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Reinsurance Group of America, Inc. (NYSE:RGA)

Q2 FY08 Earnings Call

July 22, 2008, 9:00 AM ET

Executives

Jack B. Lay - Senior EVP and CFO

A. Greig Woodring - President and CEO

Analysts

Jimmy Bhullar - J.P. Morgan Securities Inc.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Andrew Kligerman - UBS

Mark Finkelstein - Fox-Pitt Kelton Cochran Caronia Waller

Steven D. Schwartz - Raymond James

Richard A. Sbaschnig - Hovde Capital

Operator

Good day, everyone and welcome to the Reinsurance Group of America Second Quarter Conference Call. Today's call is being recorded. At this time, I would like to introduce the President and Chief Executive Officer, Mr. Greig Woodring and Senior Executive Vice President and Chief Financial Officer, Mr. Jack Lay.

Mr. Lay, please go ahead sir.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Okay. Thank you. Good morning. Thanks everyone for joining us this morning for the second quarter conference call. I'll turn the call over to our CEO, Greig Woodring in just a minute. Greig will comment on the results we released yesterday, and then we will respond to any questions from our participants.

As a reminder, during the call, we plan to make certain statements and discuss certain subjects that will contain forward-looking information, including among others, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries. You are cautioned that actual results could differ materially from expected results. A list of important factors that could cause those actual results to differ materially from expected results is included in the earnings release we issued yesterday.

In addition, during the course of the call, we will make comments about our results based upon operating income, both a pre-tax and after-tax basis. Under SEC regulations, operating income is considered a non-GAAP financial measure. We believe this measure better reflects the ongoing profitability and underlying trends of our continuing operations. Please refer to the tables in our press release for more information on this measure and a reconciliation of operating income to net income for our various business segments.

With that, I will turn the call over to Greig for his comments on the second quarter.

A. Greig Woodring - President and Chief Executive Officer

Thank you, Jack and good morning. Thanks for taking time to join us for this call. My comments will be brief and then we'll open the line for questions.

We're pleased with the strong results for the second quarter. On a consolidated basis, operating income for the quarter increased 30% to $109.7 million from $84.6 million in the prior year. On a per share basis, our reported operating income for the quarter was $1.71 per diluted share, up 31%. Reported net income for the quarter totaled $110.7 million or $1.73 per diluted share, compared to $1.20 last year.

Net premium flow during the quarter increased 12.5% to $1.4 billion. Year-to-date rate of increase is 14%, which is slightly above the range of expectations we said at the beginning of the year, 10% to 13% if you remember.

Net investment income totaled to $254.9 million, up from the first quarter total of $199.5 million. A large part of that increase is associated with our funds withheld portfolios in U.S. Asset Intensive segment. Investment income in that segment can bounce around due to movements in the fair value equity options associated with large equity-indexed annuity firms withheld treaties. You'll see a corresponding increase in interest credited expense within the segment as well. Our general account portfolio yield was essentially flat compared to the first quarter, at about 6.07%.

Turning in turn to our operating segments, first in the U.S., pre-tax operating income totaled $109.2 million compared to $93.3 million last year, or a 17% increase. Mortality experience rebounded from the poor first quarter and wasn't in the expected range in this quarter. Premiums increased 5% for the quarter. Relatively high premium flow in last year's second quarter made for a somewhat difficult comparison. Year-to-date the range of growth is about 6%. We expect that the rate of growth will get back to our guidance range of 7% to 9% by year end, albeit, likely at the bottom of that range, absent any block transactions during the third or fourth quarters.

The U.S. mortality market continues to be stable in terms of pricing and competition. We're not getting any irrational pricing or terms by competitors in the marketplace. Our U.S. Asset Intensive business contributed $9.3 million of pre-tax operating income to the quarter, up some $6.7 million last year.

Turning to Canada, our Canadian operation produced a solid quarter with some help from foreign currency. Pre-tax operating income totaled $23.8 million, up slightly from the prior year total of $22.6 million, which was very favorable mortality quarter. Mortality in the current quarter was good, but not up to the same extent that we saw last year or in the first quarter of this year.

Premiums were up 14% in the U.S.... in U.S. dollars and 5% in Canadian dollars. For the year, premiums have increased 11% as measured in Canadian dollars, pretty much in line with expectations.

