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Protective Life Corporation (NYSE:PL)

Q2 2013 Earnings Call

August 1, 2013 9:00 AM ET

Executives

Eva Robertson

John Johns – Chairman, President and CEO

Rich Bielen – Vice Chairman and CFO

Steve Walker – SVP, Controller and Chief Accounting Officer

Carl Thigpen – EVP and Chief Investment Officer

Analysts

John Nadel – Sterne Agee

Chris Giovanni – Goldman Sachs

Steven Schwartz – Raymond James Associates

Sean Dargan – Macquarie

Mark Finkelstein – Evercore Partners

Dan Bergman – UBS

Tom Gallagher – Credit Suisse

Dan Bergman – UBS

John Nadel – Sterne, Agee & Leach, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Protective Life Corporation Earnings Conference Call. My name is Ben and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Ms. Eva Robertson, Vice President of Investor Relations. Please proceed.

Eva Robertson

Thank you, operator and good morning everyone. Welcome to Protective Life Corporation’s 2013 second quarter earnings call. Our call is hosted by John Johns, Protective Chairman, President and CEO; and Rich Bielen, our Vice Chairman and CFO. Here with us also we have Carl Thigpen, our Chief Investment Officer; Mike Temple, our Chief Risk Officer and Steve Walker, our Chief Accounting Officer.

Yesterday, we released our earnings press release and the supplemental financial information and both of these documents are posted on our website at protective.com. In addition to the information we released yesterday we are using a slide presentation today with our discussion. That slide deck is being webcast from a link on the Investor Relations section of our website and the file is available for download at that location.

Finally today’s discussion includes forward-looking statements which express expectations of future events and/or results. Actual events and results may differ materially from these expectations. You can refer to our press release and the risks and uncertainties as well as Risk Factor section of the company’s most recent report on Form 10-Q and subsequent 10-Q for more information about factors that may affect future results.

Our discussion also includes non-GAAP financial information and reconciliation to the GAAP measures can also be found in the supplemental financial information on our website.

And at this time, I’ll turn the call over to John Johns.

John Johns

Yes, Eva. Thank you very much, and good morning everyone. We really appreciate you joining our call this morning where mostly is to report solid earnings in the quarter, very much in line with our plan for the quarter and on track with respect to our plan for the year.

Net income in the quarter came in at $103 million or $1.27 per share. That’s a 40% increase over the net income we reported in the same quarter of last year. Operating earnings was $78 million or $0.96 per share and that is a 13% over the same quarter last year. We did enjoy strong sales in each of our three retail segments, life insurance, annuities and asset protection. I will note that while sales were robust in the variable annuity line in the quarter, the actions we’ve taken here recently to better manage those sales has started to take effect. And in the month of July, our sales will come in at about $150 million in the month. It translates to about $450 million for the quarter, which is below the plan we had for the year, which was about $500 million for the quarter.

Our statutory results, we also expect to be very robust when we finally close the books on those here shortly. We estimate that our risk-based capital ratio at the end of the quarter will come in in the range between 525% and 530%, which is pretty close to as high as we’ve ever reported here at Protective.

Please to report that we continue to press ahead on the MONY acquisition transaction. We’re making good progress on a variety of fronts and our hope and our expectation is still that the transaction will close on October 1st.

Again, overall, it was a good quarter. There are several moving parts. And at the moment, I’ll turn the microphone over to Rich Bielen, our chief financial officer. And Rich will walk you through more of the details and especially down to the segment level and we’ll try to clarify what some of those moving parts are and how they impacted what we view as a run rate for the rest of the year.

So with that again, we think it was a good quarter. We’re pleased with it and Rich I’ll turn it over to you.

Rich Bielen

Thank you, Johnny and good morning. If you would turn to slide 4, operating income for the quarter was $0.96 versus $0.85 in the second quarter of 2012. But we did have $0.31 of net realized investment gains in the quarter versus $0.06 a year ago. And our net income available to shareholders is $1.27 versus $0.91 a year ago.

