The Phoenix Companies, Inc. Q1 2010 Earnings Call Transcript

| About: The Phoenix (PNX)

The Phoenix Companies, Inc. (NYSE:PNX)

Q1 2010 Earnings Call

May 4, 2010 11:00 am ET


Naomi Kleinman – Head Investor Relations

James Wehr – President, Chief Executive Officer

Peter Hofmann – Sr. Vice President, Chief Financial Officer

Christopher Wilkos – Chief Investment Officer

Phillip Polkinghorn – Senior Vice President Business Development


[Alex Obsevich – Credit Suisse]

Robert Glasspiegel – Langen McAlenney

Andrew Kligerman – UBS

Eric Berg – Barclays Capital


Welcome to the Phoenix first quarter 2010 earnings conference call. (Operator Instructions) I will now turn the call over to the head of Phoenix Investor Relations, Naomi Kleinman.

Naomi Kleinman

Good morning and thank you for joining us. I am going to start with the required disclosures and then turn it over to Jim Wehr, our President and CEO for an overview of the quarter. With us today are Peter Hofmann, Chief Financial Officer, Chris Wilkos, Chief Investment Officer, Phil Polkinghorn, Senior Vice President for Business Development and Mike Hammerhand, Chief Accounting Officer.

Our first quarter earnings release, our quarterly financial supplement and the first quarter earnings review presentation are available on our website at Slide 2 of the presentation contains the important disclosures. We may make forward-looking statements on this call that are subject to certain risks and uncertainties. These risks and uncertainties are discussed in detail in our first quarter earnings release and our latest SEC filings. Our actual results may differ materially from such forward-looking statements.

In addition to generally accepted accounting principles, we use non-GAAP financial measures to evaluate our financial results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our press release and financial supplement.

Now I will turn the call over to Jim.

James Wehr

Thanks, Naomi and good morning to everyone. We appreciate you taking the time to join us for our first quarter call. This morning I’ll provide some perspective on our results and Phoenix’s progress and then Peter will take everyone through the details of the numbers. Chris will follow with the investment results and then we’ll proceed to questions.

Last quarter I said the signs pointed to a better year ahead for four key reasons; first, that we expected the results of our aggressive expense reduction efforts to kick in, second capital would grow organically, third, investment performance was improving on all fronts and would continue to improve and fourth, our growth initiatives would begin to gain more traction.

Our first quarter results show continued progress in all four areas and provide early signs that 2010 will be a better year for Phoenix. We produced GAAP net income and statutory net income for Phoenix Life in the quarter, and this is the first time we’ve had both since the second quarter of 2008.

As you can see from the earnings release, our balance sheet is notably stronger. Statutory surplus grew by $85 million and we added 45 points to our RBC, now standing at 268%. On our last earnings call we projected we would add 40 percentage points from organic capital growth this year, and as you just heard, it increased by more than that in the first quarter.

We’re pleased with that positive development, but it was driven by some unusual items so we’re not projecting that pace of capital growth for RBC improvement through the remainder of 2010. Peter will provide additional detail behind the increase. Suffice it say these are good developments and ones that enhance our ability to focus on growth.

I am particularly pleased with our investment performance and its contribution to the balance sheet, which strengthens the base from which we can grow this company. We had a big drop in unrealized losses, lower impairments and lower below investment grade holdings as well as continued solid net investment income.

This portfolio and balance sheet improvement gives us time to analyze, develop and execute on the right growth initiatives. Prudent action is critical here and we have no appetite for blind alleys or missteps, but prudent action doesn’t mean sitting on our hands.

As evidence of our commitment to generate profitable growth, I’ve asked Phil Polkinghorn to take on a new assignment and focus all his energy on our growth pillar. This includes expanding in the middle market and repositioning our product portfolio including alternative retirement solutions.

Phil and his team are fully engaged in fueling growth at the company along with Ed Cassidy who leads our new distribution company, Saybrus Partners. Our initial accomplishments appear to validate this prudent approach.

Saybrus Partners, which we launched in the fourth quarter, is developing nicely as we ramp up third party insurance sales in the Edward Jones system. We are optimistic about its success and expect Saybrus to generate positive cash flow by the end of this year.

