second quarter, but was flat with the first quarter of 2011. Contributing to the increase in investment income was a $20 million rise in the fair value of option contract, supporting equity-indexed annuities.
Without the effect of those option contracts, investment income was up 9% quarter-over-quarter; a good result which reflects the continued growth of our invested asset base. Investment impairments were relatively low again.
Our net realized gain position increased nearly 25% this quarter, adding over $2 to book value per share, which now stands at $71.88 per share. Excluding all other comprehensive income, book value per share is $57.51.
Capital management continues to be an area of focus for RGA. We are pleased to report a 50% increase in our quarterly shareholder dividend, which as announced yesterday rises from $0.12 to $0.18 per share.
This action reflects our strong capital and liquidity positions, while providing flexibility for future growth opportunities. Further, we took advantage of a relatively low interest rate environment to issue $400 million of senior notes in May.
Turning to our operating segments; our US traditional business produced pre-tax operating income of $93 million, compared to $96 million last year. Premiums were up 4% this quarter; totaling $974 million.
Our large mortality block performed in line with expectations; however, we did experience some normal adverse claims volatility in our group [LTD] business, contributing to the slight decrease from an excellent 2010 result. Our US Asset Intensive business reported another strong quarter with pre-tax operating income of $20 million, up from $16 million a year ago.
We still expect an average run rate of $15 million or $16 million per quarter from this business. This quarter we benefited primarily from better than expected spreads on our equity indexed annuity blocks.
Also our financial reinsurance business performed well this quarter, with strong fee income. That business reported $7 million in pre-tax operating income, up from $4.4 million a year ago.
Turning now to Canada; our pre-tax operating income rose sharply to $42 million, up 27% over a strong $33 million result last year. Virtually everything went our way this quarter including a strong premium growth, better than expected mortality experience and favorable currency fluctuations.
Premium rose 18% to $210 million for the quarter, including 7% from favorable foreign currency movements. Even without the help from the stronger Canadian dollar, we are quite pleased with the 11% boost in original currency.
Recall that our Canadian operations had a very good 2010 and 2011 has continued that trend quite strong as well. Our international operations had a difficult quarter in total driven primarily by poor mortality claims experienced in Australia and the UK which are our two largest international markets.
First in Asia-Pacific, we reported pre-tax operating income of $8 million, down significantly from $22 million in 2010. Higher than expected mortality claims in Australia, coupled with slightly adverse claims experience in Japan, more than offset good results in Southeast Asia, Korea and Taiwan.
Reported premiums were up 23% to $316 million for the quarter. In local currencies premiums rose 8%.
We expect premiums to pick up in Asia during the second half of 2011. Next our Europe and South Africa segment reported pre-tax operating income of $15 million for the current quarter, down from $21 million last year, reflecting adverse claim results in the UK of business that reported strong results in the second quarter last year.
The UK results were offset in part by good claims experience in other European markets in South Africa. Premium growth was robust totaling $283 million, up 35% quarter-over-quarter, with strong contributions from the UK and from South Africa, as well as from many of the other European markets.
In local currencies premiums were up a strong 23%. We believe that higher than expected claims experience this quarter in our international operations reflect no more than short-term mortality.
We have seen in recent years such volatility tends to even out overtime. The negative volatility this quarter was largely offset by our North American businesses; a diversification benefit we continue to see play out.
Overall, we are pleased with the second quarter and look forward to the second half of 2011. We continue to focus on officially managing our capital base and we look for opportunities to grow our global businesses.
We strive to exceed our clients’ expectations and we are well positioned to assist those clients in most of the major insurance markets around the globe. Our in-force continues to grow; now topping $2.6 trillion of mortality risk in-force.
As a leader in the life insurance space, we expect and continue our long run of delivering solid results and value to our shareholders. We appreciate your support and interest in RGA, and now we’ll take any questions you may have.
Operator
(Operator Instruction). Our first question this morning will come from Jeffrey Schuman with KBW.
Jeffrey Schuman - KBW
I was wondering if we could first talk a little bit more about capital. I think earlier in the year you had said, you probably wouldn’t buyback more stock this year.