Turning to slide 5, is a reconciliation of the net realized investment gains and losses. As you can see, based on normal portfolio rebounding, we generated $0.17 of gains on securities. As you recall, we have a micro arrangement where any gains and losses go through our income statement and during the quarter, the trading activity there resulted in $0.15 of gain. We had a modest amount of impairments during the quarter on some old non-agency mortgage backs. That was the resets during the quarter.

In the quarter, our derivatives related to our VA contracts was a positive $0.7. All of that was attributable to the widening of credit spreads during the quarter or what people referred to as non-performance risk.

On the mortgage side, we did book a reserve of about $0.04 during the quarter. Our delinquency rate is currently four-tenths of 1% on all of our mortgages over the robust gain activity. If there’s any properties we’re not comfortable with, we’ve been putting up reserves and moving those very quickly. The category is $0.01 resulting in net realized gains of $0.31 per share.

Moving to slide 6. Our book value at the end of second quarter was $48.91 versus $59.06 at the end of the year. Excluding AOCI, our book value ended the quarter at $38.70 versus $36.84 at the end of the year, up 5%.

As you know, interest rates have been up during the first half of this year. So our net unrealized gains declined from $3.1 billion at the end of the year, now up to $1.5 billion at the end of the second quarter.

Now moving on to the segments on slide 7, life marketing is reporting $24.7 million of earnings versus $30.3 million a year ago. Our sales are up 73% to $45 million versus $26 million from a year ago second quarter. We are still seeing the effects of the build-up in demand that we saw or the backlog from some sales in the fourth and the first quarter.

Our expectations with the balance of the year that sales in the third and fourth quarter will be in the range of $30 million to $35 million in each of the quarters, consistent with our original plan. Also endowed with these higher sales in the first two quarters are unexpected new product sales expenses versus our plan were about $3 million in each of those two quarters, holding down earnings during this period of time.

As you can see, our term mortality was 87% of expected. That’s about $2 million better than our plan for the quarter. And then during the quarter, we discovered on an old reinsurance contract dating back to 2003 that we needed to make a true-up with one of our reinsurers, and as a result, we had $4.2 million accrual related to that true-up.

Now moving to slide 8. Pre-tax operating earnings of the annuity segment is $36.4 million versus $28.6 million a year ago. We had very strong VA fee income related to the good markets that we’ve seen in the first half of the year. Our account balance for the year is up 19% from a year ago period. If you recall during the first quarter, we booked a reserve related to a guaranteed fund assessment in the corporate inaugural line. When we got the final bill and we’re able to ascertain where that fund assessment was related, we reallocated that expense of the individual line. And this line was impacted $3.3 million. So it’s merely a geography issue between corporate and other and the annuity line of business.

And also (inaudible) mortality was unfavorable, $7.6 million from a year ago, it was $2.4 million unfavorable to plan during the quarter. And then as you can see our sales of $857 million versus $829 million, I will make a note. In the second quarter, we have introduced a fixed index annuity product. We had a $27 million of sales as we’ve watched product but we have seen some positive momentum, and we expect those sales to increase over the balance of the year.

Moving on now to slide 9; acquisitions. Earnings in the quarter were $29.4 million versus $43.6 million a year ago. There’s an $8.5 million unfavorable variance related to mortality, interest and other benefit. The largest item of which includes some unreported debt claims of $5 million.

We discovered a block of previously terminated policies where there was some death claims needed to be paid in the period prior to their termination. And so we set that up during the quarter.

The balance of the unfavorable variance primarily related to some items in liberty. But I will continue to focus on the fact that was about $3 million but our accumulative actual to plan mortality and liberty is 98%. Since we closed that transaction in the second quarter of 2011, I often like to know, we went back and looked at our united investors’ and our cumulative actual complain mortality, I mean, neither the investor is actually 94%

Moving on, a couple of other items that we did mention in the first quarter. When I was going through realized gains and losses, we continue to have an elevated level of micro gains. And the way we do that is that the gains go through our income statements today and then over the remaining life of the bond that was sold, we have to reimburse through its counterparties.

So with a high level of gains, we’re now seeing higher levels of interest reimbursement to that. That impacted earnings of $800,000 during the quarter and that will be a recurring item for the balance of the year. Also our earnings are reduced versus a year ago by about $1 million related to some additional reinsurance we did on the Chase block in the first quarter.