At the same time, we’re developing new relationships with middle market distributors including independent marketing organizations. And as you know from our call last quarter, we’ve added nearly two dozen new distribution agreements with IMO’s.

The growth initiative right now is focused primarily on our repositioned annuity products. Although sales are still modest, 40% of annuity deposits in the first quarter came through new relationships and we expect to expand life distribution further as we reposition that portfolio.

It’s important to note that despite the current low level of new sales, our revenue base is stable due to the strong performance of our investment portfolio and year over year growth in fee income which offset lower levels of premium from our In force business.

Another piece of good news is the quarter was that Life persistency improved to the best levels we have seen since 2008. We also continue to trend an improvement in annuity persistency. So we have a stable revenue base that is giving us runway, combined with proven persistency and growth in statutory capital at RBC.

While we’re seeing a number of signs of improvement across our business, there is still a lot of work to be done. This quarter’s favorable results put us in a position to make more progress in the coming quarters, especially in our growth initiatives.

We believe that the progress in the quarter should encourage people in the marketplace to give Phoenix a new, fresher look whether they be existing or potential partners, clients or other important constituents. We certainly expect our results this quarter, especially the growth in capital and swing in earnings to help with any conversation about doing business with Phoenix.

In sum, our foundation is stronger, but we’ve still got more building to do. As we look forward, I can tell you our resolve to continue building on these step-by-step successes is firm. We look forward to providing you updates as we make the necessary progress in turning around our business and developing sources of growth.

I’ll be back for questions, but now let me turn it over to Peter.

Peter Hofmann

Let me start by summarizing the key results of the quarter on Slide 3. As Jim said, the first quarter demonstrates that we moved the company from a position of capital consumption to one of capital generation. This is evident in the underlying business trends and our GAAP earnings, and importantly, in our statutory results as well.

On a GAAP basis, we had operating income of $12.9 million or $0.11 per share excluding unusual items. Net income was $13.7 million or $0.12 per share. Statutory net income for Phoenix Life was $14 million versus a loss of $15.7 million a year ago. This was driven primarily by lower impairments combined with realized investment gains.

We had a statutory net gain from operations of $4.3 million versus $12 million a year ago. The difference year over year was higher expense largely related to pension plan contribution this quarter. Surplus increased by 15% versus last quarter and stands at $661 million as of March 31. Estimated RBC at the end of the quarter was 268%, a 45% increase over year-end 2009.

On Slide 4, I highlight the trends in operating earnings in book value. For the first quarter, unusual items net out to a negative $0.03 per share. Those items include $5.9 million in unusual expenses including severance and tax adjustments as well as $2.7 million in tax benefits. As we indicated in prior calls, for the time being we are excluding tax benefits or expense from our comparisons because we have a zero effective tax rate.

Book value per share improved to $10.40 in the first quarter from $9.82 at the end of 2009. Book value per share excluding FAS 115 and OCI is up this quarter for the first time since the fourth quarter of 2007.

Slide 5 shows income statement detail excluding the closed block. Although up year over year, revenue is down from the fourth quarter primarily because of lower fee income and lower surrender charges. Also recall that the fourth quarter had an unlocking that increased fee income by $5.8 million.

Benefits are lower largely because of favorable mortality. Higher expenses reflect the tax adjustments I just mentioned as well as higher variable compensation.

The regulatory closed block contribution of $14.4 million, while lower than 2009, is consistent with the path of the block established at the time of the mutualization and represents roughly the expected quarterly level in 2010.

Tax benefits against operation is substantially offset by tax expense against realized gains for an overall effective tax rate of zero. The modest loss in discontinued operations relates to Philadelphia Financial Group. We continue to expect the sales of PFG to close in the second quarter and benefit statutory capital.

As I said on last quarter’s call, we have revised the metrics that we’ll use to report our mortality. We want to provide you with a more comprehensive view across all our life insurance product lines in way that’s more appropriate to our current business strategy.

