Oct 18, 2012
Executives
Jack B. Lay - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President Albert Greig Woodring - Chief Executive Officer, President, Director and Member of Finance, Investment & Risk Management Committee
Analysts
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division Nigel P.
Dally - Morgan Stanley, Research Division Humphrey Lee - UBS Investment Bank, Research Division Steven D. Schwartz - Raymond James & Associates, Inc., Research Division Jeffrey R.
Schuman - Keefe, Bruyette, & Woods, Inc., Research Division John M. Nadel - Sterne Agee & Leach Inc., Research Division Sean Dargan - Macquarie Research Paul Sarran - Evercore Partners Inc., Research Division Ryan Krueger - Dowling & Partners Securities, LLC Sarah DeWitt - Barclays Capital, Research Division
Operator
Good day, and welcome to the Reinsurance Group of America Third Quarter 2012 Results Conference Call. Today's call is being recorded.
At this time, I would like to introduce the President and Chief Executive Officer, Mr. Greig Woodring; and Senior Executive Vice President and Chief Financial Officer, Mr.
Jack Lay. Please go ahead, Mr.
Lay.
Jack B. Lay
Okay, thank you. Good morning, and welcome to everyone to RGA's Third Quarter 2012 Conference Call.
We appreciate you joining us on short notice this morning. We accelerated our earnings release this quarter since in a couple of markets, we experienced unusually high claims volumes.
And in one case, added to our IBNR accruals, that would be in Australia. Joining me this morning is Greig Woodring, our CEO.
I'll turn the call over to Greig after a quick reminder about forward-looking information and non-GAAP financial measures. Following Greig's prepared remarks, we'll open the lines 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, investment performance, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries. Keep in mind 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 we issued yesterday. In addition, during the course of the call, we will make comments on 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 supplement for more information on this measure and reconciliations of operating income to net income for our various business segments.
These documents and additional information may be found on our Investor Relations website at rgare.com. With that, I'll turn the call over to Greig.
Albert Greig Woodring
Thank you, Jack, and good morning, everyone. Thanks for joining us.
As reported in yesterday's release, we had a difficult quarter and our operating results were significantly affected by high claim levels in the U.S. and particularly in Australia, including an adjustment to the claims liabilities for Australian group business.
Collectively, these items lowered earnings by about $0.66 a share, $0.43 of that was Australia. After-tax operating income totaled $100 million or $1.35 per share, down about 28% on both counts from the prior-year quarter.
Foreign currency fluctuations also adversely affected current quarter by about $0.04, and the low rate environment continues to put some downward pressure on investment income. Reported net premiums were solid, up 8% for the quarter, 9% ignoring foreign currency headwinds.
I'll talk mostly and in more depth about our U.S. and Australia experience in a moment, but just a comment, the rest of our operations performed well this quarter pretty much across the board.
All the markets in our Asia-Pacific segment, outside of Australia, met or exceeded expectations as did substantially all of our Europe and South Africa operations, as well as a couple in the U.S. Our conservative investment portfolio remain stable and continues to grow, ignoring spread business.
Investment income was up slightly quarter-over-quarter. The portfolio grew $1.3 billion, but the average yield was down 31 basis points from the third quarter of 2011 due to the combination of low rate environment and the holding of relatively higher level of short-term investments in cash as we work to invest proceeds of our $400 million subordinated debt offering which was in August.
The average yield was down 8 basis points from the second quarter of this year. We're nearing completion of repositioning the assets associated with the large annuity block we acquired in the second quarter.
As part of that repositioning, we have sold short-term securities at a gain and reinvested in longer-duration securities with higher yields. Book value per share increased to $91.18, including AOCI and to $62.05 without it.
Our net unrealized capital gain position now exceeds $1.9 billion and accounts for almost 90% of that roughly $29 per share difference. Operating ROE was about 9% for the quarter and stands at a little over 10% year-to-date.
Getting back now to Australia and U.S. results, let me start with the Australian results.
Australia experienced adverse mortality claims and somewhat poor individual disability results. It was more of the former.
In addition to that, regular review of group IBNR, 4 groups have developed significant credibility in their history now for us to peg the IBNR a little bit more accurately. So we looked at that and because those results were coming in a little adversely, we increased the reserves about $28 million.
That's 12% of the total reserves. The total pretax loss for Australian operations was $36 million.
We continue to closely monitor and analyze this business, and we're exploring opportunities to improve its performance. Clearly, Australia has had negative fluctuations now after a long string of very good results but negative fluctuations for different reasons since the last quarter of 2010.
Results in the U.S. were below expectations.
This was split almost evenly between individual and group operations. Individual mortality was about $14 million more than our expectations.
While that's adverse, it's within a standard deviation and actually claims experience year-to-date is actually a little bit better than last year. The experience suffered from claims frequency more than severity in this third quarter, and that's something that levels out over time typically.
Our U.S. group business actually has 4 subsegments to it.
3 of those 4 subsegments, life and accident, LTD and excess medical, all experienced about $4 million excess claims. And with all 3 of them going in the same direction, it was a bad quarter for the group business.
We saw the U.S. group results be about $12 million short for the quarter.
On a year-to-date basis, 2 of those segments, life and accident and LTD, are pretty much in line with expectations, and the excess medical business is behind expectations year-to-date. But bear in mind that on a very few, large medical claims, not a significant item in our opinion, we expect volatility to occur in this line and due to the large claims, that volatility is apparent in this quarter in particular.