So we talked about that in the first quarter call. I just wanted to remind everybody. Also, we’re really close to moving forward on the money transaction. We have been very active in terms of having people on the ground in Syracuse, working with the Oxo folks (ph). The next couple of months are really where the heavy lifting goes on. But that is our focus in the acquisition areas of trying to bring that to a close here.

On slide 10, stable value products. Earnings $22.5 million versus $16 million a year ago. We continue to have very strong spreads. We had sales of $205 million in the quarter. And as you can see our account balances had been able to maintain as a $2.5 billion level for the past few quarters.

We did have participating income of $5.5 million in the quarter, resulting in a total spread of 353 basis points excluding that participating income. Again, an adjusted spread of 267 basis points. And we would expect that spread to be maintained for the balance of year.

Moving on the slide 11, acts of protections, earnings are $7.4 million versus $6.5 million in the year ago quarter. Our sales are up 6% to $127 million versus $190 million a year ago. We have continued to see strong, US auto sales at approximately $15 million per hears. We also, in the quarter benefit from some favorable impact. The lowered expenses earlier this year, we took some actions to reduce our quick prints slightly and the benefit of that came through our earnings here in the second quarter.

I’ll now move to slide 12. One of the things that we wanted to do on this call is that we are very much on plan for the year on our earnings but we have had some unusual items that have gone through. So what we wanted to do is just reforecast for you our plan that we represented to you at our investor conference of last year.

And as you can see, life marketing, we see about $5 million decline from where it was in our plans. That relates to this unusual reinsurance accrual. In our annuity segment, we see a $13 million positive variance from the improved spreads and the good market performance with higher fee income.

On acquisitions, we had previously projected about $40 million a quarter run rate. We have seen some unfavorable mortality, the unreported claims. And we’ve expect in the last two quarters is a run rate more in the $37 million to $38 million accounting for this Modco effect in the reinsurance.

On asset protection, with the lower expenses, we believe it will come in a little better than planned. Stable value, we’ve seen stronger spreads than we forecast last year plus the participating incomes that will up strongly there.

Corporate and other, we’ve also seen some strong prepayment incomes. So we’ll come in a little better than planned. And I’ll focus on the pre-tax operating income. Currently, we’re expecting to be about $12 million higher than what we originally forecast back at our investor conference. On the after tax basis, we’ll be about $9 million higher. But offsetting is as a result of suspending our share repurchase, our share count will also be 1.9 million shares higher than we originally forecast.

So if you can see at the bottom, our reforecast now indicate $382 million versus our original plan of $380 million. We’re very much on that plan with some of the items moving among the segments. But I think that also shows the diversification of all of our businesses during this period of time and that even with some positives or negatives, they seem to offset each other.

Some key items we’ve just known in the reforecast assumption is there is no buybacks in 2013. As you know in the third quarter, we review our DAC unlocking so there’s no fair value changes or DAC unlocking this reforecast. We are reforecasting in our stable value spread for the balance of the year will be 270 basis points. And then we put no impact for MONY and MLOA acquisition into these. We’re trying to give you an apples to apples comparison versus where we were last year. And with that, I will turn it back over to Johnny for some final comments.

John Johns

Yes, thanks Rich. Again, we’re pleased with the quarter. We like the fact that our capital position is very strong right now. I would hear our retail businesses is performing well and being in a healthy state. We are making good progress to close the MONY transaction later this year. And again, a look at the numbers would suggest that with the first six months, we are very much on track toward the fulfillment of the plan that we set out last year.

With that. I think it’s time for questions. We’ll turn it over to you.

Question-and-Answer Session

Operator

Fantastic. Thank you very much. (Operator instructions) The first question comes from the line of John Nadel from Sterne Agee. Please go ahead John.

John Nadel – Sterne Agee

Hey, good morning. So I think Johnny and Rich, you sort of addressed one of the areas that I wanted to focus on in the opening remarks and that was the variable annuity sales. Is there something specific that took place during the second quarter? Was it just that others retrenched more than you might’ve have expected and so, additional market share came to you? Or was there, something in front of perhaps, a product change that may have driven sales or new distribution arrangement. Can you just give us some sense? Because obviously, you’re expecting and already seeing that that’s coming down quite a bit.