Slide 6 shows two mortality cost ratios rather than the margins that we used to report for individual products. The open thought mortality benefit ratio is similar to the mortality margin that we’ve shown in the past; however, it combines universal life, variable universal life and our older grandfathered COLI block of business.

The numerator of the ratio is GAAP net death benefits and the denominator is the cost of insurance charges we assess. As you can see, open block experience this quarter this quarter was favorable particularly as measured against the four-quarter moving average.

The closed block metric same cost shows claim costs per 1,000 net amount at risk in force and is presented on a statutory basis. Because of the policyholder dividend obligation, closed block mortality does not directly affect GAAP earnings.

The closed block also had very good experience in the past two quarters. The trend for this metric should increase, but only gradually as the block ages, as increased expectations for claims will be partly offset by increased funding of the policies.

Slide 7 shows annualized aggregate surrender rates based on contract value surrendered. Experience can differ significantly by block of business. Annualized life surrenders improved in the first quarter dropping to 8.4%, the lowest level since 2008. Notably, in the closed block, annualized surrenders were at 7.7%, their lowest level in five quarters.

Annuity surrenders were at an annualized rate of 12.2%, about even with the fourth quarter. Again, my usual reminder that these surrender rates are more significant from an economic value perspective than from a general account liquidity perspective. They do not necessarily represent cash out the door, because in many cases, they’re loans outstanding against the policies and for more recently written business, charges are due upon surrender. In addition, the measure includes separate account as well as general account surrenders.

As you heard from Jim, one of our critical initiatives continues to be controlling expenses. Slide 8 shows consolidated statutory expenses on the left adjusted for noncore items. The largest item was a pension contribution in the first quarter.

There was an uptick in expenses in the first quarter reflecting higher variable compensation expenses and modest investment in growth initiatives.

On a GAAP basis, core expenses are down year over year but the trend is less visible due to the impact of deferrals. A significant portion of the reductions that we took were in new business areas that with higher sales volumes would have been deferred.

For example, we deferred $1.2 million of expense this quarter compared with $12.2 million in the first quarter of 2009. When you look before deferrals, core GAAP expenses are down 19.4% versus a year ago.

Slide 9 shows an update of our tax attributes. As I mentioned earlier, the effective tax rate remains close to zero as taxable income has been offset by prior period net losses. The DTA for capital related accounts increased from December 31, while the DTA related to ordinary accounts decreases. As you can see, we continue to carry full valuation of allowances against DTA’s.

As a reminder, the GAAP tax valuation allowances do not have any bearing on whether deferred assets, tax assets will ultimately be available to reduce taxes. We believe that our tax attributes still have substantial value as was demonstrated this quarter and substantial time remains for us to continue to recognize these benefits.

Let’s move to realized gains on Slide 10. Chris will cover the impairments and transaction gains in a moment. I’ll just comment briefly on our variable annuity-hedging program. The program generated a $7.3 million economic gain in the quarter. The gain was driven by low market volatility and favorable dividend risk primarily in January of the quarter.

It was partially offset by a $3.7 million change in the non-performance risk factor that represents the change in the liability due to Phoenix’s own credit.

The summary of our balance sheet metrics is shown on Slide 11. Leverage remains low at 24.5%. We repurchased a modest amount of our debt in the open market in the first quarter and through the first quarter, we have effectively retired $46.4 million par of our $300 million senior debt issue.

Holding company liquidity was $51.4 million in cash and securities as of March 31. As a reminder, we do have a stable liability profile with no material exposure to guaranteed investment contracts or institutional funding agreements, no securities lending activities and no exposure to credit default swaps.

Slide 12 highlights some of the detail of our first quarter statutory results. Consolidated pretax gains from operations improved from a loss of $69.8 million in first quarter of 2009 to a gain of $36.6 million in the first quarter of 2010. As I mentioned earlier, statutory surplus or Phoenix Life increased by 15%.

The increase exceeded our expectations and was driven by gains in the alternative asset portfolio, mark to market adjustments on below investment grade bonds and higher admitted deferred tax assets. We expect additional capital generation through the year, but not at the pace of the first quarter.