Regarding our international operations, it was an outstanding quarter for Asia Pacific with pre-tax operating income of $22.8 million compared with $16.1 million last year, a 42% increase. The strong result was driven by favorable mortality results in our three largest markets; Australia, Japan and South Korea. Quarterly volatility is still a reality, but on a longer term, our results in Asia continue to develop nicely.

Premium flow was robust, increasing 40% for the quarter and 34% on a year-to-date basis. On an original currency basis, premiums have increased 26% on a year-to-date basis, well ahead of the expectation we set at the beginning of the year. We continue to be pleased with our progress, particularly in emerging reinsurance markets of Japan and South Korea. Those operations combined produced nearly $130 million of net premiums for the quarter. Reinsurance penetration in these two markets are still very low, well below 5% of new businesses reinsured.

We remain optimistic about our opportunities for continued growth in these markets, as the primary life insurance companies begin to utilize some of the advantages of reinsurance and the value added services that we can provide.

Our other international operation in Europe and South Africa rebounded from a poor first quarter as well mortality results in the UK returned to normal levels. Pre-tax operating income increased to $17.2 million from $12.5 million last year. Segment-wide claims were at expected levels, and in particular UK, mortality came in at expected levels. The prior year quarter reflected unfavorable UK mortality like year-to-date results continue to reflect the adverse mortality we experienced in the first quarter; our longer term results in the UK continue to be within our pricing expectations.

Net premiums increased 13% on a U.S. dollar basis in this segment and 12% on an original currency basis. Year-to-date, premiums have increased 11% on an original currency basis. The UK market continues to be one of our most competitive and challenging markets as well as the largest in this operating segment. We are beginning to see good growth rates coming from other parts of Europe with new representative offices in Germany, Poland, and France, also seeing good contributions from Spain. However, we are starting from a very little base in Continental Europe, so results in this segment remain dominated by the UK.

Our investment security portfolio continues to be conservative at 97% investment grade and our common and preferred equity portfolio is less than $200 million. Current credit and economic environment have put pressure on fair values, but write-downs and the impact for downgrades by rating agencies have been minimal so far. It's difficult to predict the ultimate impact on our portfolio as a result of the current environment. However, we believe our portfolio is well positioned with a low percentage of non-investment grade holdings and little exposure to the equity markets. Additionally, because our operations are routinely cash flow positive, we are in a position to hold securities until recovery, provided we are comfortable with the credit profile.

Our sub-prime holdings continue to be relatively modest at approximately $257 million, less than 2% of our invested asset base. 66% of those holdings are rated AA or higher and our analysis continues to indicate minimal exposure to losses. Fannie Mae and Freddie Mac have seen some volatility to their securities in recent weeks. We do not invest in the equities securities of these government-sponsored entities. However, we hold in our general portfolio about $17 million in direct exposure in the form of the senior unsecured and preferred securities.

Additionally, the portfolios held by our ceding companies that support our funds withheld asset contain about $404 million of direct unsecured holdings and no equity exposure. Including the funds withheld portfolio, our direct exposure in the form of preferred securities totals $23 million. Indirect exposure in the form of secured structured mortgage securities issued by Fannie Mae and Freddie Mac totals about $1.1 billion across our general and funds withheld portfolios. We believe the probability of default by these entities on their debt and preferred obligations is very low.

As announced on June 2nd, MetLife may execute a stock exchange that could result in a divestiture of its majority position in RGA as early as this quarter. We are supportive of that transaction and believe it will be beneficial to RGA and its shareholders.

In conclusion, it was a strong quarter. Our results so far this year demonstrate mortality volatility that exists on a quarterly basis. However, when measured over longer periods of time, mortality rates become predictable. We have a long track record of generating solid returns on mortality businesses. We continue to execute a strategy to grow our business in a disciplined fashion. The current economic turmoil in the U.S. does not significantly alter our plans or our projected business results. We appreciate your support and your interest in RGA and are now ready to take any questions you may have.

Question And Answer

Operator

[Operator Instructions]. Our first question today will come from Jimmy Bhullar with J.P. Morgan.

Jimmy Bhullar - J.P. Morgan Securities Inc.