John Johns

Yes. John, yes good question. It’s a very dynamic process trying to manage your VA sales. We make a move with respect to our products and other competitors make moves and it’s hard to predict exactly how that will shake out. But that’s what we sought the first six months of the year, is that we took some pretty active steps to manage sale. We saw competitors to be even more proactive. And so we didn’t get the effects we desired of lower sales. But what we’ve done now is in some distribution systems, we no longer will accept 1035 exchanges with respect to VA product. And that tends to be a fairly significant segment of industry sales and that seems to be having the desired effect of bringing the run rate more in line with our plans.

John Nadel – Sterne Agee

Got it. Okay, that’s helpful. And then I guess there was – it’s kind of a surprising announcement a few weeks ago and it’s always delicate to ask about it in a management departure. But just curious as to if you can give us some color as to Carolyn’s departure, how you’re back filling that position and what you’re expecting going forward there?

John Johns

Yes, absolutely John, yes. Yes, Carolyn resigned. Carolyn Johnson resigned from the company. Carolyn did a good job here, brought some good changes, some discipline, process improvement to our company. We wish her the best as she pursues other opportunities. I will say that we have a very strong bench here at Protective and the guys behind Carolyn in life marketing and the annuity segment are very strong and we’re continuing on. And we do not expect any interruption with respect to our ability to execute on our plans.

John Nadel – Sterne Agee

Okay. And then just for Rich, just wanted to make sure – maybe you could go through for us, just remind us exactly how the funding is going to take place as we approach the closing of the deal a couple of months from now, the MONY acquisition. Could you just remind us how much cash is coming from the parent, how much in dividends need to come from the operating subs, debt, that sort of thing?

Rich Bielen

Yes, John. The current plan is, one is that the majority of the MONY is coming out of protective life insurance company. It will be the purchaser of the old Mutual of New York and co-insurance will also be in Protected Life Insurance Company.

At the RBC level that Johnny indicated, we are already $800 million above a 400% RBC threshold. As you know, we have a lot of room on our bank line. We plan on drawing on the bank line, $100 million. We are doing an add-on to one of our securitizations that is well along. And we expect to close here within the next week or two on that, that will contribute another $100 million and then just ordinary statutory growth will take care of the balance. So we are very much on plan with respect to our financial wherewithal and the promises that we’ve made with respect to the acquisition and the financial condition will be post acquisition.

John Nadel – Sterne Agee

Okay. Thank you very much.

John Johns

Yes, thanks John.

Operator

Thank you for your question John. The next question comes from the line of Chris Giovanni. Chris, go ahead, from Goldman Sachs.

Chris Giovanni – Goldman Sachs

Good morning. I guess first question on the MONY transaction. We have seen a nice move up here in interest rates and I know you don’t price your M&A around horizon interest rates, but wondering if that changes your outlook for expected accretion. And then when you get this deal done, how quickly do you think you could be back in the market and at what type of deal size?

John Johns

Chris, this is Johnny, I’ll start and then I’ll have Rich add a little more color. As you would recall, when we announced the transaction, one of the points we made is, it’s not terribly interest rate sensitive up or down, which we found is a very attractive feature of the transaction. But as always, we priced it using rather conservative assumptions I think as to the future path of interest rates.

And so it will be the case that if interest rates continue to rise at a modest pace, that the transaction will be modestly more profitable to us, but I don’t think it’s appropriate to try to readjust any sort of EPS modeling around the current change in interest rates. Rich, you want to –

Rich Bielen

Yes. The one thing I would say, Chris, on that is that the time we priced the deal, we would’ve considered reinvestment rates to be roughly 4% with the backup in rates that we’ve seen over the past 90 days. I think four and a half to four and three quarter rate would be appropriate, but that’s really on future reinvestments. So I think we look at it as really being a tailwind for us. But until we close the transaction and are able to leave enough of those cash flows, we won’t really know the impact on that.

With respect to your second question as to the ability to get back into the market, I’ll just translate that back into our capital plan. Without any capital management activity in 2014, we would project by the end of the year, we would have an RBC ratio that would be worth a 450 and that therefore, we’d have the potential for maybe up to another $0.5 billion of capital availability at that point in time. But that will be at year end 2014. So just to give you a little delta of what we think will grow during that period of time.