To remind you that on the group side, we are always readjusting prices because these are short-term contracts, and we continue to do that as we go along here. So in all, our U.S.
Traditional subsegment reported pretax operating income of $72 million, down from $80 million in last year's third quarter. Premiums were up about 8%.
So a couple more words about some of our other operations quickly, and then we'll turn it over to questions. Our U.S.
Asset Intensive subsegment posted pretax operating income of $27 million, up a couple of million from last year, reflecting relatively strong equity market. I'm sorry, up from a couple of million, $2 million last year.
So substantial increase reflecting relatively strong equity market performance this year as opposed to last year, which was weaker. The S&P 500 Index rose 5.8% compared to a drop of 14% last year, so that's part of the -- a big part of the reason.
Financial Reinsurance continue to perform well, adding $8.3 million to the pretax operating income this quarter. Pretax operating income totaled $28 million with claims experience in line with expectations.
This is in Canada now. So it's good experience, not the outstanding experience we have reported in recent quarters in Canada but good experience.
Premiums increased 23% in Canada and local currency premiums are up 25%. So it's a strong revenue quarter for the Canadian operation.
In Asia-Pacific, income ex Australia was quite strong. Pretax operating income was $15 million for the quarter, and that reflects good performance in virtually all of our markets except Australia.
Net premiums for this segment increased slightly over the quarter, not significantly. In Europe and South Africa, pretax operating income was $25 million for the quarter.
Again, a very good result, better than expected and driven by favorable results in almost all markets, especially the U.K, France and India. Reported premiums rose 6% over last year's quarter and 12% in local currencies.
Corporate segment pretax operating loss is about $6 million, similar to the second quarter, and as indicated last year -- last quarter, we expect about the same result in the fourth quarter. We're, as you can imagine, quite disappointed with the results in the U.S.
and Australia this quarter. Operating ROE at 10% through 3 quarters is on the low side for us, but historically, the fourth quarter is our strongest quarter, and we look forward to this fourth quarter coming up to hopefully repair some of the damage.
With that, I think we'll turn it over to any questions you may have.
Operator
[Operator Instructions] And we will go first to Jam Bhullar with JPMorgan.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
I had a couple of questions. The first one just on Australia.
This is obviously the second charge that you've taken in 4 quarters. How long do you expect the margins to be weak in that business?
And then related -- and then if you could talk a little bit about how soon can you reprice the contracts, what is it, how much are you pricing them -- pricing them higher by? And then related to that, for the overall business when you've talked about earnings guidance and return expectations, I think your guidance has implied an ROE maybe slightly higher than 11%, close to 12%.
How do the issues that you've seen in Australia and also just the margins, the way they've been in the U.S. affect your expectations for returns in 2013?
Albert Greig Woodring
Yes, Jimmy, first of all, we are trying to get out in front of this group experience in Australia. We haven't really seen terrible group experience in Australia unfolding, but we significantly increased a couple of reserves because we anticipate based on early results that that's starting to develop.
We've been saying that the group market in Australia has gone from nicely profitable to very competitive, and it's a little bit challenging. But we're taking actions to get in front of it and because the contracts are short-term, they're a little longer than typical in the U.S.
where it's almost everyone of them is done annually. Australia's contracts typically run for up to 3 years, and so there is some repricing that's done on a 3-year basis.
But the individual groups, we are taking active roles in them. And we took a disability LTD and disability increase last year.
Experience has been okay on that this year. The group LTD business in Australia has been fine.
It's more of a couple individual companies this time, a couple of individual quotes that has been the problem that we reserved for in this quarter. So yes, the unsatisfying part of this is while Australia has had several different bad quarters and an occasional good quarter like the first quarter thrown in, the problem seemed to be different each time.
And part of that is the fact that this is a fairly large operation that has large risks that are somewhat volatile. The group market is getting increasingly competitive.
We have, over the last little while, very much slowed down our growth in the group business to a near standstill, if anything. And the problems with individual claims go back to prior in the decade.
So there's a lot of things that we're trying to strengthen in that Australian operation, including a focus on providing stability, better information, better infrastructure and support, a lot more claims management and so forth. Those things will take hold and -- but we're working on that.
We, at this point, we don't have any backlog or gunnysack of any looming problems in Australia, and that's typically been the case. We've reserved -- when we saw the beginning of a problem, we reserved adequately for it.
But in Australia, unfortunately, we've seen a couple of different problems emerge and that's what's happened over the last couple of years.
Jack B. Lay
This is Jack. Maybe just a follow-on, I think you had asked a question about return expectations into next year and, yes, the situation that we've addressed, particularly on Australia, in third the quarter this year doesn't really have a dramatic effect on our return expectations going forward.
It's a relatively minor part of our business, and so our longer-term return expectations are not particularly affected by poor results in the third quarter this year.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
And then, I was a little bit surprised that you mentioned that U.S. for the year-to-date period is actually emerging slightly better than expected.
If I look at the lost-benefit ratio, it's been around 88% so far through the first 3 quarters. And even if I add up the earnings that you've earned in the traditional U.S.
business, I think close to $231 million year-to-date, that's lower than what you've had the first 3 quarters last year, the year before and the year before that. So it seems like the margins are actually slightly worse than they've been at least the last few years.
So my question was, like, is this really a normal quarter? It seems like the results are slightly worse than you've been reporting the last several years.
Albert Greig Woodring
No, it's definitely not a normal quarter.
Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division
For a normal year-to-date period.
