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Protective Life Corporation (NYSE:PL)

Q3 FY08 Earnings Call

November 4, 2008, 09:00 AM ET

Executives

John D. Johns - Chairman, President and CEO

Richard J. Bielen - Vice Chairman and CFO

Steven G. Walker - Sr. VP, Controller and Chief Accounting Officer

Carl S. Thigpen - EVP and chief Investment Officer

Analysts

Jukka Lipponen - KBW Asset Management

Steven Schwartz - Raymond James

Andrew Kligerman - UBS Securities

Edward Spehar - Merrill Lynch

Darin Arita - Deutsche Bank

Thomas Gallagher - Credit Suisse

John Fox - Fenimore Asset Management

Operator

Good day everyone. Welcome to the Protective Life Third Quarter Earnings Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the Q&A session. [Operator Instructions]. Please note that today's call maybe recorded.

It is now pleasure to turn the call over to Mr. Johnny Johns. Please go ahead, Sir.

John D. Johns - Chairman, President and Chief Executive Officer

Good morning everyone. This is Johnny Johns, CEO of Protective Life Corporation. Welcome to our third quarter conference call. I have with me here in our Birmingham officers with our senior management team and I will introduce them as the call progresses.

As I know, you are aware we reported a net loss for the quarter of $1.40 which was disappointing to us that was driven largely by impairments that we took in the quarter on four, five investment positions. But, on a more positive note, we reported $0.88 per share of operating earnings and if you adjust that for a number of items such as fair value mark-to-market accounting items and a few others plus and minus.

We believe that they sort of run rate if you will in the quarter was approximately $1 per share on an operating basis which was... we've in the range of expectations that we had over the quarter. Let me just kind of dive into the things that I think that, Europe probably most are focused on, as you look in the quarter.

Let me first say that we have very strong liquidity position, we believe we had liquidity sufficient to meet all our projected outflows on a monthly basis, for a number of years would add any externals sources of funding, asset sales and without, any new institutional funding agreement sales. We don't have any debt maturities of consequent for about four years. Also, we believe that our capital of high quality.

Our GAAP equity in our stat circle surplus are sort of within the same range. We have very little goodwill on our books. I know there, there's a lot of focus this quarter on risk based capital. Let me tell you about our risk based capital position. We haven't totally closed our stat book shares, so the numbers I'm giving you are estimates, but we think they're good estimates. We think we finished the quarter after absorption of the impairments that we'll talk more about in a moment with an NIIC ratio slightly below 300%. We thought a couple weeks ago slightly above, we think now it's just slightly below that levels.

As we look forward, in try to suggest that what we think our RBC ratios would be in the future. We believe that by the end of the first quarter of '09, our RBC ratio shared under normal circumstances rise to about 350%, I'll be quick to add that as you know they're lot of thing that can move the RBC ratio such as impairments are higher RBC charges and downgrades and clients and mortality novels sorts of things, but if you sort of normalized all that out, we think 350 is a reasonable projection at that point in time.

That gets around to the question of how much RBC do we need to hold respect to our ratings category. Our understanding and this varies a bit with each rating agency is that historically our ratings require an RBC ratio, enhance the RBC ratio in the range of 300% to 350%.

We have a sense that perhaps that bar is being raised a bit and the 325 on a sort of sustainable basis maybe where the rating agencies are looking at least some of them as you look forward into the future. If you go back to my estimate that the RBC ratio should be around 350 at the end of the first quarter that would suggest we could observe say $150 million of impairments or higher RBC charges or something, one of the thing... many things that can move the RBC ratio and still be above that 325 level.

Let me also talk about some other things that I think are real strengths of the company. First is that while it's well recognized I think that we do have major investments in large financial institutions in our investment portfolio and indeed those investments are giving rash to a good deal of the unrealized loss report. I'll also say that virtually all of those financial institutions carry very high investment grade ratings and we look at our larger positions, it virtually all of now within the U.S. Government TARP program. So, even though there is still some significant marks on their bonds, we feel much more confident in their credit worthiness now that the government program is in place and they're well within it.

Also our commercial mortgage portfolio continues to perform very well, our DAC appears to be very solid, we just went through our annual third quarter DAC review and as you'll see in the operating numbers, we actually had a slightly positive unlocking net.

In the quarter, we have very limited exposure to the equity markets, as I think most of you would know we've not been a big player in the variable annuity space and we don't think that the fluctuations in the equity market is likely to have material impact... immaterial impact on our RBC ratio. Rich will go through that in just a minute, but we've estimated what the impact would be for the month of October, the changes in the equity markets in October, and as Rich will tell you it's not a very material number.

We have fairly limited derivatives exposure, we have virtually no investments in hedge funds or other alternative investments, we have a quite small securities lending program, I believe it's around $100 million and it kind of one down phase. We're not reliant on letters of credit to fund our AXXX reserves. While there is a lot of uncertainty right now about the availability and cost of redundant reserve financing, our business plan has been in years to fund our requirement for those redundant reserves from our own internal sources for the foreseeable future until that market comes back.

Majority of our earnings are from season life insurance policies, other policies that we sell on a retail basis or policies that we required from third-parties. And particularly the required block is very steady and stable source of earnings to us because lot of that business is very, very seasoned.

We have experienced positive fund flows and all of our major annuity brands, annuity sales were down a bit in the quarter still are very strong back historic standards. 95% of all of our securities are investment grade and Rich we'll talk, Rick Bielen; our CFO will talk more about that in just a moment. We do however have some challenges and we want to be very clear about that as I've said earlier in this call. We were disappointed to incur losses and impairments in the investment portfolio in the quarter. The investments the solid on us were Lehman Brothers, Washington Mutual and preferred shares Fannie Mae and Freddie Mac and our portfolio of Alt A securities that we purchased over the last a year or two. Again, these were not investment positions where we were attempting to do something, unusual or out of the ordinary or even the Alt As were AA level when we generally below the level when we purchase them.