Chris Giovanni – Goldman Sachs

Okay. And then I wanted to see if you can provide some thoughts around New York taking a closer look here at the increase M&A activity from financial buyers. So recognizing a lot of them have primarily done asset deals versus what you guys like to do around pure protection. But do you believe this kind of strengthens you as a counter party to potential sellers. And then if those deal structures, going forward lead to maybe less aggressive bids from those players, would you be willing to look at more asset type deals?

John Johns

Chris, John. It’s hard to know where this whole discussion around nontraditional buyers in the industry is headed. I think, I’m sure you know better now that the Sunlight [ph] MONY transaction I believe was approved by the New York department this week, although with some strings attached to it that wouldn’t normally see in connection with a traditional strategic buyer type of transaction, I think. But who’s to say, again we’ve had good experience in partnering up with a nontraditional buyer in a liberty transaction.

Our preference continues to be strongly for mortality based liabilities spots of business. We think they did our profile better in terms of what our competencies are. But I prefer not to speculate on where all that is headed. It is certainly a dynamic environment though, I can say that. And I would say, my sense is, you probably have the same sense, is that within the world of private equity firms and nontraditional investors, I think there’s a perception that those who have been to the pioneers and getting into our space have actually done pretty well. It created some value in the process. I think they’ve certainly delivered some value to sellers.

We’re pretty adaptable and flexible as a company. I think we’re just going to figure and watch how it plays out in try to participate and continue to participate actively and aggressively in the M&A space as we have for the last 30 years. And we expect to continue to do so.

You know, I might also say I think your question was asked earlier by John Nadel about how we’re stepping in the M&A space and I think most of you would know that our Nancy Kane is now heading our M&A activity in the company. Carolyn retired recently after many, many years of extremely loyal and playful and valuable service to the company.

Those of you who know Nancy, I mean, she’s extremely well equipped to do this. She’s managed our securitization activity for a long time, very actively involved in the MONY transaction. She handled big pieces of the negotiation of that. So she’s ready to step up and play ball. And again, we think that our activity there will continue at the same level as it has in the past.

Chris Giovanni – Goldman Sachs

Thanks, appreciate the thoughts.

Operator

Thank you very much for your question Chris. The next question comes from the line of Steven Schwartz from Raymond James Associates. Thank you.

Steven Schwartz – Raymond James Associates

Hey, good morning everybody. Rich. I hate to ask this, but what’s the –

Rich Bielen

I’m sorry, Steve, you cut off there.

Operator

I do apologize. We seem to have lost the first in the queue. The next question comes from the line of Sean Dargan from Macquarie. Please go ahead Sean.

Sean Dargan – Macquarie

Thank you and good morning. I recall, I have a question around life mortality. It seems that a number of carriers are reporting actual to expected mortality getting closer to 100%. I’m just wondering if you have any observations around whether you think business in a certain year or years was underpriced or what’s going on with mortality generally?

Rich Bielen

Sean, I don’t think we have any real observation on that. I will say though that over time, you should expect our business to start moving towards that, because as we’ve observed, the better mortality, then we’ve incorporated that into new pricing which means we will be moving towards 100% as each vintage comes on board. But I don’t think we’ve noted in any of our activity or anything different on our vintages of business during these last couple years.

Sean Dargan – Macquarie

Okay. Thank you, that’s all I have.

John Johns

Thank you.

Operator

Thank you very much, Sean. The next question once again comes from the line of Steven Schwartz from Raymond James Associates. Please go ahead.

Steven Schwartz – Raymond James Associates

Can you hear me now?

Steve Walker

You can’t imagine how anxious we are to hear your questions.

Steven Schwartz – Raymond James Associates

Is that Steve Walker making a joke on my behalf? Oh boy. Rich, I hate to ask this question, but where would you put the run rate for the quarter here? There are a lot of moving parts.

Rich Bielen

I think the run rate was actually around what we reported, $0.96. If you really cut through it, we probably had about $10 million of extraordinary investment income between prepayment fees and our participating income of above our plan. Offsetting that, we did see the shortfall related to the unclaimed property and the reinsurance accrual. Those two came to just about $10 million. Everything else are small pluses and minuses within the division’s expenses, positive mortality here, negative mortality there. So I think that run rate of mid 90 is about right.