RBC is estimated at $268 million as I already mentioned. The increase from year-end was primarily due to lower variable annuity capital charges and the growth in surplus.

And with that, I’ll turn it over to Chris for a discussion of the investment portfolio.

Christopher Wilkos

My job in managing the investment portfolio continues to be about the company’s first pillar, a healthy balance sheet and this story this quarter is a very good one. As investment markets continue to rebound in the first quarter, the Phoenix portfolio, which has been carefully constructed, benefited in several key areas including solid investment income, a sharp appreciation in portfolio values, reduced bond impairments and stronger credit quality.

Let’s start with net investment income on slide 13. Sequential net investment income fell slightly, driven primarily by a small decline in alternative investment returns. Income from long term debt securities increased by $1 million as we continue to reduce our liquidity position by deploying cash into longer term investments.

The decrease in alternative asset returns was attributable to a real estate partnership in the closed block. Income from venture capital and mezzanine funds jumped from $5.6 million in the fourth quarter to $10.5 million in the first quarter.

Alternative investment returns have continued to rebound with improvements in the equity and debt markets. Net investment income does not fully reflect the performance of our alternative portfolio. During the quarter, we had a $22 million gain on a direct private equity position, which had a book value of $5.5 million. That gain is reflected in realized gains on our income statement.

While gains in direct equity investments are lumpy and not predictable, they have historically enhanced our surplus in GAAP equity. The increased M&A activity, which was responsible for the gain, bodes well for future performance in our alternative portfolio.

Consistent with the ongoing improvement in credit markets and declining default rates, our portfolio impairments shown on Slide 14, declined to $14.5 million in the first quarter. These impairments were concentrated in structured investments including Altay residential mortgage backed securities and CLO’s. We have one small impairment in our corporate bond portfolio and experience no impairments in our private placement bond portfolio.

In spite of market concerns about commercial real estate, our CMVS portfolio has held up very well, and we have suffered minimal impairments in this category of bonds. We believe this reflects our disciplined approach and in-depth knowledge of these securities, and since we have almost no commercial mortgage whole loans, we have no impairments in that asset class.

Slide 15 illustrates the continued dramatic improvement in unrealized losses in the Phoenix fixed income portfolio. With tightening credit spreads in all sectors, the unrealized loss in the portfolio declined sequentially by $255 million, dropping to $70 million at quarter or less than 1% of our portfolio book value.

We had indicated a year ago that we thought the vast majority of unrealized losses in the portfolio were driven by the irrational credit and liquidity spreads in the market, and were not indicative of future realized losses.

As spreads have normalized and the flow of credit has been strong, our unrealized losses have dropped by over 95% and credit impairments have also moderated, reflecting the strength and resiliency of the investment portfolio. The improvement in asset valuations has been a significant factor in strengthening our balance sheet and enhancing surplus.

On Slide 16, the portfolio’s percentage of low investment grade bonds declined from 10.8% at the end of Q4 to 10.1% at quarter end. Our upper limit for low investment grade bonds is 10% of the total portfolio and we expect to move below that limit during the second quarter.

During 2009, downgrades to below investment grade were significant in all bond market sectors, but especially in structured bonds. Beginning in the fourth quarter of ’09, downgrade action slowed dramatically, allowing us to reduce the percentage of low investment grade bonds in the portfolio with minimal economic loss.

In the first quarter of 2010, we began to see upgrades of securities from below investment grade back to investment grade. We also negotiated several repayments of low investment grade private placement bonds at their book values. The value of private placement covenants is especially evident in a stressed markets, and the covenants allowed us to exit these positions and reduce our below investment grade holdings with no losses.

The significant appreciation of low investment grade markets has meant that we can sell positions close to book value. We have been patient and used the strength in the below investment grade market to sell smart rather than simply selling it to fire sale conditions that prevailed in the first half of 2009.

Slide 17 provides an update on liquidity in our portfolio at quarter end. Our liquidity position is slightly lower than year-end ’09 with a decrease from about 12% of the fixed income portfolio during mid ’09. The improved bond market from both valuation and liquidity perspectives has allowed Phoenix to decrease highly liquid assets.