We do have a relatively high ratio of assets to capital that's largely because we securitized, its because we have elected to actually fund our redundant reserves of pre-securities, but I'm sure you know or maybe not but I'll say if you don't that the investments guidelines for those securitized portfolios required that we hold very high quality assets and we do. We did elect this quarter to reduce our dividend by about 50% on annual basis that's a savings of about $36 million or $37 million. Again, while we're certainly able and capable of continuing to sustain and pay the dividend as to higher level, we start given all the uncertainty and focus on redundant capital that was a prudent thing to do in the current environment. Again, we have our challenges, we certainly have our plans, we have good plans we think to deal with them.

And with that, I'm going to turn the call over to Rich Bielen, our CFO and let Rich pick it up and give you a little more detail on the quarter.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Thank you, Johnny. First I would... first point out that in addition to the information contained in our press release, we have certain supplemental financial information available on our website www.protective.com. Also this conference call discussion includes forward-looking statements which express expectations of future events in our result. Actual events and results may differ materially from these expectations. Please refer to our press release in Exhibit 99 on the company's most recent 10-K, 10-Q for more information about factors which may affect future results.

This discussion may also contain non-GAAP financial information. Please see our website for additional information and reconciliation to GAAP financial measures.

Let me start off with operating earnings. We did report $0.88 per share that compares to $0.96 in the prior quarter and $0.97 versus a year ago. We had a number of items, is about six on that if we were to back out... we would have seen kind of a normalized run rate for the quarter of about $1 and I'm going to walk through each one of those for you so that you're able to reconcile between the $0.88 and $1.

Our first thing is that we do have that trading account that is sitting in corporate in other; it's about $387 million of securities, it is down in run-off, we've discontinue to pin [ph] 46 Street and are now just letting those assets mature that impacted earnings about negatively about $0.21 a share.

On the annuity area, we have a number of fair value items that impacted us $0.04, bulk of that related to GMWB, which was about the entire $0.04 there. Now, when we looked at our annual dock unlocking that we do in the third quarter, we were very pleased that in the life marketing division primarily, the UL business, we actually saw a positive unlock that benefited us to $0.08, when we looked at our knocking in the annuity segment between both our fixed and variable, we saw a negative unlock of about $0.03.

We also had an unusual item in stable value, you may have seen that it somewhat elevated this quarter, with all the turmoil in the markets, we were able to buyback one of our funding agreements in the third quarter at a discount that contributed about a one-time item of $0.03. And then, in the third quarter similar to DAC when we filed our tax return, we true up all of our tax benefits and worked through our return and that helped earnings by about $0.05 in the quarter. So, if you're going through all those items we go from a reported $0.88 to $1.

Obviously, the net loss for the quarter was $1.40 per share including the $2.28 of realized loss that compares to $0.53 in the second quarter and $1.02 in the third quarter of last year. Our operating income return on average equity for the last 12 months has been 9.9%.

Book value as of September 30th, prior to AOCI is $35.09 after the adjustment for AOCI of 13.28 with results in a reported book value of $21.81. What I'd like to do right now is... we know one of the major issues that everybody is talking about is the level of unrealized losses and so there will be a table when we file Q later this week that will show you the breakdown of unrealized losses by ratings category. As of the end of the third quarter, the gross unrealized loss was $1.956 million, but when you look through that literally $1.79 million of it or 55% is attributable to securities that currently have ratings of A or higher. If I go down and add in the BBBs, the unrealized loss in the BBBs was $577 million, which represented about 30% of that loss. And so, when we look at the gross unrealized loss as of today, at one point almost $7 billion of it is represented by investment grade securities or 85% of that and as we look through all these investment grade securities, we're pretty confident that these securities should be able to pay going forward and should wind as being realized in a way consistent with historic levels.

When you look at the low investment grade, the unrealized loss on those is only $300 million or about 15% of that number. What I would also like to do is, there has been questions about concentration of positions in our Q we normally list the Top-10 credits and I'll just read them off to you and we're pretty confident that these companies will be around for a while, it's Toyota, AT&T, Citigroup, Wells Fargo, MetLife, Prudential, JP Morgan, Dominion, Bank America and General Electric. And as you know, the banks have been allowed Citi, Wells, JP Morgan, Beau [ph] have all been included in the government's TARP program until as a result we're pretty confident that those will be stabilized as we go forward.

With respect to the investment losses during the quarter, the bulk of the investment losses we've already previously announced to given you an indication on Freddie, Fannie, Lehman, Washington Mutual. The only new information that came up at the end of the quarter is that we reviewed all of Alt A bonds again at the end of the third quarter. And then, in light of the review, their performance in the deteriorating housing market, we had an additional impairment balance of approximately $36 million, which now totals for the year $116 million.

And I would like to just comment there, when we made the decision to buy the AA Alt As about a year ago, it was the only time we've ever purchased tranches that were subordinate to the most senior tranches in a deal. We actually invested about $230 million; we've now already written down about half of that so while remaining book value on those securities is just over $100 million, as we speak. 95% of the fixed income portfolio is the investment grade and our problem loans of foreclosed properties total $15.4 million which is less than 0.4% of the mortgage loan portfolio. We are also currently holding approximately $1 billion of cash in short-term investments in anticipation of some maturing stable value contracts over the next two quarters.

With that I'd like to just turn into each of the lines of business and give you some comments there. On the Life marketing, our operation has $52.2 million of earnings compared to $40 million in the third quarter of last year. The results were more improved by net payable perspective unlocking of $8.8 million. We also had some higher level of investment income and we are continuing to manage our expenses down. So we brought expenses down in that segment. Mortality was $2 million favorable in the quarter and our year-to-date mortalities favorable now by $4.5 million.