Steven Schwartz – Raymond James Associates

Okay. And just on the sense of you’re looking at the acquisitions. It wasn’t clear to me from the slides. The 8.5 million variance, does that include the Modco interest expense in Chase or not?

Rich Bielen

It does not.

Steven Schwartz – Raymond James Associates

Okay.

Rich Bielen

So the 8.5 includes the 5 million of unclaimed property and then a lot of other little million dollar items with some adverse mortality in there.

Steven Schwartz – Raymond James Associates

Okay, got that. And then something I noticed. What is the – maybe you can update on this, what is the plan assumption on the actual to expect for Life?

Rich Bielen

The original one was 92%. And this kind of goes back to Sean’s question. As we add new business and we move through time, that number shifts slightly. So as we looked at it our actual to plan was a favorable $2.2 million in life marketing in the quarter.

Steven Schwartz – Raymond James Associates

Okay. And that would translate to what a loss 87 A and E [ph], but backing out the 2.2 does that translate, I can work it up, does that translate to like 90 now?

Rich Bielen

Probably 91 I think is where it comes out to.

Steven Schwartz – Raymond James Associates

91, okay. And then just one more if I may. On the fixed index annuities, sales have started, you’re talking about momentum. Where are you selling this? Where are you seeing the momentum?

Rich Bielen

Through the bank channel as you know, when the banks, the traditional SPDA [ph] in most cases has a credited rate of about 1%. That’s not been very attractive to consumers. And in fact in our discussions with the banks, they were the ones who asks us to create a fixed index annuity in order to be able to sell.

So as we’ve seen SPDA sales come down, we think this may replace some of that on a going forward basis. And again, it has a commission structure much more similar that we would see through a bank channel on a going forward basis in the fixed index product.

Steven Schwartz – Raymond James Associates

Okay. That’s what I had. Thanks, got you [ph].

Operator

Thank you very much for your question, Steve. The next question comes from the line of Mark Finkelstein from Evercore. Please go ahead.

Mark Finkelstein – Evercore Partners

Good morning. I think every quarter I’m surprised by the strength and stable value spreads. And maybe I’ll ask the question this way. If you just look at the run rate for the back half of the year that you’re suggesting, it cost 66 million annualized. And that compares to what you enter the year at I think 55 million.

And I’m just thinking about expectations that you modeled down in your investor day, kind of 51 million for 2014. And I’m trying to understand how to think about forward stable value earnings beyond ‘13.

Rich Bielen

Mark, I would tell you that the late environment stage where it is, we will continue to see 200 plus basis point spreads for the next couple of years. I don’t have a more refined forecast in that at this point. I would expect that this second half of the year, we’ll probably represent this keep spread [ph]. As we’re describing it’s about 270 basis points. And now it will start to come down in an orderly basis over time.

And to just remind you, the reason we’re seeing the real benefit is we all a little longer in the duration. We’ve been re-pricing the liabilities or credit degrade greater being coming [ph] down dramatically. But our portfolio yield have been coming down but on a much slower basis. But we’re about through the remainder of those higher cost contracts here in the beginning of the third quarter.

So I don’t see much more decline in the credit degrade to the policy holders. So as a result you’re going to start to see that come down. But it’s going to come down in an orderly way. It’s not going to come down dramatically based on where rates are today.

Mark Finkelstein – Evercore Partners

Okay. I guess one of the reasons that spreads are as light as they are because you called all the retail notes [ph] awhile back, and I assume that that’s fully played out.

Rich Bielen

That has played [ph], there may be one small one out there, but it’s $25 million or something. But everything that we could have called, we called up to now.

Mark Finkelstein – Evercore Partners

Okay, perfect. Participating mortgage income, remind us about what is a normalized level and where that falls in terms of your own allocation?

Carl Thigpen

Yes, good morning. This is Carl. We put in the plan $15 million of extraordinary income for the year. On a quarterly run rate, we’re probably a little ahead of that. But as you know with real estate sales, it’s very lumpy. We do see some additional sales over the year, but probably not the same rate that have been going.