But then as you noted, you did do the $400 million debt raise, which gives you some more flexibility. So is share repurchase possibly back on the table or are you thinking more in terms of sort of, looking for opportunistic situations or how should we think about capital for the balance of the year.
Jack Lay
Jeff this is Jack. I think it’s more the latter.
We certainly did raise an additional 400. I look at that as 200 because we’ve really earmarked 200 to finance some $200 million of debt as coming to later this year.
But you could argue that we have roughly a $0.5 billion of redundant capital. We would want some of that, and I think we would want to maintain some levels of redundant capital at any point in time.
But it does give us a little bit more flexibility. I will say we haven’t determined that because of that flexibility we want to return some later this year.
It’s more help for opportunities. Now having said that, if we get in to next year and we don’t see opportunities, we will certainly look to make the capital base as efficient as possible, and that could included return of capital or a number of other options.
Jeffrey Schuman - KBW
One other area if I may. In the US premium growth year-to-date is sort of 3%-4%, a little bit below your target range for the year.
Can you give us any color there or thoughts about whether the 5 to 7 is still a good range.
Greig Woodring
5 to 7 is still an okay range for probably shooting towards the bottom of that. There’s a couple of things that are affecting that Jeff.
First of all there has been an increase in lapse rate. So we are seeing a little bit more lapse in policies.
I don’t know if that reflects the economic environment or what. Whatever the cause though we have seen that over the last six to nine months or so.
Secondly some of the business that we have relates to taking pure mortality risks on some of the guaranteed minimum death benefits. That premium, of course because the stock market has come back has really dried up.
That’s where we just ensure the mortality risk one month at a time, and not take the long term market risk at all. But that business when the market goes down, the amount of premium widens considerably and when the market goes back up it comes back in.
So we’ve seen that over the last, that’s been a downward pressure on growth rates in the US for the last couple of years, obviously as the markets come back.
Jeffrey Schuman - KBW
Just a follow-up on the persistency, is that related to age at all? Is it a function of the higher age market or where are you seeing them.
Just wondering if there’s been any change in sort of secondary market or anything there.
Greig Woodring
No, it’s mostly on term business and it’s pretty broad based Jeff.
Operator
We’ll take the next question from Jimmy Bhullar with JPMorgan.
Jimmy Bhullar - JPMorgan
I had a couple of questions. The first one is just on the disability block that experienced a high claims.
Could you give us an idea on whether this was one client spread across several clients, and then just talk about your ability to be able to reprice this, is this repriced annually or with less of a frequency. Secondly on session rates; it seems like session rates in the US market continue to decline.
What your outlook is for growth in the US life insurance market over the next few years if this tends to change.
Greig Woodring
Jimmy on the LTD business it is priced annually, it is one-year business. It is coming from a number of clients.
But as a reinsurer we do take a fairly large chunks in individual cases, and so this business tends to be quite volatile. Since we have been incorporating the numbers from the group business in to our operations at the beginning of last year, the business has performed very well, better than expected over that time.
But it does bounce on a quarterly basis. So this is potentially a volatile business on the LTD side, but it does reprice each year.
Jimmy Bhullar - JPMorgan
Was this one client this quarter and was it a number of clients.
Greig Woodring
No, no, it’s a few individualized. In terms of session rate declines we continue to see session rates declining.
We see one major company, for example, in the second quarter we are starting to retain significantly more of their business going forward.
Operator
The next question will come from John Nadel with Sterne Agee.
John Nadel - Sterne Agee
Just following up on the group disability question; we looked through the statutory filings and found that a few of your larger counterparties are StanCorp and [Met] and Delphi. Just following up on Jimmy’s question, is there anything specific there in this quarter.
Obviously we saw poor results from StanCorp last week, but is it more than just a few individual lives, is this more case specific or no.
Greig Woodring
No, it’s not. You are really talking about a few lives can swing this business from quarter-to-quarter and recoveries can swing this business from quarter-to-quarter in the other direction.
So there is really not any place that we are overly concerned about, nor are we concerned about the profitability of that line as a whole. As I said, so far, that line has performed excellently for us.
