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Reinsurance Group of America Inc. (NYSE:RGA)

Q1 2014 Earnings Conference Call

April 25, 2014 9:00 AM ET

Executives

Jack Lay – Senior EVP and CFO

Greig Woodring – President and CEO

Analysts

Nigel Dally – Morgan Stanley

Jimmy Bhullar – JP Morgan

Erik Bass – Citi

Sarah DeWitt – Barclays

Sean Dargan – Macquarie

Mark Finkelstein – Evercore

Tom Gallagher – Credit Suisse

Humphrey Lee – UBS

John Nadel – Sterne Agee

Steven Schwartz – Raymond James

Ryan Krueger – KBW

Operator

Good day, and welcome to the Reinsurance Group of America First Quarter 2014 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 Lay

Okay. Thank you. Good morning, to everyone and welcome to RGA’s first quarter 2014 conference call. Joining me this morning is Greig Woodring, our CEO. We’ll discuss the first quarter results after a quick reminder of our forward-looking information and non-GAAP financial measures. Following our 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 the call that will contain forward-looking information, including, among other things, investment performance, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries. 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 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 businesses segments. These documents and additional information may be found on our Investor Relations website at rgare.com.

We’ve aligned certain business operations and management responsibilities to better fit within our geographic-based segments, two of which have also been renamed. All comparable prior period results have been adjusted to conform with the new reporting ornament [ph].

With that, I’ll turn the call over to Greig for his comments.

Greig Woodring

Thank you, Jack, and good morning, everyone, and thanks for joining us this morning. I will provide some general comments on the quarter and some industry dynamics. Then Jack will go over the financials and finally we’ll open it up for Q&A.

This quarter was a bit below our expectations. We experienced adverse mortality results in our North American operations. It’s common for our business to have volatility in claims in the short-term but the magnitude of the effect on this quarter was on a high end of historical and expected ranges.

Our first quarter often has some seasonal effect too and we generally have had higher mortality claims that indicate some relationship to the winter months in the northern hemisphere.

We will have some additional comments on the claim shortly, but otherwise, the results reflected premium growth that was on the high end of our expectations in the US, continued momentum from global financial solutions and strong overall results in the Asia-Pacific operations.

The results in Europe were somewhat weak overall with slightly adverse mortality results in the UK offsetting strength in continental Europe and in South Africa. Benefited from a lower than expected effective tax rate and lower corporate expenses, while currency fluctuations have fairly material negative effect to both top line and the bottom line.

So Australian operation had another quarter with bottom line and reserve development [ph] were more or less in line with assumptions we made out of the second quarter of last year.

Moving back to the mortality result for a second, I’d like to provide some initial thoughts based upon our analysis today. Underwriting experience was about $30 million worse than expected in the US, about $15 million worse than expected in Canada.

Canada’s severity was the main issue. There’s a relatively small number of large claims accounted for in short term. In the US, frequency of claims increased in the first quarter. Severity was the bigger issue with a number of large claims – large claims being defined as $1 million and over – coming in at about 125 claims versus an average of 90, these larger claims were concentrated in our facultative book.

There was a particular elements [ph] from older issue age [ph] policies and long duration policies. These policies were old seasoned but came from various different periods from our history.

Our facultative policies are individually underwritten and tend to be larger in size, hence providing more volatile results. But this has always been an important part of our business and our results overtime from the facultative focus have been excellent. We’re not concerned with the performance this quarter, and historically our mortality fluctuations move out nicely over time.

That identified any other issues in terms of concentration by client, cause of death or otherwise. I mean, we did not see this quarter as negative brand [ph] in the beginning or of a systematic problem.

Given the severe winter that we had this year, we suspect it was an unusually prominent seasonal effect, but this is always difficult [indiscernible] cause and effect. We believe that there will be some natural recovery or reversal in future quarters.

While short-term claims volatility could be frustrating at times, remember, this is an integral part of our business and in fact, an important part of the value preposition we provide to our clients.

We’re quite comfortable accepting short-term volatility risks while considering the longer term nature of our business, we remain confident in the long-term performance [indiscernible].

In terms of industry dynamics, we see no significant major changes in the environment in the various regions in which we operate, noting that the US life business remains somewhat competitive. We continue to find ways to be helpful to clients and our premium have been tracking and been ahead of expectations.

Annual Society of Actuaries survey for North America showed that life reinsurance premiums were basically flat in 2013 after multiple years of decline. And we note this is a positive environmental factor.

As I mentioned, premium growth in the US traditional segment was above expectations, benefitted from better persistency in the underlying policies of somewhat recent trend that we hope is one that continues.