Albert Greig Woodring
Well, I think what I tried to say is, I think our actual-to-expected ratios are slightly better this year than they were last year, but they're similar. And in fact, the U.S.
mortality, as you know, has had more difficult quarters than -- and neither one of those years is particularly good. They're slightly subpar.
They're not -- we're not over a standard deviation or anything like that. But we've had more bad quarters than good quarters in the last several years, and that mostly goes back to that business written in the early part of the decade where mortality rates, because our supposition is, to some extent, a supposition that there was not only some excess mortality in there but it was also came about because of lax underwriting and -- in the industry and in some of our client companies because if you take our mortality rate for, say, a 50-year old and then you look at the same rate for policies issued in that area, it's a little higher.
No reason that we should expect that. So we're seeing a little bit of that.
Now this quarter, it's too early to make that determination because we have to get all that data and exposures exactly in, but -- and it actually doesn't seem like that's the case. There's some high-level things that would sort of indicate that's a different, a different problem, more of a real fluctuation this quarter.
But nevertheless, the last few years in our individual mortality business has been in the low part of where we would expect our individual life mortality results to be. And while I think the actual to expected ratios are slightly better this year, neither one of those years is a good year.
I didn't want to leave that impression.
Operator
And we will go next to Nigel Dally with Morgan Stanley.
Nigel P. Dally - Morgan Stanley, Research Division
Just on the U.S. Traditional business, can you discuss whether you've seen any delays in the company's reporting claims to you?
Seems like a lot of the primary writers have this mentality in the second quarter. I was wondering whether that's what we're seeing impact your results this quarter.
Then on Australia, you mentioned most of the business is 3-year life, but where in that 3-year life are we today? Or put differently, how much of that group disability exposure should we expect to roll off this year and next?
And then just last, if you can discuss the progress you've made in extending the duration of the Hancock fixed annuity blocks investment portfolio?
Albert Greig Woodring
I'm sorry. The first question again, Nigel?
Nigel P. Dally - Morgan Stanley, Research Division
Delays in claims.
Albert Greig Woodring
Delays in claims. No, I don't think we've seen any delays in claims.
We're usually pretty current. Some reporting where we have large number of policies with small amounts are reported quarterly, but we approve for that.
And so you're really talking about different estimations at different times. I think we're pretty current.
We did see a real surge in number of claims come through in the very last week of September. Those things happen from time to time, and I didn't see anything unusual about any of the reporting on that.
When I talk about the group business being 3 years, each different group case would have its own starting point. So some are nearly expired, some are one year in, some are 2 years in.
And that's the sort of situation you have. And we, like I said, we've, some time ago, adjusted our expectations in terms of how much growth we're going to see out of that group business.
We're trying to, trying to stay in the business, but it has become quite competitive after a number of good years. And we've seen that.
We really haven't had, like I said, terrible experience, so a lot of these actions are getting out in front of it as opposed to reflecting terrible actual claims coming in at this point on the group side. And most of Australia, other than that group IBNR increase, has been individual mortality and critical illness claims.
That's most of the damage, which was a poor second quarter and a poor third quarter in that category.
Jack B. Lay
Nigel on -- excuse me, this is Jack. On the Hancock portfolio, we're pretty much through, as we sit here today, the repositioning of that portfolio.
A lot of it took place during the latter part of the third quarter and into October, but we are about there. We have repositioned over $2 billion at this point of that portfolio.
So we think going forward, we'll be fairly close to a run rate, so to speak, on that business in terms of earnings and return.
Nigel P. Dally - Morgan Stanley, Research Division
And in terms of the return, after repositioning, have you hit the target laid out...
Jack B. Lay
Yes. Yes, we have.
Operator
And we will go next to Humphrey Lee with UBS.
Humphrey Lee - UBS Investment Bank, Research Division
Just a couple of questions on the financial reinsurance. So the cost, the acquisition cost and other insurance expense line kind of spiked up to $2 million for the quarter compared to average of around $700,000 in the first half of this year.
Albert Greig Woodring
Humphrey, I'm having a hard time hearing you. Can you speak up just a bit?
Humphrey Lee - UBS Investment Bank, Research Division
Sure. Is it better?
Albert Greig Woodring
Yes, that's a little better.
Humphrey Lee - UBS Investment Bank, Research Division
Okay. So for Financial Reinsurance, the policy acquisition cost and other insurance expense lines kind of spiked up to $2 million for the quarter compared to around $700,000 per quarter in first half of the year.
Is there any reason for the increase and how should we think about it from a modeling perspective?
Jack B. Lay
I don't know the details of that, Humphrey, but this is a fee business at the end of the day. If things move around in the overall income or balance sheet statement, they always net out.
What really counts is the fee income, which ends up basically netting everything out. These are low-risk transactions, in our opinion.
We do a lot of work to model them and make sure that's the case. We have, in our long history of doing a lot of these transactions, never had one that turned out to be other than low risk.
And so we have a long and good track record there. So if you see numbers floating around that, they will offset and I'm not sure of the details.
We can follow-up with you on that, but typically, that business is pretty predictable. Now we do collapse those deals under GAAP, so sometimes, premium numbers are big and things in a statutory statement, but on our GAAP books, we don't count them as risk deals.
If there are any changes in expenses or other things like that, it's the fee income that needs to be followed.
Humphrey Lee - UBS Investment Bank, Research Division
Okay. And then in terms of the U.K.
business, so we have a favorable experience for the fourth quarter. How should be think about the turnaround in terms of the claim experience?
And do you think the improvements for the quarter is sustainable?