John Nadel - Sterne Agee
Can you give us an order of magnitude at least relative to your normal expectations for that book? In dollars how much of a factor was that this quarter.
Jack Lay
John this is Jack. You could size at it.
It’s not that significant, about $5 million pre-tax fluctuations this quarter.
John Nadel - Sterne Agee
Just around the one year or the annual nature of these policies. Is this more your ability to go and reprice the treaty with the counterparties or are you more dependent upon the primary insurer going out to the market and repricing their business.
Greig Woodring
A little of both. It’s a typical group business; it can be placed by this carrier and renewed in the market place and then it’s got to be renewed with us, and companies may decide from year-to-year to be reinsuring some or not reinsuring some as well.
So there is a couple of decision point in there, but it clearly has a pricing characteristic every year.
John Nadel - Sterne Agee
Just totally separately; just looking out to the potential change in DAC accounting; do you guys have yet an estimate for what impact that, that ultimate change in accounting would have on both your current DAC asset as well as future amortization.
Jack Lay
John this is Jack again. That analysis is underway.
We don’t yet have a number with an specificity that I’d be comfortable giving you at this point.
John Nadel - Sterne Agee
Okay. Not even a ballparker, like 2% to 5% of DAC or 5 to 10.
Jack Lay
Not yet.
Operator
(Operator Instruction). We’ll now hear from Andrew Kligerman with UBS.
Andrew Kligerman - UBS
With regard to M&A as a follow-up, are you seeing much activity in the second half. Do you expect to complete a block acquisition or do you think we’ll end up next year seeing something in terms of capital management.
Greig Woodring
That’s always hard to estimate Andrew. We are always working on a few things and some of them are more like these and others.
I would say it’s sort of lukewarm at the moment as opposed to hot in terms of the environment. But it’s lukewarm to sort of cold as well.
One of the things that we are excited about potentially is the future needs for reinsurance to help companies manage their capital with respect to Solvency II too in Europe. So that may be still ways away before that heats up to the pitch that we hope it gets to ultimately.
Andrew Kligerman - UBS
So the Solvency II could be sizeable transactions then.
Greig Woodring
Well, it could be depending on how things evolve. But it certainly could be a situation where there are a lot of opportunities from companies who need to bolster their capital or do something with their own capital measures under Solvency II regime.
Andrew Kligerman - UBS
And then with the really sharp decrease in session rates over the last several years, of course supply then has fallen. Does that mean that the pricing or supply is pretty wide in terms of reinsurers?
Does that mean that pricing is coming off amongst you and your competitors? Are you lowering your pricing?
Greig Woodring
I would say no, that you would expect that, because supply is quite a bit greater than demand is, so that you would see some price differential. But it’s such a long term pricing business that nobody has become crazy at this point.
So we are not really seeing a lot of real pricing pressure. That’s not to say that it is uncompetitive or that occasionally we don’t see something that we don’t understand.
But for the most part the market is behaving reasonably responsibly in our opinion.
Andrew Kligerman - UBS
Just in terms of the long-term disability block. Could you just size the premium in-force and what the benefit ratio was in the quarter and where that might have been a year ago or last year, since you don’t break that out in the supplement.
Jack Lay
Andrew this is Jack. The premium level annually is 35 million to 40 million.
I would say that the fluctuations from last year’s probably, because we had some positive variance so to speak last year, it’s probably in $8 million to $10 million range. I don’t have the margin number handy here.
Andrew Kligerman - UBS
So that’s the variance over the last year quarter.
Greig Woodring
Andrew, just to clarify, that’s for the first six months versus the first six months last year.
Andrew Kligerman - UBS
Got it. And then just lastly may be the same question around the UK, what’s the premium volume on that book and may you could give us the variance or the benefit ratio on that business versus last year.
Jack Lay
Andrew this is Jack again. We don’t typically break it down by country level in terms of putting out margins and variances and so on.
Greig Woodring
I would say overall Andrew that the premium in the UK is something like $800 million give or take a range around that. Now some of that is like business, some is critical, although some is longevity business these days.