In terms of M&A, we have continued to be actively evaluating opportunities, but we don’t have anything material to announce this quarter. On the other hand, we’re not spending out our capital and we’re fairly aggressive in share buybacks during the first quarter.

With that, I’ll turn back over to Jack to discuss financial segment. Jack?

Jack Lay

Okay, thanks. We reported operating income of $115 million this quarter or $1.61 per diluted share, that’s down from $123 million or $1.65 per share a year ago primarily reflecting the items that Greig just described.

As we indicated, a relatively stronger US dollar affected our results to some extent as we gave up about $0.06 per share in operating earnings when compared to last year’s first quarter because of debt foreign currency translation difference.

Net premium growth was solid and increased 6% for the quarter in translated US dollars and 9% in original currencies. Book value per share excluding AOCI increased to $71.51. Our average investment portfolio yield was about 4.7% this period which reflects a decrease of about 9 basis points quarter over quarter.

Our new money rate was just below 4% this quarter and a bit below that we reflected in the fourth quarter as investment yields retracted a little bit during the first quarter of this year.

We continue to successfully execute our capital management strategy and bought back 1.45 million shares for about $113 million during the quarter. We estimated our current excess capital position to be at roughly $550 million and we continue to evaluate the most efficient uses for capital.

Turning now to our segment results, the US and Latin America traditional subsegment reported pre-tax operating income of $48 million compared to $72 million last year reflecting the adverse mortality upon which Greig commented earlier.

Premium growth was strong, increasing 8% quarter-over-quarter, a little better than we expected. And we also had a little bit better expected result in our individual health and mortality lines.

Our asset-intensive business in the US reported pre-tax operating income of $41 million primarily reflecting favorable spread performance in the fixed annuity reinsurance. Our financial reinsurance line showed continued fee income growth and added about $12 million to our pre-tax operating income this quarter.

Canada also experienced adverse mortality as was mentioned earlier and posted pre-tax operating income of $22 million. Similar to the US, the adverse experience was driven primarily by large claim volatility.

The relatively stronger US dollar versus the Canadian dollar reduced top and bottom line results to some extent. Translated premiums fell 5% quarter-over-quarter to $231 million including $22 million of foreign currency headwind. Local currency premiums increased 4% over the last year which was a difficult comparison considering a favorable accrual adjustment in last year’s creditor business premium.

In our Europe, Middle East and Africa segment, pre-tax operating income of $14 million was stronger than last year’s fourth quarter. But both periods fell short of our expectations due to adverse claims experienced in the UK as mortality claims were higher than we expected.

Segment wide, our net claims experience was about $12 million pre-tax worse than we would have expected. We had favorable experience in France and South Africa which was offset in part the shortfall.

Operator

Please standby. You’re live with your listening audience.

Jack Lay

Okay, this is Jack Lay again. My apologies. So we currently were disconnected. I’m going to pick up with my comments. I was starting to comment on Europe, Middle East and Africa segment.

Pre-tax operating income of $14 million was stronger than last year’s first quarter but both periods fell short of our expectations due to the adverse claims experience in the UK as mortality claims were higher than we expected.

Segment wide, our claims experience was about $12 million pre-tax worse than expected. We had favorable experience in France and South Africa which was offset in part by this experience in the UK.

EMEA premium growth was strong with premiums increasing 16% quarter-over-quarter. And original currencies premiums were up 13%. Asia-Pacific had another good quarter with pre-tax operating income of $25 million. Nearly every market in the segment performed better than expected, led by strong performances in our India and Japan businesses.

Segment wide, net premiums totaled $382 million, up 9% present in original currencies.

Our corporate segment reported pre-tax operating income of $3 million, this period a notable improvement versus last year in the fourth quarter as there were various moving parts with the most prominent being lower corporate expenses due to accrual adjustments related to the refinement of our annual incentive compensation since it is paid out in the first quarter for the prior year.

Our effective tax rate of 30.7% was below our expected rate of 34% to 35%. I would suggest that that rate is continually affected by the cash flows underlying some of our international treaties. So it’s always a little difficult for us to project that the effective tax rate on a quarterly basis. It’s little earlier task to reflect what we expect on annual basis. And I would say at this point, probably for the entire year of 2014, roughly a 34% effective tax rate would be our best estimate.

Overall then, adverse short-term mortality volatility, investment yields and not foreign currency fluctuations went against this quarter, but we were pleased with continued strong performance in many markets.