Our sales in the third quarter was $35.4 million compared to $41 million in the second quarter UL was 12.4 and term sales were $23 million. We have seen a modest upturn in the app counts since September and have optimism in the like-sales we will improve and we continue to be able to manage the business within our expense budgets.

The other thing that we pointed out even a year ago was that we are trying to shift more and more through the UL business. We have already is strengthened our line of the products over the past few months by issuing approximately four new products in that space. We also have plans over this next month issued three additional new products and that's one of the reasons we have optimism in terms of we're seeing our pickup in app count there. We haven't seen it in the premium close but we would expect that going forward.

With respect to the acquisitions divisions, pretax operating income was $33 million up 8.7% compared to $30.4 million last year. The increase was primarily due to lower operating expenses on the Chase block, a good improved mortality results partially offset by the expected run-off. We continued to be very pleased with the financial performance of both the Chase block and the core acquisition block and it provides us a really steady stream of earnings that continues to just be repeated each quarter.

With respect to the Annuity business, the pretax operating income in the annuity segment was $600,000, a 91% decrease versus $6.4 million last year, the bulk of that was caused because of two of the reductions caused because of two items, one was the unfavorable perspective unlocking of 2.8 million in the third quarter and then we also had fair value changes on the equity index annuity product and the variable annuity guaranteed minimum withdrawal benefit rider that was 4.8 million, in the bulk of that was related to GMWB.

We have seen obviously there are lot of questions regarding the GMWB rider in the marketplace. Our total, account values subject to the GMWB rider is $287 million, a total variable annuity account balance is $2.7 billion. We went ahead, on over the weekend and did a preliminarily run on the impact of the markets declined in the month of October, given the low level of volume we have in that business and if we would have adjust our numbers for the October equity market performance, we would have seen an impact to less than 5 points on our RBC ratio. So the equity market declines in this volatility, we see are not having a material impact on our RBC. From sales for the quarter were $472 million and we are on track for a record $2 billion a year which was the initial goal we've set at the beginning of the year.

Our fixed annuity sales in the third quarter was $340 million, variable sales were $132 million, our account values were $8.2 billion as of September 30th, that's almost 10% higher than the balance a year ago, and was higher than the $8.1 billion, balance of the end of second quarter. And, we continue to see positive funds flows in our MBA or SPVA in our variable annuity business.

Turning to stable value, we delivered outstanding results in the third quarter, stable value product segment, reported $28.2 million in pretax operating earnings, the $15 million increase over the same period of last year. The improvement was a cut from the combination of higher average account balances, slightly higher asset yields and significantly well liability cost. As I previously mentioned, we also had $3 million, on-time benefit from buying back and retiring a funding agreement that had been previously issued in the third quarter. Operating spreads were 170 basis point in the quarter versus a 109 last year and up from a 134 basis points in the second quarter.

We do expect spreads to decline in the fourth quarter, to the recent disruption in LIBOR as many of you have seen, our LIBOR has very elevated since the crisis, we see that impacting our cost of funds in the fourth quarter, and we'd estimates spreads to be much more similar to what we saw in the second quarter of this year.

Our sales were $685 million. We ended the quarter with a deposit balance of approximates $6 billion but in light of the environment and what we see out there were expecting to have, the balance decline over the next two quarters by approximately $1 billion roughly $500 million in each of the next two, and that's one of the reasons that we've accumulated the liquidity in order to make sure that we can comfortably meet those outflows.

Turning to asset protection on its economic conditions surrounding automobile, marine and recreational vehicle industries did not improve in the third quarter, in fact, got a little worse. But given the challenges, this division was up against, we were really pleased with the quarter, May announce pretax operating income in the third quarter was $8.2 million compared to the $9.9 million last year. The bulk of the decline really just where represents volume, we saw $2.1 million decrease in our service contract income due to the lower auto and marine volume during this quarter.

Our total sales were $104 million versus $145 million last year, the one we really focused on the credit sales somewhat by design the other products were also by design, for the service contract sales were down about 25% due to the lower auto and marine volumes.

Turning to corporate and other... I'll just make one or two comments there. In this segment, we reported an operating loss of $32.2 million, the mark-to-market on that trading portfolio negatively impacted earnings by about $20 million in the quarter, as we indicated this portfolio is now in run-off. On our participating mortgage income for the quarter was $1.6 million and that was the entire income for the company during the quarter. Typically, we usually assume a minimum of $2 million but obviously the environment is somewhat difficult out there. We did see prepayment fees of $2.4 million versus $1.7 million in the second quarter.

Now, I will turn it back over to Johnny for the outlook.

John D. Johns - Chairman, President and Chief Executive Officer

Yes. Thank you, Rich. Let me kind of briefly summarize how we see things as we look ahead in the next this quarter, fourth quarter. In terms of our basic operations, we think that our life insurance in our acquired businesses will be steady sort of inline with historic performance. We think that the asset protection division will likely be negatively impacted by the conditions in the auto and marine businesses as that Rich described but we are hopeful that our team there will continue to perform reasonably well given the challenges they face.

We believe stable value is likely to be down a bit because of the fact that we are seeing a reduction in account balances and some reduction in spread particularly as we continue to hold high levels of liquidity in preparation for meeting the outflows that we see in the future. We think that corporate and another likely will be better than in this quarter we hope so in any event. But, when you add all that up, we are reluctant to give what we would consider formal earnings guidance for just too many moving parts now under the accounting regime that we're under particularly mark-to-market and fair value items, it's impossible really to predict how those items are going to impact earnings. But, I will say this just to give sort of a sense of our... what we consider the earnings power of the franchise absent fair value and mark-to-market changes, which we know can be quite volatile or any kind of significant fluctuations and claims mortality in other items that are several of them that are volatile on a quarter-to-quarter basis. We think that toward the earnings power of the business on an operating basis is in kind of a low $0.90 a share or $0.95 range again I don't mean to put that out there as formal earnings guidance because there are so many things that can move that number around that we really can't estimate or forecast with any certainty.