The life is the biggest piece of that critical only [sizeable] and longevity is growing.
Andrew Kligerman - UBS
And the variance around the UK in terms of the impact there.
Greig Woodring
In terms of excess claims this quarter, I would say we ended up somewhere around, give or take $5 million to $10 million over this quarter and we had roughly the same amount going the opposite way last year in the second quarter. I think is your question in comparison quarter-to-quarter.
Operator
Steven Schwartz from Raymond James has the next question.
Steven Schwartz - Raymond James
Just real quickly the $5 million to $10 million was that for the company as a whole or was that for one of the segments.
Greig Woodring
That was the ESA segment.
Steven Schwartz - Raymond James
Just the ESA segment, just wanted to make sure. If I can beat the DI horse some more.
Greig when you say it’s just a few lives are you talking about frequency here or are you talking about a couple of high insured lives talking about severity here.
Greig Woodring
You are talking about severity, but remember that we are talking excess here, so the amounts tends to be large on average, and the reserves that you set up when there is the [disable] life are very high at the outset.
Steven Schwartz - Raymond James
Now let me ask you this. Most of the business that you do on the DI side is that normal flow business or are you primarily reinsuring close blocks of claims.
Greig Woodring
It’s primarily normal organic flow business.
Steven Schwartz - Raymond James
Were these losses, were they from the normal organic business, or were they from the closed blocks.
Greig Woodring
Yeah, they are from the normal organic business.
Steven Schwartz - Raymond James
That’s what I wanted to know on that subject. Looking out longer term I believe the Reliastar was a big player in stop loss, because there have been a number of article studies talking about what could happen to the group business with small companies in particular putting their employees in to the exchanges.
Have you guys thought about that, what your exposure might be?
Greig Woodring
You mean the Stop-loss medical business. That’s a proportion of our overall business from Reliastar.
That’s been performing very well.
Steven Schwartz - Raymond James
Okay. Any thought on what that might look like in the future or not yet.
Greig Woodring
No, we’ve got a very credible and experience team that’s navigating all those waters. Up there in Minneapolis they do a great job with this business and I think they will watching it very carefully and maneuvering as things evolve.
Steven Schwartz - Raymond James
Two more quickies if I may. Jack in the corporate and other we’ve got some volatility in other operating expense line, shoots up from 13.6 million in the fourth quarter up to 17.6 down to 13 million.
Anything going on there?
Jack Lay
No. I would advise you to take a look at the year-to-date run rate and that’s pretty much what our expectation will be.
We are going have some degree of volatility quarter-to-quarter.
Steven Schwartz - Raymond James
Greig back to you. Korea, Japan, new programs, how is that coming along.
Greig Woodring
In terms of trying to fill off some of the holes in the pipeline, I guess is your question.
Steven Schwartz - Raymond James
Yeah.
Greig Woodring
Korea is coming on, it’s a little slower than we expected in terms of materializing some of the premium through. The results are strong this year, so far, but the premiums are a little bit lagging from what we expected.
They are up from last year though and we’ve seen a turnaround there. In Japan, we are still struggling a bit to fill up some of the pipeline, because we had some really big deals come to an end, and so it takes a while to pull that back up.
But we are actually quite encouraged with the way Japan is developing and the things happening in Japan for us.
Operator
We’ll now hear from Thomas Gallagher with Credit Suisse.
Thomas Gallagher - Credit Suisse
Question on Asia-Pacific, what gives you confidence that this is a short-term blip that we are going to get back up to normal profit ranges that you’ve seen in the past. If I just look at the last year or so, you’ve had two quarters in the $8 million pre-tax range, two quarters mid 25 million to 27 million.
So how should we be thinking about that business, and may be just discuss a little bit about, what you saw in Australia and why you think it’s just a short-term issue.
Greig Woodring
Well that is something that we always worry about, because whenever we do have a blip we do all the investigation we can possibly do to assure our selves that it can be a random event and there’s no systematic problem that we are uncovering or treating or something like that that we need to deal with. Now we did have a problem with a particular Ltd situation last year in Australia, and this what we’ve seen in the second quarter was individual claims coming from five or six different companies in large mouths, and so we basically saw a lot of large claims hitting us at one particular time.