Jack B. Lay
In the U.K?
Humphrey Lee - UBS Investment Bank, Research Division
Yes, U.K.
Jack B. Lay
The U.K. business has historically run reasonably well.
It has, like our other businesses, had it's bad quarters and its good quarters. This was a particularly good quarter.
But historically, we are seeing claims experience emerge pretty much right on expected, give or take a point or 2 at any given measurement period. And so we're pretty pleased with the experience development on our U.K.
operations. Caution you against taking a good quarter and projecting it, just like I'd caution you against taking a bad quarter and projecting it.
But the U.K. has had a good year this year.
Humphrey Lee - UBS Investment Bank, Research Division
Just one final question. So in terms of the Asian premium mix, it seems to be -- so it's 12% for the quarter, how much of that is from the non-Australian region of the markets versus the Australian markets?
Jack B. Lay
Australians are our biggest producer of premium out in that part of the world, and I'm not sure I have handy what the total premiums are without Australia, but I would guess that a good chunk of that is certainly Australia. Yes, more than 50% is outside the Australian market.
Operator
And we'll go next to Steven Schwartz with Raymond James.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Just to follow-up on Humphrey's first question with regards to the policy acquisition cost. In February, to be honest, it doesn't look like anything particularly netted out or any other number was particularly strange.
I was wondering, Jack, is it possible maybe there was an unlocking in the quarter in that area?
Albert Greig Woodring
No. We don't have an unlocking in that line, so I think if you look at the run rate in terms of -- in the U.S.
Financial Reinsurance at a little over $8 million. That's -- and you can see we're at $24 million year-to-date, if you're taking a look at that Page in the QFS.
So, yes, I'd say that's a fairly reasonable run rate at this point, but no, there's nothing unusual in there. And I don't have at hand why the policy acquisition cost was slightly elevated this quarter, but there's nothing particularly meaningful about that.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And if we can return to Australia here.
And by the way, a couple of times you said you referred to the policies written earlier in the decade. I presume you mean earlier in the century?
Jack B. Lay
Yes.
Albert Greig Woodring
That's right, early in the century, last decade.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Last decade. Okay.
All right. so Australia here, we've got a couple of things going on, if I understand this correctly.
You've got adverse experience, which you think is just one of those things in individual life and in critical illness, right?
Albert Greig Woodring
Yes, the -- it is a little concerning because we've had these blips 3 times now in individual life and critical illness. So lapse rates are fairly high in Australia, and what we're concerned about is any selective lapses from policies that were issued some years ago.
This is all individual stuff, not the group stuff. And so that might mean that there's some expectations that experience won't be quite as good as we would have hoped.
But we're following that. We actually do have some ability to raise rates in Australia, but that's a difficult thing if it promotes more lapsation and leads to even worse experience.
This is an industry problem. We are doing what we can to beat the drum with the industry and begin to make sure everybody is aware of the issues.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then on the group side, you said it wasn't LTD.
So the issue is life?
Albert Greig Woodring
Yes. The issue is more life than LTD.
LTD, there's a difference between reserve development and experience, but the experience on LTD has been pretty good this year. But on these 4 accounts, we're taking a holistic approach to what the total claims evolution we expect to see in the future.
So those are claims that haven't been incurred yet, so we can't really...
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
So you're looking at data that would suggest these 4 accounts are problematic, and then going back to Nigel's question, I guess then, when do these 4 accounts, I guess the size of them, when do these 4 accounts come up for renewal and repricing?
Albert Greig Woodring
I think they're all within a couple of years.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
A couple of years. Okay.
And then if I may, just off the topic. The Hancock book has been reinvested.
How much, Jack, would you think that could add to investment income going forward from what we saw in the third quarter?
Jack B. Lay
Let's see. It would add probably up to 10% to the growth investment income.
If you think of it in terms of returns, we think we have the portfolio repositioned in such a way that we will meet the returns that we articulated last quarter.
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Okay. And then just one more, if you will, and then I'll get back in the queue.
Anything on the active credit finance exemptions?
Jack B. Lay
This is Jack. I'll take that.
No, there isn't. We still expect that to see some movement after the election that is in the fourth quarter.
But as we sit here today, no, there's really nothing to report.
Operator
And we'll go next to Jeffrey Schuman with KBW.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Sorry to beat this to death, but I didn't -- I wasn't quite sure I followed part of the discussion with Steven. So this quarter's reserve increase in Australia is related more to disability or life?
Jack B. Lay
I don't know the proportions, Jeff, but what it is, is 4 contracts, 3 main ones, that had early claims that were adverse but not particularly credible and have -- and we have projected that out to the life of the policy.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, but it's some combination of life and total...
Jack B. Lay
Yes, it's life and total permanent disability.
Albert Greig Woodring
But it's more life.
Jack B. Lay
More of it does relate to the life portfolio. But the proportions, I don't know exactly.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, that's helpful. And then to the extent you've increased some reserve in Australia this quarter and into the fourth quarter, did any of that, any of those reserve increases address the issues of the individual side with the anti-selective lapsation?
Jack B. Lay
No, they didn't.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. And then lastly, a technical issue.
It looks to me like in the corporate segment, the interest costs went up sequentially by what I would have thought was the full amount of the interest on the new debt, but that was issued mid-quarter. So was there some reason why you ran a whole quarter of interest in there or is that not the case?
Albert Greig Woodring
No, it's just the interest accrual for the -- from the point at which we issued those securities.
Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. So that means that as we go from here, then interest cost should be incremented a little higher from this baseline because you have the full quarter, is that correct?
Albert Greig Woodring
That is correct, Jeff.
Operator
And we'll go next to John Nadel with Sterne Agee.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
A couple of questions for you guys. In the U.S, I think you gave some decent granularity on sort of understanding what the shortfall was in the U.S.
traditional between mortality or life and other products. Was there any concentration of that claim activity, whether on the life side or disability or accident and health to any particular carriers?
Because I know, in particular, on the group side, the size of the business, the size of the block is relatively small, right?
Albert Greig Woodring
Yes, it's reasonably small, yes.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
So is there any concentration there?
Albert Greig Woodring
The excess medical seem to come from one particular state Medicaid program. That situation is actually taking care of itself through the regular process of pricing and falling off of some contracts though.
But again, there's so few claims that tend to be large, that is hard to say that that's the real problem or if there is any real problem there.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And on the disability side, anything?
Albert Greig Woodring
No, no. I think the LTD, as I said, year-to-date is okay, pretty much what we expected it to be.
That's a result of a bad quarter this quarter but better than expected cumulative first 6 months.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And just to be clear, on the disability side, that's a claims incidence or a frequency issue?
Albert Greig Woodring
On the disability side, this quarter, typically, that's large amounts of LTD reserve set up. So it could be either, but I don't know specifically in this case.
We're not typically talking about a large number of policies.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
Okay. Turning back to asset intensive, just a thing about getting maybe a bit more clarity, can you just break out, in this quarter, the contribution in the quarter from sort of your legacy business versus the Hancock book that you acquired last quarter.
And just remind us what the rate of earnings you're expecting on a quarterly basis once the Hancock block reaches their targeted return.
Jack B. Lay
This is Jack. Let me start with that latter point.
I think we would project probably a $30 million to $35 million sort of run rate at this point going forward. That includes the Hancock transaction.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
Okay, that's helpful. I'm interested, too, in new money investment yields.
It seems to me that new money investment yields have dropped pretty sharply, certainly over the course of the third quarter and by the end of the third quarter in particular. I'm just wondering how we should think about that.
I know you guys have given us some thoughts on rate pressure to earnings looking out. I'm just wondering if there's any update to that, particularly as we turn forward to 2013.
Jack B. Lay
This is Jack. We haven't remodeled it recently here, You're certainly accurate in your observation that we continue to see more and more headwind.
We don't think it's dramatic in terms of kind of what we've articulated as impacts going forward. We would -- or I should say, we will very likely refine that in connection with any commentary next quarter on the 2013 expectations.
But I would say, our prior estimations, I included a pretty reasonable falloff in new money rates, so I would suggest that we haven't changed our opinion dramatically on the effect of those -- of that investment environment on our projections.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And there's no impact on your projected, on sort of your projected returns on the Hancock block, given where you've been investing this or repositioning this $2 billion or so?
Jack B. Lay
John, that's correct. We repositioned pretty much as we expected in terms of the resulting yield.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And then just the last question I have for you is can you estimate what your capital deployment capacity is now? I mean, the debt offering certainly has to add to that capacity.
I'm just wondering if there's any update on that versus last quarter when I think you were talking about a couple of hundred million dollars.
Jack B. Lay
Yes, well, roughly $600 million would be a good estimate at this point in terms of deployable, what we would view as excess capital.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And I saw the comments in the press release about looking at block transactions. I mean, no real change in that but just wondering if you can give us, Greig, a more current update of your thoughts and expectations around what's going on out there.
Albert Greig Woodring
Yes, there are a lot of blocks of business for sale, and it's U.S, Europe -- mostly U.S. and Europe, not much in Asia.
But there's a lot of interesting situations, you never know how they will transact, when they will transact. They are keeping us very busy, but we will have to follow up with details when something really emerges.
It's a really active time. There's a lot of processes underway, some private, some public, and it's probably as much activity as we've ever seen.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And any concentration just in terms of business -- the types of business, Greig, whether life or group or annuities or otherwise?
Albert Greig Woodring
Well, if we wanted to reinsure big blocks of variable annuity, we can do that in a heartbeat. There's a lot of companies that would like to and have tested the waters with people who might be buyers.
But a lot of asset deals. But it really runs the gamut.
We have basically a situation where a lot of companies have decided that it's time for a strategic review because they're suffering from low grade -- low growth and/or pressure from low interest rates and they want to see where the returns can be in the future and decide what businesses to sell. So you've got some major groups that operate on a global basis that have taken a look at their whole portfolio of companies or business operations and said, we're going to sell these, we're going to rehabilitate these and we're going to keep these and split the world into 2 or 3 categories.
And so part of this is a strategic review by the industry at large that is occurring with more frequency than we've ever seen.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
And sorry, just one last follow-up, Greig. You said if you were interested in doing a variable annuity transaction, does that continue to suggest that you have no interest in doing that?
Albert Greig Woodring
We're not doing any variable -- new variable annuity business right now, although I would say that our small block that we have, the performance has been okay. We've had some rough quarters and some good quarters, but overall, we're fine, happy with the performance.
But it's so volatile that we're not anxious to load up on more. If we could find a good way to do the same thing with a lot less volatility, we would consider it.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
Do you still have an interest in doing long-term care deal?
Albert Greig Woodring
We haven't done any in-force blocks of long-term care. We've been very pleased with the development of experience under our long-term care business.
It's been nice and steady, and we've picked situations that we want to be in. We have, in our opinion, developed a very nice operation with very good group of treaties that are producing nicely for us.