So, I am sure you have a lot of questions and we welcome them. So, I'll turn it back over to the operator and will start to respond.

Question And Answer

Operator

[Operator Instructions]. And our first question comes from Jukka Lipponen with KBW Asset Management. Please go ahead sir.

Jukka Lipponen - KBW Asset Management

Good morning. Do you have any gig or funding agreements that have any kind of ratings triggers allowing early withdrawal?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Jukka, this is Rich. We have a de minimis amount, usually that happens in the municipal sector and as our last count, we have less than $10 million of municipal related gigs that would have any kind of item related to downgrades.

Jukka Lipponen - KBW Asset Management

And now you're seeing any impact on your sales in gigs funding agreements or annuities, I guess particularly given the ratings watch?

John D. Johns - Chairman, President and Chief Executive Officer

Jukka, this is John. The institutional funding agreement is pretty much shutdown I think, industry widening. Not aware of much of any issuance there by anyone and I think spreads would be extraordinarily flat in terms to the cost of that funding. We continue to see a modest flow of gig business, we see that coming on through and as you've seen the results in the annuity business they are very strong. I think to the extent we did see a bit of a sequential decline in annuities, it was really function in the bank channel, some of our competitors really priced their products very, very aggressively and we stayed within our normal distance. But, I think it was really just competition driven as people really seem to be aggressively gathering funds out there. So, answer to your question is no, we really see things have been actually recently have been kind of inline with expectations.

Jukka Lipponen - KBW Asset Management

And lastly, can you sort of map, how you get from the slightly below 300 RBC, currently at the end of the third quarter to 350 by the end of the first quarter '09?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Jukka there is probably... there is two components. One is, just the natural kind of growth than capital generation of the business. As you may recall back at the investor conference, we believe well over and above our organic growth, we throw of about, $300 million of capital. Well, we also expect here is that we will have some decline and stable value given the environment that is currently out there. Among the third factor is our RBC ratio is being heard by kind of technical items with respect to a mortgage experience factor. That will burn off for us in the first quarter. And we'll release close to $200 million of capital, as of the end of the first quarter for us which would improve our RBC ratio by roughly 25 points.

Jukka Lipponen - KBW Asset Management

Rich should I add $300 million number that you side go is before the securitization.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Right, it assumes we can securitize in the marketplace.

Jukka Lipponen - KBW Asset Management

To absorb some of that number, obviously if we don't. '

John D. Johns - Chairman, President and Chief Executive Officer

Okay.

Operator

And our next question comes from Steven Schwartz. Your line is open.

Steven Schwartz - Raymond James

All right. Thank you very much. Rich can you quickly... what was the life mortality number and do you have a mortality number for the acquisition division?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

The life mortality number for the quarter was $2 million, in unit days it was 4.5 in life marketing and it was approximately $1 million in the acquisition division, this quarter positive.

Steven Schwartz - Raymond James

Okay. Then if I could go on with some others, Rich you took nothing. It looks like you took no impairment for AIG, what was the thought pattern there?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

AIG has now had access to commercial paper facilities, the governments, loans that are being put in place and there is obviously very comments in the marketplace on that, but we kind of look that in and so with that kind of liquidity support to work their way through their SEC lending and their other issues and their collateral requirements. We believe ultimately that asset is going to be recoverable in full.

Steven Schwartz - Raymond James

Okay. And then a still... Johnny you brought up the fact that the competitors you've got very competitive in the bank channel. I am aware you have a product, it's a major product I think its called platinum, supposedly you're offering 7% on this for 15 years, 6 and 3 quarters for 10, 5.10 for 4.

Those rates look high to me, but I know that others were there as well. Maybe you guys could talk about what is going on and what is driving what appears to be very, very high crediting rates.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Steve, this is Rich Bielen. If you realize the duration of 15 year major products. Some of the consumers take out the interest every year, but some of them do not. So it is a very long duration liability. If you were to look in the public markets over the past number of weeks especially in corporate bonds. There has been series of issuers which have been issuing with A ratings in higher with coupons anywhere from the 7% up to 10 %. We have stuck to the same pricing metrics that we've traditionally stuck with and based on our asset mix and that asset mix supports that kind of credited rate. We're not doing anything to see different than what we've done.

Steven Schwartz - Raymond James

And I believe that product is protected by both the market value adjustment and a surrender charge and so that's a earns spread on that product is much tighter than you would see on a SPDA product that has a three years surrender charge and lots of liquidity risk associated with it.

John D. Johns - Chairman, President and Chief Executive Officer

Christie.

Operator

And our next question comes from Andrew Kligerman of UBS. Your line is open.

Andrew Kligerman - UBS Securities

Yes, good morning. Three questions, the first one is with regard to deferred debt cost and VOBA [ph] and if I tried to normalize the numbers based on assets to realize losses based on you're... I guess one-time study that you did some unlocking. I get about $14 million of amortization in life marketing in the third quarter versus 27 in the second and 27 or 28 in the year ago quarter. So it seems a bit low same thing when I normalize on the acquisitions unit, I get a normalized 14 versus about 20 in the second quarter and 18 in the year ago. So, maybe you could give a little color on why at least from where I see it, it seems a bit low.

Second question on stabled value 170 basis points of spread, that is just awesome and the question what I've like is maybe some color because historically you've guided to about 90 to 110 basis points of spread. Could you give us a little color on the invested assets side, what's happening with the yield very specifically and then on the crediting side what's happening there with those liabilities, how are you getting... where are the crediting rates right now and then you mentioned that it would get back to the second quarter level which I think was around 130 plus, why is it going to trend down there, give us some specifics? And then lastly, you think that Alabama is going to beat LSU this Saturday?