We’re not concerned with the periods of mortality experience and expect the volatility to level out over time. We’re also pleased to report the ongoing successful execution of our capital management strategies and we continue to simultaneously evaluate global block [ph] acquisitions and return of capital opportunities.

As a reminder, we’re hosting an investor day conference in New York on May 20th. We hope to see many of you there. We thank you for your time this morning, and appreciate your support. And with that, we’ll open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll take our first question from Nigel Dally with Morgan Stanley.

Nigel Dally – Morgan Stanley

Right, thank you, good morning. So we see adverse mortality and consider this to be worst conditions, were the claims perhaps focused more in the north east whether it’s more [indiscernible] than another location or did you see any patterns [indiscernible] mentality?

Operator

(Operator instructions) Mr. Dally, you may continue with your question.

Nigel Dally – Morgan Stanley

Right, thanks. Just on the adverse mentality and the linkages to this with the weather, were they claims focused in the north east or some of the other areas that had this [indiscernible] weather or any patterns with regards to the cause of mortality and perhaps being linked to weather-related factor that’s influenced it. Any color there would be helpful.

Greig Woodring

Yes, Nigel, I actually don’t know the answer to that. I don’t know that we really study that. In fact, the seasonality of claims is not usually more pronounced in the cold areas. It’s actually more pronounced in, say, the southern states of the US which have warm summers and cold winters. But I don’t actually know this quarter where they came from.

And like I said, it’s really difficult to connect the dots with any confidence that the cold winter caused it. When you’re dealing with an extra 35 deaths of large cases that that could happen any quarter I suppose. Which just often does happen in these quarter, and nothing we’ve overly concerned about because when you look over a reasonably short period of time, all those things smooth out and we’ll be back on expected overall.

Jack Lay

Yeah, Nigel, this is Jack. Maybe I just could just add that if we get the claims in, it’s not always clear where the individual was residing at the time of their death. So it’s a little difficult as Greig was sentimenting [ph] to kind of confine it to various regions. I’d also point out that really, it wasn’t just the northeast region. It was entire US for the most part that had a very difficult winter.

So I think it’s likely not going to be if we did – to the extent do get better information, it’s not likely going to be a regional issue, but certainly from the standpoint of the northern hemisphere being – going through to a fairly cold winter that we suspect that we did have some – that that did have some implication on our claims.

Nigel Dally – Morgan Stanley

Okay, thanks. And then the second question with regard to your capital management strategy, clearly I could have been buying back stock, but your leverage ratios or amongst the highest in the industry. [Indiscernible] debt reductions and [indiscernible] to you priorities as well.

Jack Lay

Yeah. This is Jack. I’ll take that. Our leverage, we don’t view it as particularly high. But we also, in term of our ratings, don’t think we have a whole lot of leverage ability right now.

And when you take a look at our leverage ratio, some of that is hybrid securities which have a more benign treatment from the rating agencies than some of the just pure senior debts.

So we don’t feel over levered, but we don’t have a whole lot of leverage ability at this point. And in fact, if we were to go out and try and finance a large acquisition that needed financing above and beyond our current return on capital, likely, we would want to look at a security that did have some equity treatment like a hybrid [ph].

Nigel Dally – Morgan Stanley

Great. Thanks a lot.

Operator

And we’ll take our next question from Jimmy Bhullar with JP Morgan.

Jimmy Bhullar – JP Morgan

Hi, good morning. First on just the mortality, just following up on the previous question, was there anything related to an interest of percentages [ph] or was it spread across? Like, I just want to get a feel for better than this – the business had experienced poor results was related to what you sold in the late-90s or early 2000s. And then how much of this do you expect to continue or have you seen it continue into this month?

And then secondly on buybacks, do you expect to remain active throughout the year or given what’ you’ve done already in the first quarter, are you going to wait and see what’s the – other opportunities are before pursuing buybacks?

And then finally, on the 34% tax rate, does that – I’m assuming that you’re implying that that’s where the renewal of the active premium finance legislation. So if that isn’t renewed, how much would the impact would be on the tax rate then.

Greig Woodring

Okay, Jimmy. Let me talk about the mortality. The mortality was spread overall the areas. As I said, it tended to be a little more facultative business than automatic business. A lot of it was some very profitable areas that sort of go back into the mid-90s and earlier.

So I don’t think we draw any conclusions about where this was coming from policies had been enforced generally speaking an average of a long time. So, pretty good on that front. So we don’t really draw any conclusions from that from what we’ve seen.

Jack Lay

Yeah, Jimmy, on the buybacks, I’m sure you’re aware we’ve got an authorization for about $300 million for the year. So that’s likely the maximum amount we would want to buyback during the year. And certainly going forward, we’re always influenced by the extent to which we think we have other opportunities, for instance investing in merger and acquisition support and that sort of thing.