Hi, thank you. I have a couple of questions. The first one is on your outlook for the U.S. business and what are you seeing in terms of activity in the reinsurance market? I would have thought that with the securitization markets being tight, you'd actually see a pickup in volumes. We're really not seeing that in the results. So if you could talk about just cession rates, are they declining further? Or what's causing the slowdown in your premium growth?

Secondly, on your capital position, if you can talk about when you anticipate needing additional capital based on your current growth plan? That's it.

A. Greig Woodring - President and Chief Executive Officer

Jimmy, this is Greig. I'll take the first one and I'll let Jack answer the capital question. In terms of the U.S., we've seen cession rates fall over the last several years and they fell again last year. In terms of our client base, we're really not seeing them retain any more, they're pretty much holding path. You're correct in saying that the securitization market would lead you to believe that ultimately companies might begin to reinsure more, but that's not happening yet. They're retaining the business or retaining, I should say, the XXX reserve at this point waiting for the market to change or something to change in the overall landscape that would allow them to handle that business in the future. Nobody seems to be particularly concerned about at all although there are couple of companies making a little bit of noise by doing something about their XXX reserves at this point.

U.S. market continues to be a very favorable market for RGA right now. It's a market in which we feel that the things that we bring to the table are valued highly by clients and our market share has slowly cropped upward over the last several years.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Excuse me, this is Jack. Regarding the capital question, we don't have any imminent plans in terms of raising any sort of... I will confine the comments primarily to equity capital; I think that's the real issue. We have some leveragability and could add a little bit of debt, although we don't have any plans right now for that either. But in terms of equity, as I said no current plans, that's always influenced going forward by rates of growth which are pretty stable. So we don't really expect any surprise there, unless we do have an M&A opportunity in which case we would have to take a look at the capital base and make a determination as to whether an enhancement to capital would be appropriate. If we got to that point, we would obviously go through the deliberation of what type of capital.

Pure common equities, low on our risk, structured hybrids are little more expensive than they were 12 or 15 months ago. But we would certainly consider that sort of thing. We are at the point where we have quite a bit of retained earnings throw off from our mortality portfolio, so to speak. So, it's interesting in that we continually grow the capital base and you've seen that this quarter, we are up to about $45 book value per share. And to the extent we continue to do that, that obviously takes pressure off the capital raise situation to the extent that our top line growth rates are not as high as they were, when the markets were a little more booming, so to speak several years ago. That also takes pressure off the capital raise situation.

So, kind of a long answer, we don't have any plans currently for a capital raise. I guess I would handicap, it is very unlikely this year to have some change in business.

Jimmy Bhullar - J.P. Morgan Securities Inc.

Okay, thank you.

Operator

And our next question will come from Jeff Schuman with KBW.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Hi, good morning. A few things. First of all, a couple of technical items. I know that in Canada, there was $13 million of other revenues. Normally that's de minimis. What was that and what sort of expenses goes against that?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Jeff, that relates primarily to a recapture that we reflected in Canada, relative to one of our retros. Now, all $13 million didn't fall to the bottom line, about $2 million did. And the offset is in the reserve and the bad debt line as well as the DAC line. So you can think of that as kind of an unusual item, not all of which fell to the bottom line, about $2 million ended up in operating income.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. Thank you. And next, insurance expenses line appeared late this quarter relative to our models, also somewhat late in the first quarter. Is that driven by business mix or have there been some DAC adjustments recently or what may have driven a little change in question there?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Well Jeff, unfortunately part of this relates to the embedded derivatives. And when we revalue quarter-to-quarter the embedded derivatives, there is a resultant impact on DAC, which shows up in that line. I think as you go through your analysis and a lot of what I am describing shows up in the asset intensive line. As you go through your analysis, I think if you look at the relative proportion of policy acquisition costs to premium, for each of the operating units, there is really not much in the way of any kind of volatility. It's reasonably stable. I think if you look at it enterprise wide and you saw it even more dramatically in the first quarter, you get kind of a funny answer. So I would encourage you to take a look at it business-by-business.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Lay [ph], I think you gave us the embedded derivative impact which we are able to back out, right?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Yes. They are in the -- that's in the table.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Yes. Which we try and back it out, I guess I know we are maybe ratioing it to a revenue as opposed to premium. I don't know if that distorted our ratio or not but any --

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

It's distorted a lot, but I think premium may be a better metric to use.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. But I guess the bottom line is there were no DAC... major DAC through upsurge or from you doing that?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