And we're quite happy with it. The experience has been just fine ever since we started it, and we continue to monitor it very closely, of course, because it is something that the earlier you get information, the better served you are.
And we're taking advantage of that. But the infrastructure we've built and the people that we have involved, we think very highly of.
Results are very good. It's not a big line for us at this point, but because of the long-term nature of it, it will continue to add premiums each year.
Operator
And we will go next to Sean Dargan with Macquarie.
Sean Dargan - Macquarie Research
Coming back to Australia, I think Greig mentioned that the market was getting more competitive. Are you referring to the group reinsurance market?
Albert Greig Woodring
I am. That's a market that really took off with the launching of the superfunds, superannuation funds, which is started by life insurance and their members.
The contracts -- the purchases can be very large. Some of these groups can be talking about hundreds of millions of premium in their group schemes.
And so the reinsurance market got very large and we were one of the early ones in there. We did very well.
Others have seen how well we were doing and followed us. And as more and more direct companies started fighting over this and more and more reinsurers started fighting over it, it got more and more competitive.
And we've been seeing that for a number of years. So this isn't something that's emerging this year as new information to us or a realization that the market is competitive, we've been talking about it for a couple of years that the market is starting to get more and more competitive.
Let's back off in these situations where we think it's overblown, try to develop good working relationships with some customers who value the services we provide, and that's the pathway we've been following. And our historical group experience has been really excellent early on, is returning to sort of a, what I'd say, a more normal picture now.
But some of these groups are very large. And so when claims develop either one way or the other by a few percent more than you expect or less than you expect, some of the ramifications can be outsized because they can be amplified through the projection process.
And so you do have some big swings and while they -- many years have gone in our favor, this particular year, it's going against us.
Sean Dargan - Macquarie Research
And as it relates to group disability in Australia, the commodities boom in that country seems to be ending. Given the experience we've had in the U.S.
in economically challenging times, with the heightened claims disability -- from disability, rather, do you think there's any chance of that kind of phenomenon repeats itself in Australia?
Albert Greig Woodring
First of all, our LTD experience in the group side has been pretty good this year. We -- it depends also where these groups are, what types of groups they are.
If you're talking about the group based in Sydney or at Melbourne or one of major metropolitan areas as opposed to out west where the mining is, it might be quite different picture, too. Unemployment has actually been pretty high in Australia in some -- elevated I should say from levels of past years in those cities.
And so that's already the case. I think the concern in the industry is frankly centered more on the individual disability than on group disability, and we did have a little bit of adverse experience in the third quarter, that certainly got our antenna up because we try to be very conservative on individual disability, and we take it because it's necessary.
It's packaged with the Life Reinsurance business, life insurance business as well, and so it's difficult not to participate in, but we set our prices on the conservative end, at least that's our intention all the time, and we haven't been in that business through some of the historically bad years. So our experience has been not good, but we've been tolerant so far, so we're keeping our eyes on it.
But industrywide, I think that's more of a concern, frankly, than the group LTD at this point, although you're correct that changing economic conditions very often have an effect on that experience as it unfolds.
Operator
And we'll go next to Paul Sarran with Evercore Partners.
Paul Sarran - Evercore Partners Inc., Research Division
In the U.S. individual, can you give us a breakout of actual versus expected pricing ratios for the '98 to '04 business versus business written since '04?
Albert Greig Woodring
No, I don't think I can do that. First of all, I'm not sure if we want to give out that information.
But secondly, I don't think I could do it even if I wanted to off the top of my head here. But actually, the real -- we tend to lump '98 to '04, because '98 was sort of the year where preferred underwriting had achieved a critical mass.
Actually, it really looks more like 2000 to the first part of 2005, that is the problematic era. And that experience has been worse than all the other experience.
And we know it was a competitive part of the -- competitive times, but not only were pricing -- were prices lower for reinsurance but, in addition, mortality just isn't at the same level as other eras. And so that particular period is difficult.
As I had alluded to earlier, it's not clear that this third quarter suffered from that block being worse than -- as a matter of fact, there's some indication that it wasn't any worse than the rest of the business, this particular quarter. But that is what has dragged down our experience being less than we would have liked, more often than not, over the last couple of years.
Jack B. Lay
Paul, this is Jack. Maybe this will help a little bit in terms of -- it's not a comparison to pricing but in terms of returns on that business in that competitive era, the actual returns, low-single digits, whereas if you call that out, you look at the return on all the other eras, it's well into the double digits.
So maybe that helps in terms of interpreting how that business is performing.
Albert Greig Woodring
Yes, the business we're pricing today has a very nice return on it, and the more we go down the road and put more of that business on, the better off we are. But Jack's right, we're just sort of averaging low-single digits with mid-teens, in the era since and the era prior.
Who knows the era prior might even be higher, but there's not much left of that.
Paul Sarran - Evercore Partners Inc., Research Division
That actually does help. Do you have any sense of the taste that, that low return business is going to be running off?
Jack B. Lay
No, actually, we continue to work on modeling all of that, but it typically does -- it does have a bigger impact, given years issues, and so you get about 7, 8, 10 years depending on the business written and so forth. We should see the peak of that pretty soon if we haven't seen it already, I hope, but maybe not, maybe it's a couple of years out.
Part of the issue is we're not writing as much business today as we were back in earlier years. And so as the market starts to decline, that doesn't help water down the experience of that prior year.
We'd like to see more business coming in the door, but as you know, session rates in the U.S. continue to decline.