So we had a fairly robust buyback in the first quarter. We will pick our spots going forward and we’ll be influenced by how much redundant capital that we’re generating and the extent at which we expect to have other opportunities for deployment.

Jimmy Bhullar – JP Morgan

Just on that, is it fair to assume that you would intend to complete the authorization this year or not necessarily?

Greig Woodring

I wouldn’t put too fine a point on that. In other words, the goal is not necessarily to complete the whole 300. The goal is more to make sure that we don’t continue to build up a lot of redundant capital.

And so 300 is not a bad estimate. But I’ll let you, the goal, we won’t be disappointed if we don’t buyback all 300. On the other hand, if don’t deploy into other opportunities, it’s likely we will take advantage of much – perhaps all of that authorization.

In terms of your question on the tax rate, yeah, the active financing exception has not been extended. It’s being discussed currently. I think based upon the input that we get – we kind of expect it to be extended this year. So my comment on extended tax rate does reflect an expectation that there will an extension there.

For the first quarter, it didn’t have a dramatic effect on us. Certainly, it hadn’t been extended. So we couldn’t reflect our tax provision. And that’s actually drove off our tax provision by a little less than 1% in terms of the effective tax rate. Now that was overtaken by other issues that drove the effective tax rate back down. But that’s the size, that was the amount of the additional provision we had to provide.

Jimmy Bhullar – JP Morgan

Okay, then finally, I recognize it’s early but have you seen the elevated claims continuing to April as well or not?

Jack Lay

Yeah, the trend of spend each month has been a little bit better than the preceding month this year, but first that doesn’t form any pattern that you can rely on. Things bounce around and so forth. April is okay so far.

Jimmy Bhullar – JP Morgan

Okay, thank you.

Operator

And we’ll take our next question from Erik Bass with Citi.

Erik Bass – Citi

Hi, thank you. You talked on the call in the last quarter about seeing increased competition in the US and Canada, and can you just provide us some more detail on what is driving this? Whether it’s just a function of the market shrinking over the past few years or is it more aggressive competition from some of the newer players?

And in terms of the impact in RGA, are you seeing that in terms of lower close rates or is there pressure on your business margins?

Jack Lay

We’re sticking with our margins. We don’t see any reduction in margins. This increased environment mainly due to the fact that the US – in US, it may be due to the fact that the overall market size is shrinking a bit, and people are competing harder over what’s left in a smaller pond.

We’ve seen our market share fall over the last couple of years. And we’re okay with that. We’re not concerned about that at the moment. The fact is that this environment is a little bit more competitive, but we wouldn’t carry that too far. It’s not by any means the worse market you’ve seen or anything like that.

In Canada, the situation is a little different and that there’s a couple of new entrance center that are occasionally taking some business, making it a little bit more competitive [indiscernible]. But again, it’s still a very attractive market in Canada.

Erik Bass – Citi

Okay. And premiums in US and Latin America were up about 8% this quarter. And in general, your comments I think on new business I think are relatively positive. So can you just talk about where you are seeing growth opportunities in the US particularly in light of the competitive dynamics?

Jack Lay

We’ve done a few small in-force blocks. We’ve seen pretty steady growth in our group business and in our long-term care business. And both of them had excellent results in the first quarter.

Effective, that persistency that I mentioned in my earlier comments I think is also a little bit different. Now we’re seeing that for nine months or so where persistency has just gotten a little bit better industry-wide which with our cross-section, it helps us considerably. And so that’s been a nice feature and we’re happy to see that.

All those things combined can make it a reasonably strong by our estimation premium growth quarter for the US.

Erik Bass – Citi

Okay, thank you.

Operator

We’re going next to Sarah DeWitt with Barclays.

Sarah DeWitt – Barclays

Hi, good morning. Just following up on the competitive landscape, are you seeing any increased competition from European reinsurers because historically is PNC reinsurance prices have softened. They kind of tend to be a bit more competitive in life reinsurance. Are you seeing that dynamic at all?

Jack Lay

Most of our competition is European based. So yes, I guess we’re seeing competition has increased a little bit over the last little while. It’s basically from the same group of people that have been here for four years.

But having said that, there isn’t a sharp uptick. Don’t get that impression. This is just a slow, gradual build up over the last couple of years I suppose. Nobody is changing character in rapid fashion or exhibiting characteristics that are different from one quarter to the next in a big way. It’s just a slow build up over time.