That's correct.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. Next I want to come back to the capital issue a little bit more. Kind of sort of step back it, look at the sort of big picture, I mean the business overall continues to grow pretty nicely, whether you measure it by premiums or re in force, basically growing the enterprise at 10% plus and yet stat earnings were slightly negative in '06, slightly negative '07, negative in the first quarter. So just kind of conceptually, as we kind of go forward how is it that you are able to... you have several double-digit growth sort in the absence of positive statutory earnings that would be... that really aren't driving I guess the teen statutory earnings?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Well it really depends on what metric you are using. And we run the company on an economic capital basis. So it's not on a statutory basis. And when you talk about stat earnings, I presume you're talking about RGA Re's statutory earnings, the U.S. operating company. We look at economic capital as we commensurate with rating agencies. They have their own capital models, which don't mirror the RBC models or any kind of stat base models, and that they are different in several respects. So I think yes, I think you do get an unusual picture if you looks only at the stat, the U.S. statutory return. But if you look at it enterprise wide, and look at it on either an economic capital base or a rating agency capital model, the income throw off and availability of that income in terms of dividends is adequate to support the ratings.

A. Greig Woodring - President and Chief Executive Officer

I know you use risk based capital on the U.S. company, it is a high level constraints on the longer term, you are correct, Jeff, we do have to monitor those things. But overall, we are reasonably good shaped with capital.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Jeff, one other item too. If you look at... if you are just looking at the annual statement, the statutory annual statement and look solely at net income, it gives you a little bit of a puzzling picture. You have to look kind of below the line because of the way statutory reporting works, some of the earnings so to speak go straight to surplus. So, you really have to disaggregate all that to come to a conclusion.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Well, I did note that you have been getting a positive contribution from a line in the capital account call, changes due to reinsurance of something, is that surplus release that transaction, or what is that?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

It's primarily in force block transactions and some ancillary transactions.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. And then lastly, I am not sure if I got this, but I think when Greig was reviewing through some of the specifics, he said that there were what about $400 million of direct Fannie and Freddie holdings in the funds withheld portfolio, is that right?

A. Greig Woodring - President and Chief Executive Officer

That's right.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

And just remind me, because of the funds withheld, does that mean that you are absorbing marks though net income and so you were already kind of absorb some hits on those securities, is that correct?

A. Greig Woodring - President and Chief Executive Officer

No, to the extent there is any realized capital gains or losses, we would have reflected those through earnings.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay and how --

A. Greig Woodring - President and Chief Executive Officer

Equity holdings.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Sorry?

A. Greig Woodring - President and Chief Executive Officer

Those are not equity holdings.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. So to the extent that they are unrealized losses on those securities, how is that reflected in your balance sheet at this point?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

On the balance sheet, it would be reflected as we go through the embedded value, I am sorry, the embedded derivative revaluation process.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

So that --

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

I am sorry, go ahead.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Does it hit... does it hit net earnings or does it hit AOCI [ph], where does it hit?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

It hits net earnings. We back it out of operating earnings in the tables that accompany the press release.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay so, so it does run through earnings?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Right.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. So it's in the... it's in the book value, whether you are looking at a pre AOCI or with AOCI whatever, is already in there?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

That's right. Through that the B36 sort to speak revaluation.

Jeffrey R. Schuman - Keefe, Bruyette & Woods, Inc.

Okay. That's real. Thank you.

Operator

And our next question will come from Andrew Kligerman with UBS.

Andrew Kligerman - UBS

Hey good morning. Two questions and a follow-up. With regard to the U.S. Asset Intensive business, coming in at about $16 million of earnings in the second quarter versus a loss of about $47 million in the prior quarter. And then in the fourth quarter you earned about 7 plus million. And I think Greig touched on the pickup in investment income. Could you give us a little color or guidance over the next few quarters as to what we might expect in terms of earnings?

And then just very similarly, on the corporate line item, operating income was an attractive, relatively attractive $3.5 million loss versus about $6 million in losses in the first quarter and $10.4 million in losses in the fourth of last year. Maybe talk about a few of the dynamics there and what we should be thinking about over the next few quarters?