Now, until you go down the road some ways, you can’t put that in perspective exactly, but this is a business that’s performed okay in the past. Australian operation is a good operation that has had a long history of excellent results, and it’s had frankly some difficult experience in the last 12 months or so in a number of different directions.
So they are working hard to over come this and we will hopefully see this all turnaround. But we see no reason based on the claims where they came from, how they are spread in the organization or in that one operation from different companies, different years, different treaties.
To conclude that its anything outside of the ordinary, its not a statistically significant even in the sense that its well outside the range. It’s very possibly and very likely actually just a fluctuation.
Thomas Gallagher - Credit Suisse
So it’s severity not frequency. Did you say they were larger than expected claims?
Greig Woodring
Yeah, in this case it is. Like I said, they did have problem with one treaty that we talked about in the fourth quarter last year, and that treaty runs through the end of this year.
There was an opportunity to increase pricing at the July first point which has happened. It’s a group case and the client and ourselves are both all over it and trying to manage it as best we both can, so that, that particular case will see the end of, at the end of the year.
Thomas Gallagher - Credit Suisse
Just on the lapse rate comment you made on term life in the US. I don’t know if you can discuss it all, the types of policies with these 10 year level term or is there a specific reason why you think you are seeing the increase in lapsation from a specific product type and also have you now fully reflected that in your DAC amortization or is that something you’ve going to have to watch in terms of looking at the captive DAC amortization as it relates to lapse rates.
Greig Woodring
First of all I don’t think it effects our DAC amortization at all. Some of it is 10-year term policies and if the lapse rates are more than we expect after 10 years, we would have all of our DAC amortization by then anyway.
So that’s not an issue. The lapse rates are something we have been studying and have just produced quite a bit of information about.
I think it’s going to take some time to really understand exactly what’s driving it. It’s not easy to see in the instant exactly all the things that are going on, but it’s clear that lapse rate haven’t increased a bit.
Operator
We’ll take a follow-up question from John Nadel.
John Nadel - Sterne Agee
I just wanted to follow up on Solvency II. Greig I definitely understand the theory that implementation of Solvency II could have a positive impact on opportunities for reinsurance activity for you guys to help out, some of the companies implementing and where they might see opportunities to use reinsurance a bit more effectively to manage their capital.
But I guess I am also wondering on the flipside, given your sizeable foreign operations, if we need to think about the implementation of Solvency II for RGA as having any impact on your own capital levels and how much you will need to hold in your foreign operations, should we think about that $500 million or roughly $500 million of excess capital may be a bit differently under that scenario.
Greig Woodring
No John, we don’t really expect that we are going to have a big capital event with Solvency II. We will have to comply with Solvency II and we’ll do so.
But for most of the types of business we have on our books at this point, it’s not an event.
John Nadel - Sterne Agee
It’s my understanding, may be you could give us your thoughts. It seems that at the margin the biggest impact of Solvency II at least as it relates to insurance companies is, it appears that it has more of an impact on the higher asset leverage type product like annuities etcetera.
Greig Woodring
Yes it does. Long term guarantees and high asset amounts have a big capital charge potentially, and it’s typically why our key business or risk business does have some long term guarantees in it, but some of that’s overcome by being able to take some of the present value or future profits in to your picture too.
So the picture for us doesn’t look like we are going to be sticking any considerable amounts of capital in to over and above what we’ve already got. It’s pretty high.
We already have a lot of capital allocated to European operations.
John Nadel - Sterne Agee
Just sort of a bigger picture, may be follow-up thinking about premium growth levels, just in relation to your original guidance for 2011. I think we are looking at the US and Canada guidance 5% to 7% growth for the year.
Europe, South Africa and Asia-Pacific 10% to 15%, I think that’s ex-currency. Where you stand year-to-date, how you look at those targets, what should we be expecting for 2011, and may be just a hint on whether it looks like a little bit longer term.
Greig Woodring
Yeah John, the currency always gets in the mix as well, and I won’t try to pull that out. But as we sit here through six months, we are very happy with where we are.