Rich Bielen

And in that we forecast Mark, we have presumed 3.8 million of extraordinary income in each of the last two quarters consistent with our $15 million run rate.

Mark Finkelstein – Evercore Partners

Okay. But just to help, the $3.8 million, does that get split between stable value and corporate? Or how does that get split?

Rich Bielen

It is all in corporate, although, if a loan turns out to be in stable value, the geography may wind up somewhere else. But for the reforecast it’s incorporate.

Mark Finkelstein – Evercore Partners

Okay. All right, thank you.

Rich Bielen

Thank you.

Operator

Thank you very much for your question Mark. The next question comes from the line of Dan Bergman from UBS. Please go ahead.

Dan Bergman – UBS

Hey, good morning. I just want to first follow up on the fixed index annuity sale, can you give us any sense of how the $27 million in the quarter compared to your expectations? And also I think you mentioned positive momentum in those sales within expected increase going forward? So I just want to see if you can give any more detailed thoughts or how much or how quickly those sales may ramp up going forward? Thanks.

Rich Bielen

Again, the $27 million is little less than we plan. But mostly products usually start off pretty slow. I think we’re hoping for sales over time of $200 million to $300 million through this product.

So I could see us getting to an annualized rate there over the next couple of quarters as that moves up. I can see the sales reports every day. And we’re seeing sprinkling of those sales continuing. So I’d expect that 27 to be moving up in each of the next two quarters.

Dan Bergman – UBS

Great. And just a little bit of a higher level question. I know a number of your competitors gave some new disclosures around their enforced variable annuity businesses at their investor days over the past couple of months including I guess showing accumulative cash flows over a variety of market scenarios.

So I just wanted to see if you had any reaction to those presentations or new thoughts around the VA business in general.

Rich Bielen

We’ve lifted all of those presentations and it all had slightly different flavors to them. I think it was our intention that when we get to our investor conference later in the year, we would take a little bit of a deeper dive around our own business. I think the big thing to remind everybody within that business is we really didn’t enter the business to oppose the financial crisis to speak of.

And so, we don’t have any legacy issues around the block. Our account value exceeds our benefit base in the terms of the current market. And so, I think some of their presentation had a different flavor, because they were addressing different issues that we might address at our conference.

Dan Bergman – UBS

Great. Thanks so much.

Operator

Thank you very much for your question Dan. The next question comes from the line of Tom Gallagher from Credit Suisse. Please go ahead.

Tom Gallagher – Credit Suisse

Good morning guys.

Rich Bielen

Hi, Tom.

Tom Gallagher – Credit Suisse

I just want to ask a question on the, I guess the comment that was put out by the New York insurance regulator about the use of CapEx [ph] and financing structures. Where do you guys if anywhere see that going? Do you think there’s going to be any changes on the way you financing or the industry? Any comments on that would be appreciated.

John Johns

Yes. Tom, this is Jonny. I would say that I think the regulatory community is having a very interesting discussion debate around what’s the appropriate use of CapEx and how are they appropriately regulated. I think every regulator that are out here speak to the issue. Their interest isn’t doing what’s best for the policy owner. And they want to make sure that they are discharging their duty to protect policy holders as the best they know how. And I’ll say that people outside of that issue, they just come at it from a little bit perspective in terms of what is in the best interest of policy holders.

We’re actively involved in the discussion through our participation in that Trade Association [ph], the American Council of Life Insurers. And ACLI has a paper out in which they plan on the ACLI’s position on captives [ph] against what Superintendent Larsky said in recent statement [ph], there’s a high degree of confluence in terms of agreement between the two positions, there are points of bearing it.

So I’m hopeful that they at least starting [ph] what we’re advocating that the industry there is advocacy efforts helps the NAIC to get to a resolution where cap [ph] are still available as a mechanism for financing redundant reserves with respect to products that create excessive redundant reserves like guarantee term in UL products.