A. Greig Woodring - President and Chief Executive Officer

In terms of the asset intensive business, that's been a pretty stable and solid performer of the year. Quoting some of the net income items, which are affected by that B36 adjustment which reflects predominantly changes in credit spread environment, as they go up and down, it begins at zero and ends at zero in the longer term for the most part. So we ignore those for operating income calculations and on an operating income basis, the asset intensive business has been pretty well managed, pretty solid performer. It's obviously not doing as well in this kind of an economic environment as it was a year ago. But it's still not doing badly, and we're happy with that business and the diversification it does provide and the stability it has provided.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Andrew, this is Jack. In terms of the corporate line, I think you're asking for kind of guidance sort of speaking on that.

Andrew Kligerman - UBS

Yes, sort of a run rate.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Yes, I think if you look at for the six-month period in terms of operating income, that's roughly the run rate. I think we've lost about $7 million. I expect that for the year, it would be in the $15 million to $18 million range. So hopefully that helps.

Andrew Kligerman - UBS

Okay. And you know, I guess okay, I'll just go with that maybe follow up with a little more color for details but --

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Yes, if you want to go through line items, maybe we've got to take that off.

Andrew Kligerman - UBS

We'd take that one off line. And then just going back to the comments on excess capital. I think Greig mentioned that you are in reasonably good shape and so forth. I mean could you give any color on where you are in terms of redeployable capital and may be where your RBC ratio stand at end of the second quarter?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

RBC ratios may not help you a whole lot only because it relates only to part of our business. I think I'd rather address that in terms of economic capital models.

Andrew Kligerman - UBS

Okay.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

And what they reflect enterprise wide. We haven't really gone through formal capital raise in a while here. We continue to grow the business. We, in our view have some excess capital and it's always hard to pinpoint quarter-to-quarter. But, if I had to quantify I'd say it's in the $100 million to $200 million range in terms of excess. Now that's the way we look at capital. There is a lot of dynamics out there that come in to play, not at least to which relate to how the rating agencies look at capital. And I think the agencies would all characterize RGA as running with adequate capital, but not a lot of excess capital. So we are always towards between the midpoint and the low end of most of the agency's capital models vis-à-vis the current ratings for the company.

Andrew Kligerman - UBS

And then just lastly, you mentioned a little earlier that you really didn't see any real need in the near term to raise the capital, unless of course there were an M&A opportunity. Any thing imminent and then what might you would be looking at it, if you were to do a transaction?

A. Greig Woodring - President and Chief Executive Officer

Well, no there is nothing eminent right now that we are looking at. And there could be some transactions in the future, but we do not have any on our raider screen. And if we have to raise capital to support a transaction and we would certainly want to make that an accretive transaction. It's pretty expensive time to be doing that right now. So it's not really the case that we are looking eagerly for and beating the bushes for acquisitions in long run. We are happy with the organic growth we are achieving.

Andrew Kligerman - UBS

Alright.

Operator

And our next question comes from Mark Finkelstein with FPK.

Mark Finkelstein - Fox-Pitt Kelton Cochran Caronia Waller

Good morning. A couple of questions. I guess firstly, can you just elaborate a little bit on Asia Pacific, and that would be I guess, Korea which seems strong. What exactly you are seeing to raise penetration levels and just a quick comment on Japan, which I believe historically has had extraordinarily low penetration rates in the 1%. Are you seeing kind of some pickup in opportunities there and expect to see continued penetration increases?

A. Greig Woodring - President and Chief Executive Officer

Yes. In terms of South Korea, it was a pretty good quarter in terms of revenue. It was a fine quarter in terms of bottom line as well, but not anything extraordinary, good results. On the premium side, South Korea is somewhat lumpy in terms of reporting still, in terms of companies who report infrequently and so this happened to be a big quarter, sort of smoothes that out over time. We won't see the same sort of increases in premium and revenue in every quarter in Korea every quarter than we have this quarter. But we are very happy with the way Korea has grown, and it's provided us a lot about opportunities and a good set of stable results in South Korea.

In Japan, I suppose we are seeing more opportunities. It's slow and hard to measure them always because you're talking about the very incremental changes in the fabric of the way the industry operates there. But our business has increased each year. And in fact, we do business with most all of the companies in Japan and are seeing very nice growth and good profitability and good strong results out of the Japanese market. We think we bring quite a bit to both of those countries in terms of helping the industry with certain products and certain mortality insights and so forth.