Sarah DeWitt – Barclays

Okay, great. And then do you expect any – are there implications of Walton Rasing [ph] acquired by Canadian Pension Plan for your business whether that’s increased competition on block deals or even existing business?

Jack Lay

Well, I suppose that could happen in a specific situation. Walton [ph] is a good company. And I think they are – and that we’re pleased with where they’ve ended up in this funding round. And so it could happen, but I’m not expecting that we’re going to see that it as a major at all in the next little while.

Sarah DeWitt – Barclays

Okay, great, thank you.

Operator

We’re going to take our next question from Sean Dargan with Macquarie.

Sean Dargan – Macquarie

Thank you and good morning. As we think about demand for life reinsurance over the next few years, with principal base reserving being implemented and then in the [indiscernible] will a change be reserving requirements for triple X sort of companies have the whole blast redundant resources, is that going to be a factor? Does that factor into the reasons why primary care is pilot for new entrants?

Jack Lay

I don’t really expect it to have a big impact. In fact, most direct carriers reinsurers are triple X business, not on a coinsurance basis. In other words, they don’t transfer that redundant reserve to the reinsurers. They keep that redundant reserve and have used capitals and other things to help finance that in policy [ph]. Works out to be a little bit cheaper for them to do it that way.

But I don’t really expect that to have a big impact on the overall size of the marketplace. You could have a little bit and there could be some business that is lost to the principals base reserve.

Sean Dargan – Macquarie

But if there’s a movement to I guess restrict new capitals and the primary carriers do not capitals to the extent they have in recent years, would that benefit your business?

Jack Lay

Well, again, it depend on what the reserve level that they have to hold to keep this trade off to eliminate the redundancy of the reserve and that’s the piece that makes everybody accept the provision of capitals in that use, then yes, it doesn’t change anything.

Sean Dargan – Macquarie

Okay, thanks. And just modeling question. I think you said that Asia-Pacific was more or less normalized this quarter and I think some countries are moved around between segments. What should we think of those as perhaps from run rate in the Asia-Pacific segment?

Jack Lay

The Asia-Pacific had another very good quarter. They’ve had a growth store rate [ph] for the last couple of years. It’s been a little bit nasty because we have Australia reported in that segment for a while, part of that period.

And if we take Australia out, we can see a nice results coming out of Asia-Pacific. And in fact, good results across the board there. So we expect, this is a little bit better than we expected in the first quarter, but we do expect to have pretty good results in Asia-Pacific this year.

Sean Dargan – Macquarie

Okay, thank you.

Operator

We’re going next to Mark Finkelstein with Evercore.

Mark Finkelstein – Evercore

Good morning. Greig, you talked about persistency as being one of the kind of drivers of better growth in the US, and I have a second question on that. But how are you looking at this improved persistency? On the one hand, you’ve got warranty which applied benefits and the other coinsurance lots [ph] supportive products like – do we look at this improving persistency as a net positive for margin or how are you thinking about that?

Greig Woodring

Oh yes, it’s absolutely a net positive for margins. Not only do you collect more premiums over time, but the more persistent the better the mortality in a block of business. And conversely, this is really – most of our business is warranty. There’s some coinsurance, but it’s dominantly warranty. And so good persistence for you is a good thing.

Mark Finkelstein – Evercore

Okay. And then I guess just on the grid, I guess I’m still struggling a little bit with just the size of the growth. I get on the LTC [ph] newer area you’re going at reasonably rapidly, group business sales I understand. But I mean it’s still a life-dominated block. And when you think about the growth rates and you think about persistency not being a seismic change I assume, but rather a kind of a steadier improvement, I guess I’m still struggling with why the growth was so strong and what is kind of a structurally declining at least for a new business reinsurance market.

Greig Woodring

Well, I would say that in any given quarter, there’s always a bit of noise due to policies reinstated, reporting that sometimes gets caught out where we don’t get a report in one month, we’ll get two in the next month and we’re estimating the first one of those. And so there’s always a little bit of noise in there. So it’s hard to pick anything much on one quarter.

But [indiscernible] with the level of premium growth in the quarter and that we noticed a few effects that [indiscernible] some of the [indiscernible] what we hope are sustainable [indiscernible].

Mark Finkelstein – Evercore

Okay. And then just one more quick one, Jack. Could you explain capital is over $500 million, last quarter you kind of gave a framework for how much over, I think it was 600, any sense on this quarter how much over the 500?

Jack Lay

Yes, I think that [indiscernible] $550 million over right now. That is $550 million of redundant capital.

Mark Finkelstein – Evercore

Okay, thank you.