John D. Johns - Chairman, President and Chief Executive Officer

This is Johnny, we're going to...I'm going to assign answers to these questions.

Andrew Kligerman - UBS Securities

You're going to take the last one though right?

John D. Johns - Chairman, President and Chief Executive Officer

Right. I think Steve Walker our Chief Accountant will do the DAC, VOBA, Rich will talk will about stable value and I will talk about the gain? Steve?

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Okay. This is Steve. Just on the perspective unlocking, is non-labor purchase back unlocking but you're also unlocking all of your related self inducement assets and other SOP liabilities that can flow through the benefit line on the income statement. So there is two lines on the income statement that are affected by the unlocking benefits, settlement expenses and amortization of DAC and VOBA, and specifically within the Life marketing segment, there were offsetting effects that netted to the $8.8 million in those two income statement lines. So if you just focused on the amortization line, you would not get the right effect, but the actual effect on the amortization line was about $23.3 million reduction and amortization and the impact in the benefit and settlement line was about... it was a net increase of about $14 million minus about $1.5 million, still it's about $13 million. So if you net those two, you can get to the $8.8 net effect that we quoted.

Andrew Kligerman - UBS Securities

I see. So the $23.3 minus $13... so you had sort of a... gosh I'll work through it. I'll work through with you later on.

John D. Johns - Chairman, President and Chief Executive Officer

Okay.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Andrew, with respect to stable value, one of the things we've been seeing this widening spread environment all year as you know. The asset yield in the portfolio has been incredibly steady all year and roughly about 6% so that hasn't really changed during the year and we've been able to buy at those levels.

The real change came about on the credited rate side. We were able to offer some contracts in the marketplace, many of them LIBOR based as we were managing our assets and liabilities and when we introduced the LIBOR contracts into the equation, we were able to bring our credited rate down. It got down as low as roughly about 420, during the quarter. The reason that we are going to see a reversal is that when all of the financial crisis began in the month of September, we then saw LIBOR was well publicized, start to go haywire those rates have now moved up and what we've seen is that our credit, our average credited rate has move from that 420 level into the 450 as a result of the disruption in LIBOR and so that's the reason that we went from your $134 up to about $170 and we expect to go down to somewhere in that $130 this level again with the higher LIBOR levels that we're seeing go through our credited rate. And with that all I'll let Johnny for prognosticated about the gain.

John D. Johns - Chairman, President and Chief Executive Officer

Andrew you know the answer to the question.

Andrew Kligerman - UBS Securities

Probably. Yes.

John D. Johns - Chairman, President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Edward Spehar from Merrill Lynch. Please go ahead.

Edward Spehar - Merrill Lynch

Thank you, good morning. I had a few questions, on the 350 RBC expectation by the end of the first quarter. I'm assuming that has built in the internal funding of excess reserves is that correct?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

That's all is correct.

Edward Spehar - Merrill Lynch

Okay, and if for some reason you were able to do something other than fund internally that would give you something like 40, 35, 40 additional percentage points?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Yes, that's probably about the right range. We think it'll be somewhere around $175 to $200 million of excess reserves they were holding on the balance sheet into next year.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

And just into coup hard [ph] required capital is about $700 millions per year. The numbers are about right?

Edward Spehar - Merrill Lynch

Okay, and then... so $700 million is the denominator here, will turn up?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Yes.

Edward Spehar - Merrill Lynch

Okay, and in the corporate in other the mark-to-market with this trading portfolio in the line down mode. Can you give us sort of the average rating is that an A rated portfolio and what portion of that, Mark do you think is going to come back to you?

John D. Johns - Chairman, President and Chief Executive Officer

This is Carl Thigpen, our Chief Investment Officer.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

Yes, the overall portfolio is very highly rated, there is no maybe one bond in there that's below investment grade. The average rating of that portfolio would probably be A1 to low double A ratings. There are some shorter assets in there that will be maturing over the next few years. But there are some longer assets that we would need the credit spreads and the interest rate environment to cooperate on that. But overall we do anticipate, the mark someone back on that, as it rolls down the curve.

Edward Spehar - Merrill Lynch

And so... is there anyway you could give us... I mean a couple quarters ago, I think or maybe last quarter, you gave us some expectation... two quarters ago I guess some expectation about how much of that would come back?

Carl S. Thigpen - Executive Vice President and chief Investment Officer

Yes, that's hard to predict. We've been wrong on those predictions because of the widening spreads. We are starting to see a little better tone to the markets, the TARP has helped the market financial institutions on the spreads and the overall tone of the market is getting better. But I would be foolish to sort of predict what the thing --

John D. Johns - Chairman, President and Chief Executive Officer

One thing we can do, that we can certainly age out the portfolio and provide that information supplementally and I think that'll go to answering your question because some of the security, do pay-off and mature in the next year or so when we're expecting to pay-off at parts so there should be some natural recovery there.

Edward Spehar - Merrill Lynch

Then I guess the question is though if you just put this in run off and if everything precede as expected in terms of what actual losses will be, at some point here given your comments about the mark-to-market accounting not really being necessarily something we should be overly focused on I guess, maybe I am reading too much into it. You would expect that to just naturally come back to as the bonds mature those, is that correct?

John D. Johns - Chairman, President and Chief Executive Officer

That's correct.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

Yes, that's correct and I think the average life for me is that, this is probably in the three to four year range when you look at them. So we will start to see that number come down every quarter.