And so we're not getting as much relief as quickly as we would like, but it will happen.
Paul Sarran - Evercore Partners Inc., Research Division
And now Australia, have you started the process of trying to put in rate increases on the group business?
Albert Greig Woodring
Oh, we did that all that time. Yes, every time something comes to market, we take a fresh look at it.
These things are too big not to do that, and they -- and it's most often the case that they go back to market, they don't just renew with us. We try to do the best job of retaining, but it's not only up to us.
It's our clients that have to retain the risk, and so we work with them very closely. We're always reviewing the pricing, always reviewing the latest information as we continually update that portfolio.
And this reserve analysis we did is something we do regularly as well. That happens all the time but, clearly, we're trying to get out in front of a lot of the stuff on the group's side just to make sure that we're, going forward, with a clean slate.
Paul Sarran - Evercore Partners Inc., Research Division
So this year, are you tending to get the pricing you're asking for or are you finding that competitive to the point where you're having to walk away for more business? And does that give any view on how that plays onto the overall top line outlook?
Albert Greig Woodring
Yes, we've been increasingly walking away from business over the last couple of years. We've -- some of the really monster-sized groups, that have come up, we backed off of, we thought that the pricing got overheated.
We have managed to secure a treaty here and there, but for the most part, we're trying to just sort of stand pat where we like the business, we'd like to stay in it longer term, and that we think we have a lot to offer. But it is very a difficult time right now in terms of the competitive dynamics.
Paul Sarran - Evercore Partners Inc., Research Division
Okay, and then I guess overall the global outlook on the acquisition front. You said there's a lot of deals out there and a lot of activity.
When you look at what's out there, is there much in the types of businesses you'd like to be involved in that would be big enough to allow you to use up your whole $600 million of excess capital?
Albert Greig Woodring
There are a couple of situations that we are looking at, that would be of that size. Not all are -- what businesses would we like to look at?
Well, we can play a role in a lot of different things. We are not particularly looking for asset business at the moment because of the Hancock transaction, we want to get that bedded down and digested a bit before we launch into another one.
But there's quite a few of those sorts of situations around. Of course, what we'd like best and what we have the deepest knowledge of is mortality, just pure mortality risk.
There's some of that and there's some of that embedded in deals where we can partner. And so there's a lot of different ways we can play this, but we are currently pushing on a lot of different efforts.
Paul Sarran - Evercore Partners Inc., Research Division
Okay. And then lastly, you commented on a couple of other products but specifically, your appetite for universal life and after you've kind of settled into the Hancock treaty, any appetite for further fixed annuity business?
Jack B. Lay
Yes, I mean, we like the fixed annuity business. We've had nice stable returns, and as a reinsurer, we can pretty well lock that down.
We don't necessarily have to keep the business open for new activity, so if you've got a transaction like Hancock, where if you know the assets and you match them with the liabilities and model it very carefully, you can pretty much let it run off and generate very predictable returns, and that's a nice situation for us. We don't have new clothes coming in, it's just a one-shot, just match up the assets to what you need and then manage it and adjust as things go along.
In terms of UL, that's another product that a lot of companies would like to lessen their involvement in the UL secondary guarantees or level premium guarantees. We have not had a real appetite to coinsure most of those businesses.
And with the interest rates where they are, it's become a difficult -- a more difficult situation on top of that. So that is one place where there's more demand than supply.
Operator
And we'll go next to Ryan Krueger with Dowling & Partners.
Ryan Krueger - Dowling & Partners Securities, LLC
Greig, we've talked a lot about the group business in Australia, but I just wanted to get a sense, given some of the experience you've had there, is the group business still a business that you have painted appetite for on a global basis? Because it is a relatively less aligned with, that you guys have less experience in than individual, so I just want to get a sense for if this is still a market that you'd like to get bigger in overall as a company?
Albert Greig Woodring
Yes, we have a large operation in Australia on the group side. It's quite large, it's over $300 million of premium, and we have about the same size operation in Minneapolis, with a lot of expertise and experience that runs deep and long.
That was the acquisition we made, so it wasn't something that is historically part of our experience. But certainly, now that we have them onboard, we have a lot of experience, and we view the group business as very attractive business.
It's more volatile than individual life because of the short-term nature of it. The pricing, there's not a lot -- not nearly as much capital involved as in the long-term guarantees and so the pricing tends to be thinner and the volatility tends to be greater.
But the best risk management tool in the world is being able to get off treaties and reprice treaties, and so we view that as a very good business. We have a lot of capabilities within pockets of the organization, and I wouldn't go so far as to say we are good group reinsurers around the world yet, but we have operations that are growing and leveraging the experience and skills that we have resident in Australia and in Minneapolis.
And I think we're quite deep there, especially in Minneapolis, very good skill.
Ryan Krueger - Dowling & Partners Securities, LLC
And then just thinking about the growth rate in Asia-Pacific, given that group is the bigger business for you there and you don't expect much growth, how should we think about the growth rate going forward in that geography?
Albert Greig Woodring
In Asia, growth rates in Asia should be very good, x Australia, and as I said, growth is not a focus for us in Australia. It's a big operation for us and right now, our focus is elsewhere, for the next period of time, building infrastructure, getting a better understanding and trying to take remedial actions for things we can do to affect some of this volatility we've seen.
But the rest of Asia is a growth area in insurance, and while those markets, at this point, are small for us, they're growing rapidly and they are becoming meaningful each quarter more so, and we expect good growth to continue throughout the Asian area.