Mark Finkelstein - Fox-Pitt Kelton Cochran Caronia Waller

Okay. And just I guess technical question, why did the... if my numbers are right, why did the in force in Asia actually declined sequentially in the second quarter? Was it currency or what's going on?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Well there is a fuel impact there. But in general, that relates to currency as well as reporting. It's always... surprisingly, it's always hard for us to nail down that metric much harder than some of the others to feed financials. So you have a true-up so to speak in terms of client reporting. Once we put it on our system, we have certain adjustments. So, you'd... unfortunately, we have seen that several quarters in a row with respect to the Asia Pacific in force in particular. We think we've got it pretty well nailed down though at this point.

Mark Finkelstein - Fox-Pitt Kelton Cochran Caronia Waller

Okay. Great, thank you.

Operator

[Operator Instructions]. And we will now take a question from Steven Schwartz from Raymond James and Associates.

Steven D. Schwartz - Raymond James

Hey, good morning everybody. Just I've got a couple. But I would like to go over a couple of numbers if we can in the financial re business. I was wondering about the investment income number there, that looked like it was kind OF up and then other in asset intensive. And then I want to ask you a general question.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Okay. Well, investment income in any of these segments and sub-segments is nothing more than an allocation of the broader enterprise wide investment income.

Steven D. Schwartz - Raymond James

Okay

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

And the allocation metrics relate to our economic capital model. So that tends to drive it and it tends to provide a little or present a little bit of volatility, although not dramatic.

Steven D. Schwartz - Raymond James

Okay, fair enough. And then if I could, Greig, you mentioned some of the European companies. I've been reading about Brazil. I guess it's opening up its reinsurance market. Is there anything there for you?

A. Greig Woodring - President and Chief Executive Officer

Well, we are looking at Brazil, intend to look at Brazil in the upcoming months. And as time goes on, it's almost certain that that will be our large market, an exciting market. Lot of companies have already started to cast their eye in that direction. And we are no different; we will be looking at that market as a future growth opportunity for us. It's clearly one of the biggest markets that we are not involved in potentially and up to this point with the IRB, the government owned reinsurer has been a little chance for us to do any reinsurance business in Brazil in that we would be looking at how that's changing right now.

Steven D. Schwartz - Raymond James

Okay. And then I don't know if you can comment on this or not. But can you maybe talk a little bit about the timing of this split-off and maybe you can't but maybe at least when you expect the ratio to be set assuming whatever it is?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Steven, this is Jack. I will take that. The process is moving along, and the process includes as you know filing with the SEC and the review process, back and forth with the SEC. We've also had a back and forth with the IRS. And all of that I would characterize as moving along pretty well, really at a pace that we pretty much expected. Now, beyond that, it's really hard to call if they're certainly a potential for us, actually I'd say for us really, for Met to announce an exchange this quarter. I really can't say much beyond that.

Steven D. Schwartz - Raymond James

Okay. Alright, thanks guys.

Operator

[Operator Instructions]. Our next question comes from Richard Sbaschnig with Hovde Capital.

Richard A. Sbaschnig - Hovde Capital

Hi good morning. And I had to step off the call for a little bit, so forgive me if you've already answered this. But regarding the takeover approach that was disclosed in the S-4, is there anything preventing after this... soon this split-off is completed, is there anything that would prevent that party from coming back at RGA again shortly after this split-off if it's completed?

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

This is Jack. No, there really isn't anything. It is a publicly traded company with widely spread securities, there is certainly no protection. Or there is nothing in our structure that would create a situation where any party couldn't come in and tender for their shares.

Richard A. Sbaschnig - Hovde Capital

Okay. Thanks a lot.

Operator

And gentlemen, there are no further questions at this time.

Jack B. Lay - Senior Executive Vice President and Chief Financial Officer

Okay. This is Jack and I want to thank everybody for joining us. One item I should note, the replay for this call should appear on our website, some time tomorrow, following the filing of a transcript of the call with the SEC. That's a step we feel a need to go through. So if you are looking for a replay that will be the timing. With that, we'll end the call, and we thank everyone for joining us. Certainly feel free to give us a call here at St. Louis should any other questions arise.

Operator

And that does conclude today's teleconference. We like to thank everyone for their participation and wish everyone a great day.

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Source: Reinsurance Group of America, Inc. Q2 2008 Earnings Call Transcript

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