Edward Spehar - Merrill Lynch

Okay, and then I guess just on the corporate, they're participating mortgage income is below the $2 million that you usually assume. So is there a negative allocation to corporate or I mean it's a small number but I'm just curious --

John D. Johns - Chairman, President and Chief Executive Officer

I believe it was 400,000.

Edward Spehar - Merrill Lynch

Okay, and then finally, on some of the sales opportunities. I think there is some questions about concerned policy holder not specifically to protective but just overall about the financial services industry. But looking at some of the businesses that AIG was large and term life businesses is obviously one that's there. You guys have focused UL because term was very competitive. Are there any indications here early on of change in the market in terms of the term life business.

John D. Johns - Chairman, President and Chief Executive Officer

We have an idea of saying any change in terms of the pricing with respect to term insurance, one would naturally expect if the borrow is being raised with respect to how much capital one must hold for various ratings categories and just the credit volatility we're seeing at some point in same industry... the industry might think that but we haven't seen that as yet. We do see, we see some of the conference calls, we listen to those, some speculation that variable annuity business might actually stopped to be going through the transition in light of recent experience.

Edward Spehar - Merrill Lynch

Okay. Thank you very much.

John D. Johns - Chairman, President and Chief Executive Officer

Thank you.

Operator

And our next question comes from David Stiffer [ph] of DC Associates. Please go ahead.

Unidentified Analyst

Hi. I moved into the real pass [ph] buy, but can you tell me your cash for your equivalent book value based on what I can see is something like $8.5 of shares. Is that correct? And that would compare with roughly somewhere between $33 and $36 a share approximately a year ago.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

We're little confused by the question. I'm sorry, could you repeat that.

Unidentified Analyst

What is your... now, I'm sure that you looked at your book value per share?

Carl S. Thigpen - Executive Vice President and chief Investment Officer

Right.

Unidentified Analyst

And what should you have in cash or equivalent that is something that can be converted in to cash within 7 to 14 days.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

That, we have approximately $1 billion, the ball can reduce in our operating companies, as we speak and we have about $70 million shares outstanding.

Unidentified Analyst

Right, so that's about, that's net dollars a share.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Not more than that.

Unidentified Analyst

Okay, fine. But, not much more. Now, compared with the year ago, will it be somewhere between $33 and $36 a share.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

We've tried, I don't have the numbers in front of me, but we traditionally seen our cash balances, range for maybe $600 million to $1 billion, three or so, somewhere in that range, I think as I've look back over our quarters.

Unidentified Analyst

Okay. The other part of this is, what am I suppose to do with that loss of accumulated other comprehensive income per share, that's $13 a share, will anybody ever see that again?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Again. I am not in the account but... answer. That's just a mark-to-market adjusted for back in taxes and other things is unrealized so to the extent our securities pay-off when they believe in that will go away to the extent we have impairment to losses some of that will cover the loss. And that's... Steve you point --

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

I was just trying to comment that the company has the ability intend to hold those securities they're unrealized loss position to either recovery or to maturity. So, within and not expect to realize that though that $13 loss what we expect to recovery that pull those securities and let them recover. Not to say that we couldn't be subject to further realized losses, but we do expect to hold those to recovery.

Carl S. Thigpen - Executive Vice President and chief Investment Officer

Well as of September 30, and I'm sure that when somebody signed off for the quarterly statement that you had both management and board members look at that number and if you took a really cold, dirty look at that $13.28 how much realistically would you see when you get back?

John D. Johns - Chairman, President and Chief Executive Officer

Well I mean we're basically asserting that we do not need to write any of that off your income statement, therefore we are assuming that all of it would recover based on our current projections.

Operator

And our next question comes from Darin Arita from Deutsche Bank. Please go ahead.

Darin Arita - Deutsche Bank

Good morning.

John D. Johns - Chairman, President and Chief Executive Officer

Hi, Darin.

Darin Arita - Deutsche Bank

Johnny with respect to your comments about your rising capital requirements or the potential for rising capital requirements amongst the products, how does it protect to feel about its own pricing and whether it is risk adjusted returns are still adequate?

John D. Johns - Chairman, President and Chief Executive Officer

No, I think that's something that we've continually review. I don't think we think we need to do anything for the moment but I think we will watch market conditions and we will see where capital requirements shake out and continue to assess the way we price our products.

Darin Arita - Deutsche Bank

Okay, and then with respect to your once redundant reserves, how long could protective go on as funding that internally before it starts to have an adverse effect in your RBC ratio?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Darin, we believe the way we been enable to project our models and given our current level of sales that we could continue funding those for a number of years without having our RBC ratio is drop from the kind of the levels we're projecting for next year. But we would not be generating excess capital to go do acquisitions or other things would be funding all the reserves.

Darin Arita - Deutsche Bank

Okay great that's helpful. Thank you.

Operator

And our next question comes from Tom Gallagher of Credit Suisse. Please go ahead.

Thomas Gallagher - Credit Suisse

Hi, just a few questions on the RBC outlook and I guess how the rating agencies are looking at it. First question is have you all ran through sort of your plans for capital management yet with the agencies and do you think you'll be given sometime to rebuild capital now, that your below AA levels but plan to get back to those in six months that's my first question?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Tom, we've been in discussion with the couple of... several of the agencies in what we're telling them is essentially what we're telling you and their approach to that it... their approach in annuities is certainly got us under review which I have lot respect annuities and we'll just have to see, how they point it out?

Thomas Gallagher - Credit Suisse

Okay. So, I guess few follow-ups on it. Rich if I understood you correctly. Are you securitizing some of your whole loans and if so you're going to keep or hold on to the securitizations as to get that done or any of those going to be sold or how was that going to be?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Tom, if you're referring any commercial mortgages?