Ryan Krueger - Dowling & Partners Securities, LLC
I think in the past you've thought you could get maybe back up to high-single digits, to maybe low double digits. Given how big Australia is, do you have any updated sense on an overall basis what that might look like?
Albert Greig Woodring
We're trying to -- we're putting together sort of next year's plan now, so I don't really have a roll up to see what things look like next year or in the immediate future. But I would see no reason why, x Australia, we wouldn't be growing easily in double digits, the territory.
And even if Australia stays flat, I would expect then that the overall Asia business will be in pretty good shape. Now as we've said a couple of times in the past quarters, we have had to refill pipelines in both Korea and Japan, and a lot of that work is behind us.
And -- that has tended to slow the top line down a little bit. That's just the natural evolution of some of the transactions that had a limited lifespan or other situations that were peculiar.
But Southeast Asia for us in particular is one of our strongest areas in the company. We're doing a very good work there and we've got a good team on site at Hong Kong that services that area.
And then Korea and Japan are fairly large places for us. Operator, we may just have time for perhaps one more question.
Operator
We'll go next to Sarah DeWitt with Barclays.
Sarah DeWitt - Barclays Capital, Research Division
I was wondering if you could help us in terms of how we should be thinking about what the potential worst-case scenario for losses could be if you have -- if elevated claims activity continues in individual disability in Australia and then if you need further reserve strengthening in the group business in Australia?
Albert Greig Woodring
Sorry, hard to say what the worst case is. First of all, we don't have a real big block of individual disability.
It's a small-ish block, and we -- can see volatility. We can certainly see bad results there and reserve increases there.
And part of the reserve increase in disability we set up last year, and was for individual as well, just because the industry has experienced elevated levels, and we were anticipating some of that happening. But we don't really think that that's going to be devastating in terms of size.
The group business is quite large and that experience is volatile, and you can go through periods where disability is -- LTD is a bad risk and in other periods it's extremely good risk. We don't have any reason to believe that there's going to be a worst-case scenario or anything like that looming in the horizon in Australia.
We believe that we're getting the situation -- getting more visibility in the situation everyday and certainly working hard at that, putting a lot of resources on it from certainly the Australian team but others around the enterprise, spending a lot of time making sure that we're doing everything we can, and we're really expecting that the slate is clean as of this moment.
Sarah DeWitt - Barclays Capital, Research Division
Okay, so there's no way to think about quantifying the worst-case of...
Jack B. Lay
No, no, I mean, one thing we can say is we have over $300 million of group business. We have $300 million of IBNR, something like that.
You can do what you want with those numbers, a 12% increase, which is what we had this time in the IBNR reserve is a pretty extreme one. We have seen reserve in decreases of that magnitude in past years, but that's about -- that might be the biggest we've seen on the group side, and I don't expect that you're going to see a continuation of that on a recurring basis.
This is something we don't expect to recur but it is a volatile business.
Operator
And we do have one question left in queue. We'll go next to John Nadel with Sterne Agee.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
Greig, I was going back through my notes, and I just wanted to clarify on the U.S. Traditional mortality block, which specific years, when you think about the cohort of business, that you would describe as maybe more competitively priced and lower return.
Because I go back to my notes and I sort of thought that, that was a late 1990s through maybe very early 2000s. I thought you mentioned in response to a question earlier that, that might have extended out to sort of the mid-2000s.
I also thought that the peak contribution to the overall results from that business was expected to have peaked really last year, but now it sounds like it might be couple more years out? So I just wanted to square that.
Albert Greig Woodring
John, first of all, I think that, I think we would identify the problematic years as more like 2000 to the first part of 2005. There's sort of a gray beginning to that period.
It's a little clearer on the endpoint as we, in particular, I think, were early in the industry, probably the first in the industry to start putting through increases on overaged premiums and that helped the situation. But returns got a lot better after that, where the period of sort of lax underwriting industrywide, and certainly, this is not something that happened everywhere.
But it happened in enough pockets that it's noticeable in our books from -- enough companies that it's noticeable in our books, is centered in the early part of, early part of the 2000s, up to 2004 probably. And yes, I think you're right, I think we have been extending a little bit our thinking on when this is going to start getting better because, like I said, we're not writing as much business as maybe 3 or 4 years we thought we might at this point.
Session rates are continuing to fall down, and so the impact of that older business is still a little bit stronger than we had thought, and we're continuing to do a lot of research and effort to get our hands around how that experience should unfold. But our thoughts are evolving a little bit, and it's extending out a little bit longer than we thought.
But as I said, this experience this quarter, while disappointing, is not that far off of expected. It's on a block where you're expecting claims to be $230 million, $240 million a month in the U.S.
and you get an extra $12 million a quarter, that's not nearly a standard deviation.
John M. Nadel - Sterne Agee & Leach Inc., Research Division
That's very helpful. Do you have a statistic on what percentage of the total U.S.
mortality premiums that, that cohort of business represents today?
Jack B. Lay
John, this is Jack. I'd say it's roughly 35% or so.
Operator
And at this time, there are no further questions in queue. I'd like to turn it back over to our speakers for any additional and closing remarks.
Albert Greig Woodring
Okay. Thanks, again for everybody who joined us this morning.
If then any other questions come up, why don't you give us a call directly, and we will certainly try to do our best to respond to any of those questions. And with that, we'll end the Third Quarter Conference Call.
Thanks again.
Operator
And this does conclude today's conference. We thank you for your participation.