Operator

We’ll take our next question from Tom Gallagher with Credit Suisse.

Tom Gallagher – Credit Suisse

Good morning. Just a question on the large claim issue in the US. Over $1 million has been the primary cause of the weaker results this quarter. I get the frequency seasonality, but not exactly sure what’s happening on this larger claims issue because we’ve heard the same issue pop up for a few other companies over the last year or two. And just curious if that’s something you spend any time focused on analyzing in terms of what’s driving that.

Greig Woodring

Oh yes, we do, Tom. But really, the answer is that we do get spikes like that and then we get also periods where it’s a lot less. It’s pretty predictable. If you look at say any 24-month period, large claims are pretty, pretty much right on track. So if they die in the winter, they don’t die again. They don’t die in the summer time.

Yes, I mean when it comes to the sustained elevated large claim pattern, we can get it for three quarters in a year and that’s above average. That can usually happen. But we don’t really see any two to three-year runs of large claims over expected.

Tom Gallagher – Credit Suisse

So there’s – I guess where I was going with that is if you look at over a multiyear period, it’s actually not that larger claims are becoming a larger portion of the overall pool if you will, it’s that you’re just seeing greater standard deviation of those or –

Greig Woodring

Yes, our mortality results in the US have been very good for the last two years. And the driver or good or bad in a given period of time is always large claims. It’s not really frequency that’s quite predictable with the large – the millions of policies we have in quarters.

But when you’re talking about the difference that the [indiscernible] extra claims to make, well, that’s a pretty small number. And you can’t predict that from quarter to quarter.

Tom Gallagher – Credit Suisse

Understood. So you don’t see this as being a solely issue that’s sort of now coming more into fruition or anything like that?

Greig Woodring

No, we really don’t. That sort of average amount of large claims in the US, 90 will tend to rise over time as you get more and more big policies issue. So that’s the driver of it is not – and as long as large policies start to reach people age 80, age – even age 90, they will die eventually and they will become claims and that’s what we’re in the business for.

Tom Gallagher – Credit Suisse

Okay. And then just a question as well if you can comment on what are you seeing from the primaries in terms of retention and pricing, and I know you said the market’s been somewhat competitive. But how about from the primary side, are companies generally seeding more, retaining more? What’s been happening on that end?

Greig Woodring

Well, as I mentioned earlier, the overall marketplace that was about level in 2013 over 2012, it was very close to the prior year. So companies are new to retaining much more or for reinsuring much more. It’s pretty steady.

We don’t see – the competition in the marketplace is not so strong that companies feel that they should reinsure lots of business because the reinsurers are taking business at a loss. There’s not a movement to reinsure vast quantities into a marketplace. It’s too hot. So it’s a fairly normal but still a little bit elevated temperature competitive environment. I think that would be how the primary has mostly been.

Tom Gallagher – Credit Suisse

Okay, thanks.

Operator

We’ll take our next question from Humphrey Lee with UBS.

Humphrey Lee – UBS

Good morning. Thanks for the bit of coverage on the US mortality. I was just wondering, you talked about a little bit more on the Canadian, the [indiscernible] mortality for the quarter.

Greig Woodring

On the Canadian side, again, they have elevated mortality due to a few large claims. The Canadian business has had a wonderful experience for a long stretch of time. We really haven’t had too many wobbles in the Canadian experience but this quarter was one of them and they do have a lot of large cases enforced as well just like the US market that in many ways is similar to the US. It has its differences but in many ways it’s very similar to the US and smaller. But you can get quarters like this and we just had a result that reflected a pretty bad experience in the book this quarter.

Humphrey Lee – UBS

Okay. And [indiscernible] concentrated in [indiscernible] advantages or how do those claims spread on a [indiscernible]?

Greig Woodring

Yeah, I don’t think that numbers we’re talking about are big enough to really draw any conclusions at all, Humphrey. I think that that in Canada that the business is pretty well spread out over the marketplace. We have a big block of business but these extra claims, these extra large claims were coming from – were not enough to draw any conclusions from where they’re coming from or how they’re coming at this stage.

Humphrey Lee – UBS

Okay. Shifting to asset in [indiscernible]. So I think you mentioned in the past kind of run rate would be somewhere between $35 million to $40 million in the quarter. And then, first quarter equity market was not as positive and the sort of the decline. I was a little bit surprised by the [indiscernible] performance [indiscernible] suggested run rate. Is there any color for this kind of strong results for the quarter and what’s bond prepayment income [indiscernible]?