More importantly, we have shifted the composition of our liquidity pool from very low yielding Treasury bills and notes to higher yielding agency mortgage backed securities. Based on the improvement in portfolio valuations, and decreased surrender activity, we have reduced our liquidity target from 10% of the portfolio down to 8%.

This decrease in liquid assets will be deployed into investment grade public and private debt securities to enhance investment income.

Slide 18 summarizes our non-agency residential mortgage holdings by borrower type, credit quality, vintage and collateral type, the factors that drive the ultimate performance of RMBS. Our story here remains largely the same. The Phoenix RMBS portfolio is high quality, seasoned, and has a substantially higher amount of fixed rate mortgages compared to the market overall.

We believe these factors drive relative performance and the percentage of delinquent loans in our RMBS holdings is about half of the market delinquency rates for each of the categories listed in this table.

Slide 19 shows a snapshot of our CMBS portfolio. There has also been little change during the last several quarters. Even after the rating agencies downgraded a significant portion of the CMBS market, our portfolio remains 99% investment grade rated with 89% rated AAA and AA. The aggregate price of our CMBS holdings at quarter end was 96% of value, indicative of the quality of those holdings.

During 2009, both rating agency and equity analyst reports acknowledged the strength of the Phoenix CMBS portfolio and its significant credit support that will allow it to withstand multiples of the projections for commercial mortgage defaults while incurring minimal losses. This speaks to the careful construction of this piece of the portfolio and our unwillingness to invest as underwriting standards weakened.

As Jim described in his opening remarks, at the end of 2009 we believed that our carefully constructed investment portfolio was improving on all fronts, and the results of this quarter have demonstrated that. Our balance sheet has been strengthened by higher portfolio valuations and a reduction in high yield bonds while our income statement benefited from stable NII, a reduction in impairments and realization of significant capital gains.

Now, I’ll turn the call back over to Jim.

James Wehr

Thank you for joining us on the call. Before opening it up for questions, let me reiterate two important points. First, as this quarter’s results show, our efforts of the past year have produced clear progress on a number of fronts including return to profitability and meaningful capital generation.

Second, our growth initiatives are beginning to gain traction and the results of this quarter position us for further momentum. Thanks again

Sarah, please open the lines for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [Alex Obsevich – Credit Suisse]

[Alex Obsevich – Credit Suisse]

My first question on statutory capital, have you disclosed what the gain would be from the PFG sale and if so, how much would it be? The second question is you talked about reducing some of the junk bond positions by selling them at book value. Given the high RBC charges for these below investment grade securities, is it possible to sell them at current market prices and still boost your RBC ratio?

Peter Hofmann

We did not disclose the specific gain for the PFG sale at this point. I could tell you that it’s not going to be huge, but it will be incrementally positive.

Christopher Wilkos

In terms of the reduction in below investment grade, you’re correct. There are situations where you can sell bonds that are not at book value that would below book value and still benefit RBC. We did some of that selling in the second half of 2009, but we’re actually less willing to do it in 2010 because we think we have other alternatives as I mentioned, prepayments at book value or selling some bonds actually at higher levels than their book values which are more preferable at this time.

Given that we have those options, we again, will be less willing to sell bonds at below their book values, although that may benefit RBC.

[Alex Obsevich – Credit Suisse]

On the DAK asset, can you describe how much of your DAK includes fixed expenses such as salaries or marketing expenses that you may have to be expensed sooner than anticipated?

Peter Hofmann

We only defer sales related expenses in the DAK assets, and the point I was trying to make was that given the very low level of sales, we’ve actually deferred very low levels of expenses and I drew the comparison between a year ago deferring $12 million of sales related expenses to just $1 million, so we’re currently really experiencing that drag of expenses that we’re not able to defer.

[Alex Obsevich – Credit Suisse]

I was asking more about the in force DAK rather than deferring current expenses. How much of the DAK that you’ve already capitalized includes selling expenses beyond commissions. That would ongoing salaries or marketing expenses.