I think that to the extent there are any sometimes called abuses or outlier kind of positions on captives are used. I hope those are ran done [ph]. And regulators put some guardrails around those sorts of things. But I don’t have a crystal ball. I can’t really predict how all that’s going to come out, but that is our hope. And certainly what we’re advocating is a comfort level in the part of regulators that captives scanning does their useful purpose [ph]. They do keep the cost of life insurance affordable for particularly for middle and lower income consumers, to give them benefits that at the heart of the entry provided [ph] they didn’t have captives available to them.

But to the extent there are any things on the fringe that aren’t in the best interest to policy holders if those things are changed and ran done by the regulators.

So, I think Scott have optimism. We got some great regulators out there, they all trying to do their best and I think it got to be helpful that they’ll get to an answer this is a win for everybody.

Dan Bergman – UBS

Got it. And Jonny, do you think, I mean, is the risk for you and the risk for others that are using some of the structures from a financing stand point simply that you’d have to finance them more conservatively? I mean, does that, because in my mind this really isn’t a capital issue at all, especially considering their redundant reserves. It would simply be, if this were to go in a more of a negative direction, it would simply increase the funding cost. Is that the right way to think about it? And if it is, where could that potentially go for you, if this did play out negatively?

John Johns

Well, yes, I think if it did play out negatively for the industry, I think what you probably see is products who get more extensive if they have robust guarantees in them. And companies who probably try to redesign products to provide less robust guarantees which will create lessen way of holly [ph] redundant reserves.

There’s always this question about offshore reinsurance. I mean there are other ways to skin the cat. I think we don’t really employ those ourselves. But I think there are out there with their other ways to finance redundant reserves. I mean, that’s one of the real goal I think is to get [inaudible] reserving with rational set of rules so that you don’t have all these issues around excesses reserves and the need to use captives in order to offer the kind of products that consumers, they really want, which is with pretty strong interest rate guarantees in them.

So I don’t know. It will be interesting to see what happen. My guess is the products will be less appealing to consumers and it will be more expensive if the captive discussion goes in a way that significantly restricts the use of captives.

Dan Bergman – UBS

Got you. Thank you.

John Johns

Thank you.

Operator

Thank you very much for your question Tom. The next question comes from the line of John Nadel again, from Sterne, Agee.

John Nadel – Sterne, Agee & Leach, Inc.

Good morning. I have more of a high level question for you. The Asset Protection Division, I guess at this point is running it about maybe 5% or 6% of the total companies earnings. And I know there’s been some growth there, but there’s also been some very choppy results. I guess I’ll just ask you this question Jonny. How core is that business to protective life as you continue to do acquisitions that in the life insurance side primarily and you’re growing the annuity business at a relatively rapid pace? It feels like that division is getting to be a smaller and smaller portion of the company. I just wonder strategically where you see it fits longer term.

John Johns

Well, again, we’re pleased to see the improved results in that segment. We have young leadership there that’s doing a great job of better managing expenses and better managing sort of risk selection with respect to the products. And you’re starting to see the result of that already. And I’m pretty excited about seeing where that team can go with that product line.

You do put your finger on something and then at least to start leaders [ph], there’s not been a lot of strategic confluence between that line of business in our other life and annuity businesses or acquisitions business. But it’s part of our new customer engagement strategy. We’re actually starting to try to see if there is some.

One thing that business does, it brings in a lot of new customers every month, hundreds of thousands of new customers every year. And these are people that have demonstrated, they value risk protection products at written checks, providing checks [ph]. There are demographic. It’s very attractive to our industry because they tend to be in that income level, middle income, low to middle income level where we think there’s an underserved market.

So that’s kind of new frontier for us. We try to see where there is in strategic opportunity to length that business back to the other. So we never say never about anything [ph], but we kind of like the trajectory of that business right now.

John Nadel – Sterne, Agee & Leach, Inc.

I appreciate the thoughts. Thank you.

John Johns

Thank you.

Operator

Thank you very much for your question John. Ladies and gentlemen that is all the time we have questions. I would now like to turn the call back over to John Johns for closing remarks.

John Johns

Well, just once again, I would like to say [ph], how much we appreciate everyone’s interest in following our company. And we thank you again, for your participation in the call. Have a good day.

Operator

Thank you very much for your participation in today’s conference ladies and gentlemen. This concludes the presentation. You may now disconnect. Thank you for joining and have a good day.

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