Jack Lay

Yeah, Humphrey, I’ll – you cut off a little bit, so I’m not sure I got the whole question there. But I think you were referencing the run rate on asset intensive [ph] what can we expect. Our best estimate right now would be a run rate of about 150 million for the entire year. So a little bit stronger performance than we would have expected in 1Q, but if we had to peg it right now, that’s the best estimate I could give you.

Humphrey Lee – UBS

I guess, the second part was bond prepayment income a benefit for this quarter?

Greig Woodring

Yeah, but why we got that performance, Humphrey?

Humphrey Lee – UBS

No, no, no, I mean, did you get any like a bond prepayment in the quarter?

[Line disconnected]

Operator

Please stand by. Caller, you may continue with your question.

Jack Lay

Yeah, this is Jack. Let me apologize. I’m not sure why we continually get disconnected here. I know it’s very frustrating for everybody on the call, but hopefully we’ll get it resolved before the next quarter’s call.

Humphrey Lee – UBS

Yeah, I think, the second part of my question was bond prepayment up in the [ph] fourth quarter.

Jack Lay

Humphrey, could you repeat that. The connection isn’t real good here.

Humphrey Lee – UBS

Okay. Did you get any bond prepayment in the quarter?

Jack Lay

Oh, yeah, we got some but not above and beyond what we would expect, so I’d say in terms of that variability on investment income, it was pretty much as predicted.

Humphrey Lee – UBS

Okay. If I can sneak in one more. So for Australia, in the press release you mentioned that it was in line with your expectations. So was it like least [ph] profitable in the quarter?

Jack Lay

Yes, it was. We were in several million dollars there, which is about what we expected. So it wasn’t dramatic but it was pretty much on the run rate that we expected.

Humphrey Lee – UBS

Okay, got it. Thanks.

Operator

We’ll take our next question from John Nadel with Sterne Agee.

John Nadel – Sterne Agee

Good morning. A couple of quick questions. Greig, I’m just wondering how you’re thinking about acquisition opportunities at this point relative, for instance, to let’s say a year or two or even three ago. My sense is that the competition out there for potential deals is significantly heated up relative to where it’s been and in particular, I guess, the sort of new entrant if you can sort of isolate on one is, of course, resolution which has made it very clear that they have huge interest in acquiring existing blocks of business. So I’m just wondering, if you had to think about – you had to sort of peg probability of getting a transaction done today versus even a couple of years ago, I’m assuming that probability is lower. Maybe you can comment?

Greig Woodring

Yeah, yes, John, I think that’s a fair observation that if you’re looking at the large headline-type acquisition, the number of people that are interested in that marketplace is increasing a bit. We actually expect that there’s going to be more opportunities on the smaller end that we’ll be tackling. Some of them may not even rise to things we’ll announce because they’re not that big. Others might be things that we notice we use a chunk of capital. It’s noticeable for us but falls well below the radar screen of other places.

John Nadel – Sterne Agee

Okay.

Greig Woodring

And we continue to expect and see the beginnings of a lot of the companies in Europe beginning to address their changing strategy with respect to mix of business after Solvency II becomes effective. And many of those companies we expect will be looking to sell pieces of their business or blocks of their business and those may be small enough that they don’t attract widespread competition, maybe two or three bidders at a given time. And we think that market is going to be pretty active in the next few years; maybe not so much this year but really opening up in 2015 and beyond.

John Nadel – Sterne Agee

Okay, I mean, I assume there’s already – you’re already have a lot of discussions with some of these management teams sort of setting that process up I assume.

Greig Woodring

Yeah, we are. We are.

John Nadel – Sterne Agee

Okay. Just, maybe it’s more of an accounting question and it might be better to take offline, but I’m just curious about this. In larger death claims or frankly just in death claims in general of older – at older ages, I’m curious why we even see that show up in your numbers just given – just given that, I think, I would imagine that the death benefit reserve by the time you get to an older age like that should be at a point where it’s all but covering the actual death claim, am I wrong on that?

Greig Woodring

Yeah, you’re wrong on that. That’s probably true for the primary companies that issue universal life or whole life policies. Remember most of our business is wired fee. And our reserve is basically –

John Nadel – Sterne Agee

Got it.

Greig Woodring

– under premium.

John Nadel – Sterne Agee

Yeah.

Greig Woodring

So, our premiums [indiscernible] and premiums get fairly large but they get nowhere close 1,000 per 1,000.

John Nadel – Sterne Agee

Okay, that’s helpful. And then just a numbers question, a ballpark number would be helpful. I mean, just in general, when you’re talking about 90-ish on average, larger claims per quarter, I mean, so 350, 360 for the year, how does that compare to the overall number of policies you’ve got on this – in the facultative book?