Peter Hofmann

The projection of the profit margins, the EGP’s have an expense component but the selling related expenses really are up fronts. Maybe I’m not fully understanding the question. Take it off line and we can follow up.


You're next question comes from Robert Glasspiegel – Langen McAlenney.

Robert Glasspiegel – Langen McAlenney

Could you give me how big a positive the deferred tax change was to your RBC?

Peter Hofmann

We haven’t published the results yet, so once we do, we’ll provide all the details. We were able, you can see, we were able to utilize roughly $40 million of NOL’s which is one piece, and then there’s the increase in admitted component, but we haven’t broken out all the details of that yet.

Robert Glasspiegel – Langen McAlenney

I read it as this was a change in NAIC deferred tax rules, not how your deferred tax numbers were going through our RBC.

Peter Hofmann

It’s a function of the growth in surplus and the fact that the rules instruct us to use a projected tax rate for the year as opposed to the change in the rules which occurred last year, and which we did reflect in our year-end.

Robert Glasspiegel – Langen McAlenney

I was a little confused with the text matching the Slide 17 where you were talking about reducing liquidity with cash and Treasuries, yet the numbers look like they went up sequentially. Did I miss-interpret what you were saying?

Christopher Wilkos

We’re going to reduce that in the second quarter. We changed the target at the end of the first quarter, so you didn’t see much change year-end versus March 31, but based on the surrender activity that we saw in the first quarter, we made that decision to begin the second quarter by reducing the target, so we expect to be there by the end of June.

Robert Glasspiegel – Langen McAlenney

What’s the yield pickup from the move?

Peter Hofmann

Again, there’s two components of it. If you reduce your cash position again, which we have cash in Treasuries, the pickup is in the neighborhood of about 3.5% to 4%.

Robert Glasspiegel – Langen McAlenney

On what number of assets? Where do you want to get to?

Peter Hofmann

About $200 million.


You're next question comes from Andrew Kligerman – UBS.

Andrew Kligerman – UBS

First question is around operating expenses. Are there any initiatives in place to really reduce operating expenses going forward and if so, how much?

Peter Hofmann

As you know, we took some fairly significant actions last year reducing that by more than 35% and bringing the run rate expenses down. We will continue to focus on expense reductions. We haven’t put out a specific target. Our focus really now is on a lot of the operation, the processes which take a little bit more time to effect because it requires changes to the IT infrastructure etc., but we’re going to focus very much on operational efficiency going forward, and obviously also be responsive to the environment as we move forward.

So if sales continue to grow, that’s one picture. If sales don’t, then we re-evaluate. So we’ll be very responsive. But we don’t have a specific target out there.

Andrew Kligerman – UBS

While you’re mentioning sales, any thoughts on how substantial sales can get? I know light sales were only about a little less than $1 million this quarter, but are you thinking in any ballparks? Annuities were a little less than $20 million. Any ballparks that you could see on the near term horizon? Any benchmarks that you’ve set that you could share with us?

Peter Hofmann

You know we’re really in a re-start mode on the sales front and what you’re seeing on the annuity front as Jim mentioned, some of the early traction that we’re getting in some of the newer distribution relationships on the life front we’re really a little behind the annuity front because we just now are introducing some of the newer products.

James Wehr

We obviously haven’t given specific guidance on overall numbers for the year, so it’s difficult to give guidance on the rate of growth quarter to quarter, month to month. But we reached out to a large number of independent marketing organizations and we’ve reached agreements with a couple dozen of them.

Together with Saybrus, we’ve evaluate the opportunity, and we’ve introduced two new annuities based upon our view of these opportunities. We think that we’re beginning to get some traction. It’s obviously small at this point, so our hope would be for substantial growth in that, but that will depend upon our relative competitive positioning in the marketplace, and we’ve been pretty diligent on rates.

We’ve also been approached by some marketing organizations about developing some custom products for them. We evaluate those carefully, but it’s likely that we’ll develop a small number of those in the future.

In all of these conversations, we’ve been telling our story around the four pillars as we have with you and in the past quarters, some of the progress we’ve made was notable and helped us. And this quarter will help enhance our credibility too with those audiences.