Our premiums and revenues are coming in a little stronger than our original plan going in to the year and our earnings are pretty much right on. We expect it through six months, and so we see no reason to adjust our thinking at all on average.
Now, if you were to ask, would we adjust individual good on the country level or product line level? Yes, we would have some pluses and minuses, but overall, we would say we are doing exactly what we thought we would do through six months, and that’s a happy place to be in some ways.
John Nadel - Sterne Agee
Related to that, just sort of thinking about that organic growth rate, I think on a consolidated basis will that put your premium growth rate at was about 8% to 10%, if I recall. And if we thought that 8% to 10% was a reasonable longer term view; under that scenario about what proportion of your annual earnings do you think would represent free cash flow?
Jack Lay
John this is Jack. That’s always a hard one to answer because its affected so many different things.
But I think you could look at, and I think we mentioned this before, on a very general terms, redundant or call it additional retained earnings that result in redundant capital in the neighborhood of a couple of 100 million per year.
John Nadel - Sterne Agee
Just so I understand that. So a couple of $100 million of your annual earnings would be necessary to be retained to support that.
Jack Lay
No, that would be excess John.
John Nadel - Sterne Agee
That would be the excess. So a couple of $100 million of your annual earnings could be deemed excess under that sort of organic environment.
Greig Woodring
That’s correct.
John Nadel - Sterne Agee
Very helpful.
Operator
We will now take a follow-up question from Andrew Kligerman.
Andrew Kligerman - UBS
Just a little color on the interest rate outlook; 10 year treasuries have come down 40, 50 bps in the last quarter or so. What are your thoughts as we move into the second half of the year and any material changes in investment income?
Jack Lay
Yeah Andrew, we do expect, because our reinvestment rate is lower than the portfolio yield. We do expect to see a gradual continual decline under this rate scenario in investment income.
You probably noticed the effective rate was identical first quarter and second quarter. But that’s affected by a number of different things, including how much of the portfolio is rolling off and reinvestment opportunities and all that sort of things.
But if we take a step back. We would expect to see still a continual, not significant, but gradual decline in an effective yield.
Andrew Kligerman - UBS
Any magnitude. So was it always at 5.35 or something like that off the top of my head?
I mean do you see like a 10 bps decline, do you see 20, 30 over the next 12 months? Where do you think that trend towards?
Jack Lay
If you wanted to annualize it, I think 20 to 25 is not a bad estimate.
Andrew Kligerman - UBS
Over the course of the year?
Jack Lay
That’s right.
Andrew Kligerman - UBS
And then the pressure kind of remains at that level annually?
Jack Lay
Yes.
Andrew Kligerman - UBS
If we stay where we are.
Jack Lay
Yeah, in the current scenario, that’s right.
Andrew Kligerman - UBS
I guess a new business for you over the last two years or so has been long term care. Just kind of curious about how big the book has gotten and has it been performing well.
What are your thought about the long term care books that you have.
Greig Woodring
This is Greig, Andrew. The long term care business has been performing very well so far.
That doesn’t tell you so much, because it’s still fairly early days, but a little bit better than expected in terms of experience. It’s about a $115 million of annual premium.
So out of our $7 billion of premium it’s a small percentage, but it’s been doing fine.
Andrew Kligerman - UBS
You expect to see a lot of growth there or you are trying to not going to move very quickly.
Greig Woodring
We don’t see sky rocketing growth. We do expect to see a little bit of growth.
This business sticks around so every year’s premium adds a little bit more to the book. So from the base we started it will continue to grow at a nice percentage clip, and it wouldn’t surprise me if we are adding $50 million or $75 million a year to that (inaudible) for a while.
Operator
We will take a follow-up question from Steven Schwartz.
Steven Schwartz - Raymond James
Hey guys a couple; one more on the group DI. I just want to make sure that I understand what’s going on here.
The primaries, they do new business, they get new clients. They generally have a rate guarantee period two may be three year.
You are not tied in to that at all. Is that correct?