Thomas Gallagher - Credit Suisse

Yes.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Okay. We don't have any plans to securitize right now. The $4 million that were being subject to as we foreclosing that about $13 million of properties a couple years ago and its causing our staff in the elevated level of required RBC, its an eight quarter average and it rolls off for the end of the year and, that's where we get our benefit, our required RBC drops in the first quarter.

Thomas Gallagher - Credit Suisse

Okay. And, the pickup on that is, is it $200 million or what would that?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

It's approaching $200 million of capital.

Thomas Gallagher - Credit Suisse

Okay, so that's just an issue with the categorization of some of that portfolio and how that potential, what is the seasoning of that is going to look better as you roll into 1Q.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

That's correct.

Thomas Gallagher - Credit Suisse

Okay. So, there's really... is there any risk to that not happening because that's a big swing factor for your RBC.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

It should be mechanical.

Thomas Gallagher - Credit Suisse

Okay. So, yes. This is really just a passage of time. This is an execute... there is no execution risk in there?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

We're not planning to take any steps to achieve that result to except the passage of time.

Thomas Gallagher - Credit Suisse

Got it. Okay. The next question is on the stable value so you have $1 billion of maturities coming due. Can you give us some sense here, I mean if we step back and say historically looking at where some of you're ratings are right now. Can you continue to really operate in that business where is it? Is there a real possibility that this business isn't runoff for a couple of year period, If you were downgraded to single way and I really you may not want to sort of speculate and get ahead of ourselves here but can you just talk maybe about the opportunities under... maybe a range of scenarios and whether if in fact the business is put into runoff. How that portfolio backing it stands positioned then over what period of time, we would look for that to runoff over?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Tom, we'll just step back, recognize that we've been in the stabled value business since 1989 and we were actually upgraded to AAA by Moody's in 2002. So, we've operated with a lower rating for over a decade in that marketplace. What traditionally happen is, we maybe excluded from some purchasers who have strict AA guidelines across the board but what we've typically seen is that people may just not buy as much they may limit the diversification, we may have to pay a few more basis points in order to reflect the lower rating which is traditional in the marketplace. But, we think there is a business there continuing on, we've been in it before. We're not such a large player in that market that we don't think there is some opportunities.

The other thing with respect to if we saw a continued decline in the balance. As you know, we've run, kind of all of our cash flows and look at the company there. The balance here we continued to go down the assets supporting it but we have plenty of cash flow on a consolidated basis to meet those app that's part of our liquidity projection that we don't need new sales to meet outflows.

Thomas Gallagher - Credit Suisse

Okay and Rich if we just look at this as if you wrote no new business just to contractual maturities alone. How would this play out, if you think about it that way would it be over multiple years?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

It would simplistically be in the range of about $1 billion a year.

Thomas Gallagher - Credit Suisse

Okay that's helpful and then just last question is just a historical back to the benefit that you'll get in 1Q from some of the factors going away here on the asset charge. Would that be negated, if you had some new defaults on direct commercial mortgage loans?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

It could as we... if our number got elevated relative to the industries then some of that would be there, but we're not forecasting that right now.

Thomas Gallagher - Credit Suisse

Yes, I mean at this point there is nothing in the pipeline that would cause us any concern that could cause that number to be elevated at all. So, we don't anticipate that.

Operator

And our next question comes from John Fox of Fenimore Asset Management. Your line is open.

John Fox - Fenimore Asset Management

Okay, thank you. Good morning everybody.

John D. Johns - Chairman, President and Chief Executive Officer

John.

John Fox - Fenimore Asset Management

I have a number of questions. First just a follow-up on the last one, is stable... so we should models we think about the balance say for the next six months that we will continue to have stable value sales, is that correct?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

There should... well I think we're predicting that will probably drop the balance for about $5 billion at the end of the first quarter and then we really don't have a lot of significant outflows after that. So, I'm not sure if you model what the level of balance is, that we'd expect to be able to operate in the environment going forward?

John Fox - Fenimore Asset Management

Yes I definitely have the balance so that's helpful. Another question on the GMWB given where obviously you got some peers in this quarter. Can we just straight line that kind of ratio, if you're done 9% or the S&P was down 9% of third quarter is down 17% this quarter. Can we just kind of take that ratio and assume there'll be some additional GMWB charges or is it not that simple or can you help us out there?.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Steve Walker. It's really not quite as difficult... it's based on both equity market movements, volatility and interest rate curves, but the bottom-line as when we looked at the October decline in the S&P which I think is around 17%.

John Fox - Fenimore Asset Management

Yes.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

It has less than a 5 point impact on our RBC ratio. So, we just don't have that much exposure out there to really impact our RBC in a material ways.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Steve as I understand its volatility, it's one of the biggest drivers right now more maybe this much or more than the absolute level of the S&P

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Right

John Fox - Fenimore Asset Management

Yes I was asking too for the fourth quarter earnings just thinking about another type of mark in that segment.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

With respect, I was speaking more on the statutory side. We look at just the numbers for October, I think netted back the number was kind of in the 6 million this range negative mark-to-market on the GMWB FAS 133.

John Fox - Fenimore Asset Management

Right. Okay. Why this corporate get better. You mentioned the trading portfolios and run-off. So, I just... is that trend sir, can you just talked about why the corporate segment you would expect to get better overtime.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Well the trading port... the bonds in the trading portfolio in marks. I don't have it in front of me, it is significant discount to their what I call their original book value as they move to foreign [ph] and pay-off that will come back through income overtime. So, these marks that we've seen like the $20 million in the current quarter as an asset mature is just going to pay-off at par versus maybe it's market $0.95 currently.

John Fox - Fenimore Asset Management

Thanks. And I was under the impression, maybe on getting this mixed up on the Medico portfolio that when you had losses there. You, some how recoup those some insurance partners overtime, is that correct and if so where does that show up in your financial statements?