Greig Woodring

Oh, well, it’s like [indiscernible]. Yeah, let me say that in the – the last number I remember on the number of large policies and I really haven’t got that number updated recently that I remember hearing. It was in the tens of thousands. It’s not a small number but it’s not a huge – it’s not in the millions.

John Nadel – Sterne Agee

Okay. All right. That’s helpful. And then I just wanted to comment that I’m scared enough about dying once. I’m so glad we won’t be able to die twice.

Greig Woodring

Yeah, well, that’s good.

John Nadel – Sterne Agee

Thanks.

Operator

We’ll go next to Steven Schwartz with Raymond James.

Steven Schwartz – Raymond James

Hey, good morning everybody. Jack, first, a couple of numbers questions. The tax rate that you talked about, 34% is that for the year or is that for the remaining 9 months?

Jack Lay

No, I was trying to give an annual sort of argument [ph]. So that’d be for all four quarters.

Steven Schwartz – Raymond James

Okay. And do you know, off the top of your head, the accrual that occurred that you sighted incorporate another [ph]?

Jack Lay

The refinement of accruals in corporate?

Steven Schwartz – Raymond James

Yeah, you mentioned that that was –

Jack Lay

Yeah, yeah, that was roughly $8 million or so pretax.

Steven Schwartz – Raymond James

8 million pretax. Okay. Thanks. And then, just to follow up on the comment, Greig, that you just gave to John, I mean, this does explain, because these are generally – I would assume older people because this is [indiscernible] that were written in the 80s and 90s. I would assume that this explains why we haven’t really seen this from the primaries because if this was written on a whole life, then the reserve would be there. You write on a YRT therefore you take a hit given how you write these policies. Is that an accurate statement of really what’s going on and why we’re not seeing this on a primary side?

Greig Woodring

Yeah, a couple of things. It could be, Steven, it also is the case that on facultative business, the preceding [ph] company very often doesn’t keep any of the case [ph].

Steven Schwartz – Raymond James

Okay. That was my other question.

Greig Woodring

So we underwrite the case. It’s our underwriting. We keep the entire risk. And so they wouldn’t have these particular policies necessarily.

Steven Schwartz – Raymond James

Okay. And one might think that older people, just trying to connect the dots, one might think that older might be in the south. Jack mentioned that you tend to see this in the south, and of course older people are going to be more susceptible to things [ph].

Greig Woodring

Well, yeah, and yeah – let me – if I left the wrong impression, let me correct it. This business was spread out a bit. It does have a lot of contribution from those older vintages that you mentioned, but there are some newer ones too.

Steven Schwartz – Raymond James

Okay. All right. That’s all I had right now. Thanks guys.

Operator

We’ll go next to Randy [ph] Krueger with KBW.

Ryan Krueger – KBW

Oh, hi, good morning. It’s Ryan. Just one follow up question on the Canadian pension plan acquisition of Wilton Re. Less about that specific transaction but more broad – we’ve seen a lot of pension money come in to the property as of today. It would seem like given that pension plans have a lot of longevity risk and mortality risk would be a natural offset. So I’m just curious if you think longer term we’ll see more pension money come in to the life reinsurance space.

Greig Woodring

Well, I don’t know how to answer that, Randy [ph]. It could well be. It’s hard to guess but there’s always a lot of basis risk when you try to match up their longevity risk with an underwritten insured population mortality book. It’s generally reverse correlated but it’s not a direct offset and it depends. You can probably guess as well as I can what people will do especially if the trend starts and people start following.

Jack Lay

Yeah, Ryan, this is Jack. We could probably build a case that we’ll see some accelerated opportunities there but you could also build a case that would have really very little influence. So it’s just a hard one to call.

Ryan Krueger – KBW

Okay. That sounds like this is kind of a one-off transaction at this point.

Greig Woodring

Well, yeah, we don’t. At this point, yes, that’s what we’d say.

Ryan Krueger – KBW

Okay. Thank you.

Operator

And it appears we have no further questions at this time.

Jack Lay

All right.

Operator

You’re live with your listening audience.

Jack Lay

Yeah, I don’t know if anyone is left on the line. I was just – this is Jack. I was just going to suggest that we wanted to thank everybody for joining us. Sorry for all the technical problems here. We’ll try to get that resolved going forward. But to the extent you have any questions, feel free to give us a call here in St. Louis. And with that, we’ll end the call. Thank you.

Operator

That does conclude today’s conference. We appreciate your participation. You may now disconnect.

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