Greig Woodring
I think Steven that may depend on the treaties. I don’t know exactly if in these particular cases that had some claims, whether they were tied in for longer periods, one year or two years.
But we have a contract that’s typically renewing each year with the underlying company, and it’s not necessarily tied to their direct contract with the underlying groups.
Steven Schwartz - Raymond James
Yeah, that’s what I want to make sure about. Just on the lapsation question.
Jack if you were in our shoes, how would you track this. Historically what I have done is on a quarterly basis is start with assumed business in force and in new business assumed, you subtract from that the assumed business at the end of the quarter, and that I thought gave me my lapse number.
Is that an inaccurate way of doing this?
Jack Lay
Steven that’s fairly general, but yeah, that’s in the ballpark.
Steven Schwartz - Raymond James
Because I am wondering, because it does not show and may be this is mix that you are really talking about. But that would necessarily show an increase in lapsation six months or six months or even quarter-over-quarter.
Greig Woodring
There’s so much noise in that, it is the problem Steven. When we talk about that, what we do is there’s true (inaudible) study which says lapse rates in your seven for ages x to y are supposed to be a certain level in there, a little bit higher than that.
Steven Schwartz - Raymond James
Okay. So it sounds more like product specific mix.
That’s what I had, thanks.
Operator
We’ll take our next question from Colin Devine with Citi.
Colin Devine - Citi
Sort of more generic question. Guys I assume you’ve certainly been approached many times to look at variable annuities living benefit blocks and also secondary guarantee universal life, and I wondered what it is that you see in those products that has made you very reluctant to reinsure them.
Greig Woodring
Well Colin, we did do some variable annuity reinsurance. We got in to that, we thought carefully picked what we thought were the best designed products from our perspective, build the capabilities to manage the hedging required and so forth, and then the financial crisis hit and there we spent a lot of time discussing variable annuity results which were only a minor part of our business.
So we decided to cool that for a while. We basically have not done any more variable annuities and those treaties are not active at the moment.
We are still managing the in-force business, and actually they are performing very well contract to date. They are in good shape.
But its not impossible that we would look at variable annuity sometime in the future, and we continue to keep our eyes open for the right opportunities and right situation. I guess we always want to try to find ways to help our customers manage any risks or any potential capital needs or other structural needs that they have, that can be approached by reinsurance.
So something like secondary guarantee UL for example, we have wanted to find a way to get comfortable with, but we’ve never really gotten comfortable with the level of risk in those products. We reinsure that mortality, straight mortality out of them quite a bit; by taking the actual guarantee risk is something we haven’t gotten comfortable enough to do yet.
Colin Devine - Citi
That’s sort of what I am trying to get at. So it’s the guarantee risk there that from your perspective has clearly been a fundamental issue, and when you look at that in capital or reserve requirement.
Is that guarantee risk, is it making you then uncomfortable with what current capital requirements are for that products. And then just to clarify, I was aware you’ve done some [V8] stuff in the past.
It wasn’t clear to me; I thought that was sort of older vintage stuff that didn’t have some of the more generous features that got added in to products in the later sort of go-go years.
Greig Woodring
No, I think it was some of the more recent products right towards the end, but some of the less adventurous of those selectively going with situations that were better for us. Like I said, I think, if we were to take a look at the performance of that block contract to date, we’d be ahead of the game.
But, on the secondary guarantees we just have never gotten comfortable that the risks were adequately priced.
Colin Devine - Citi
Maybe I will put you on the spot. Do you think the AXXX reserving levels are adequate?
Greig Woodring
Well I guess what I am saying is, there is enough uncertainty around them that they might require a little bit more capital than the current levels are. It’s clearly not the same as XXX, where you have an absolutely clear redundant reserve situation on XXX.
On AXXX you might have a redundant reserve or you might no in our opinion.
Operator
And with no questions remaining gentlemen, I will turn the call back to you.
Jack Lay
Well thanks to everyone who joined us this morning. To the extent you have any other issues or questions, feel free to call us here in St.
Louis, and with we’ll end the second quarter conference call. Thanks again.
Operator
Once again, this does conclude today’s conference call. We thank you for your participation.