John D. Johns - Chairman, President and Chief Executive Officer

That is correct in those recoveries are both again the realized gains in on offline on our income statement. So, what you're seeing less there is the net number, net of recoveries on reinsurance contracts.

John Fox - Fenimore Asset Management

Okay. So, that's already in the net number that we say?

John D. Johns - Chairman, President and Chief Executive Officer

Yes. It is.

John Fox - Fenimore Asset Management

Okay and then last question might be a little unusual but I noticed in your June queue that you joined the federal home loan bank of Cincinnati, I believe. And I was just curious if by doing that you had some access to the TARP to either some type of banking subsidiaries or something of that nature or as you could just comment on that?

John D. Johns - Chairman, President and Chief Executive Officer

That doesn't give us access to TARP, we are watching however with interest the developments with respect to whether TARP will be made available to the insurance industry but we don't really no more about that than is out there I think, generally, I mean which is that we understand the Treasury Department is taking a careful look in that there is some view that they think there maybe some advantage to the U.S. economy to including our industry in TARP and like every insurance company we probably take a look at that and the event we became available but we're certainly not planning around that happening.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Let's me just John you will take another or two from you but it's about 9'O clock I know there is another call right behind our s that most people would probably want to jump off. So why don't we take another question or two and then as always we will be glad to follow-up offline to try to fill any gaps we created in our presentation.

Operator

Our next question comes from Mark Finkelstein [ph]. Please go ahead sir.

Unidentified Analyst

Good morning. I'll make this quick. I guess I just wanted to make a couple of clarifications on RBC, the comment... did you say that you could sustain 150 million of impairments through I guess over the next couple of quarters and still be ahead of 325% RBC did I hear that correctly?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Yes Mark, the 350 is our base case, it assumes normal earnings but it doesn't assume impairments or other things it can move it around. Its just the base case so if you again you go back to that requirements, it's going to be a little less than less $700 million than $150 million, of impairments say would reduce to roughly 25 points of RBC.

Unidentified Analyst

Okay and then just a clarification that you addresses, but the 350 does or does not assume some financing for XXX or AXXX reserves?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

It doesn't... so many kind of external, securitization financing or letter of credit anything like that. We just funded internally from our own resources.

Unidentified Analyst

Would that include like the bank line or --?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Not possibly, but It's very immaterially.

Unidentified Analyst

Okay. What has been your October credit performance in terms of impairments, if you can talk about that?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Mark that's a little early, we usually do everything at quarter end to go through there I mean you can see the marketing environment at this point, on the corporate side I think we're fine, we didn't see anything. We keep seeing the housing markets somewhat the deteriorates with the end of the year will look at where all of the residential bonds [ph] review again with this point. We don't see anything large at this point.

Unidentified Analyst

Okay and just finally I think it sounds like your, your okay with your capital position currently, but I'm just curious if you're looking at any non-traditional means of generating capital whether it's reinsurance of blocks or anything along those lines to improve RBC further.

Richard J. Bielen - Vice Chairman and Chief Financial Officer

Yes. We have a few of those ideas on the drawing board, but we're not actively at the moment pursuing any sort of capitalizing activity.

Unidentified Analyst

Okay. All right, thank you.

John D. Johns - Chairman, President and Chief Executive Officer

Let's take one more question and then say we will wrap this call up.

Operator

Our final question comes from John Nadal [ph]. Your line is open.

John D. Johns - Chairman, President and Chief Executive Officer

Hello John.

Unidentified Analyst

Good morning everybody. Couple quick ones, any difference in your impairment policy on the statutory versus the GAAP basis.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Steve Walker. The only difference we have really is statutory accounting on structure securities are requires you to do an impairment based on undiscounted cash flows. So, we would look at our recovery value on a bonds and the impairment would be based on that.

You will prepared down to the recovery value on our undiscounted cash flow basis and then on a GAAP basis we would take a down the fair value and in these markets that would be lower. On just the normal bond to credit impairments that we had on Fannie, Freddie, Lehman along with the same amount as to credit impairment that goes through on both adjusted GAAP same amount.

Unidentified Analyst

Okay. So, is it fair to assume in the follow-up to your answer on the structured that the impairments taken on the Alt A securities on a GAAP basis or higher currently than they are on a statutory basis and its still by about how much?

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

The impairments for the quarter on the Alt A's was about $36 million the stat impairment was about $24 million on a year-to-date basis the GAAP impairment was 116 and the stat impairment was year-to-date 39.

Unidentified Analyst

Okay. Thank you.

John D. Johns - Chairman, President and Chief Executive Officer

And then the other question I have for you is Rich could you just go back real quick through and you were going sort of fast in the prepared remarks on the annuity, the variable annuity impact on your risk base capital and could you talk a little bit more about the sensitivity to especially to October's that's some key down you something in order of magnitude 17, 18%?

Richard J. Bielen - Vice Chairman and Chief Financial Officer

The variable annuity given the fact of more small blocks of variable annuity items with respect to GMWB, that's kind of... it didn't have much impact on our RBC as of September 30th. But then we stressed it preliminarily as to what we saw through the end of October. So we used last Friday and ran it over the weekend and it didn't have less than 5 point impacts to our RBC is our preliminary estimate.

Steven G. Walker - Senior Vice President, Controller and Chief Accounting Officer

Just what Carl mentioned is 930, there was zero impact on the GMWB feature for RBC. Just the October is where we modeled that. Okay, John it?

John D. Johns - Chairman, President and Chief Executive Officer

Great, well thanks, everyone. We appreciate your participation in our call and I do thank you for your time and attention and feel free to follow-up with us if you have a follow-up questions. Thanks.

Operator

This concludes today's teleconference. You may disconnect at anytime. Thank you and have a great day. .

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Source: Protective Life Corp. Q3 2008 Earnings Call Transcript

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