On the Life side, it’s a bit more – we have to really take the temperature of this market and the distribution outlets, but we have developed a set of prototype designs that we’re evaluating in conjunction with them and so it’s a rebuild process and we’ve put the first couple of building blocks in place and looking forward to put the next couple in place and then grow from there.

Andrew Kligerman – UBS

I was trying to get a better sense of the run rate. The number that you came in with was certainly an improvement but a little less than I thought and as I look at amortization expense, even the operating expense, and Peter mentioned some things around deferrals, they both looked a little more elevated than I would have anticipated. Could you give a little color? I know you said there was $0.03 of unusual, but could you give any color around any of these items including the favorable mortality, which offset any specifics around these items that might have been a little elevated. Maybe you wouldn’t have called them unusual but might have been a little elevated in taking the number than it normally could have been.

Peter Hofmann

If you take the adjusted $0.11 or so that I referenced, there’s probably as much as $0.05 of good mortality in there. We also are carrying the cost of Saybrus while that entity is ramping up and that I would say more than slightly offsets that mortality. So we’re looking at about $0.12 recognizing that we’re making an investment in Saybrus.

The other thing that we’re facing is a rate environment that is lower where we emphasize liquidity and Chris just mentioned some of the magnitude of the opportunity there. But I would say that in order to get our run rate earnings from that $0.10 to $0.12 range upward, we need to continue to gain traction at Saybrus.

We need to do what Phil just discussed which is to build building blocks in annuity sales, and we need to continue to reduce expenses and we focus on all of those areas.

In terms of some of the specific line items, it’s probably best to take you through those offline because a lot of the adjustment actually from a geography perspective show up in the operating expense line, but have offsets on the back line and the PDO, and the mortality is the reverse. There’s a big offset in mortality as well. So the geography I think we can take you through in some more detail, but at a high level of what I just said.


You're next question comes from Eric Berg – Barclays Capital.

Eric Berg – Barclays Capital

You just mentioned what has to happen in order for the earnings to go higher. Maybe you could enhance the conversation by providing a timetable and so in particular, when would you expect your new distribution effort, which you said you’re carrying now to break into the black and are there more expense cutting to come through the financial GAAP financials? So the distribution profitability is first. Future expense cutting and the GAAP financials is second. And most importantly, what is a realistic timetable for us to expect counter parties to be building business again with the Phoenix. By your own acknowledgement, the sales are basically restarting at this point. Customers are, essentially not new customers are in a small way doing business with the Phoenix. What’s the timetable for that? So those are my three questions; distribution, expenses and a timetable for recovery in sales.

Peter Hofmann

I’ll take the distribution expense and I’ll pass it over to Phil for the sales. On the Saybrus side, we are targeting a break even by the fourth quarter. That’s really what the focus is and contribution to GAAP earnings next year. So it’s a fairly quick break-even period. There aren’t any deferrals or anything so this is very much a fee business that will be driven very much by the level of activity that they generate.

On the expense side, the broader expense side I mentioned that we’re looking at a lot more operational improvements. Realistically, the real benefit there is probably 18 to 24 months out in terms of seeing benefits from significant operational repositioning.

And in terms of the traction that we’re getting with counter parties, I’ll turn it to Phil.

Eric Berg – Barclays Capital

Before you respond, Peter could you explain which it is a year and a half to two years before we see the benefit of operational efficiencies?

Peter Hofmann

There are different pieces to it, but we’re looking at an operational environment at the company that is very complex from a systems perspective, has a lot of processes in place that are not easily unwound, and require also some expense quite frankly to simplify and to streamline.

So we will be focused on that, but we don’t want to be overly aggressive in terms of the expectations around the time frame.

Philip Polkinghorn

In terms of the timing, when can we expect to see people get comfortable with the counter party issues and begin selling, the answer is right away. The volumes will be modest at the start as we rebuild. As we’ve mentioned, we’ve entered into a couple dozen selling agreements with marketing organizations.

In the midst of some of the down times for Phoenix counter party views, we’ve been telling them the same story we’ve been telling you. I think they’re looking for improvement. In the past quarters, we were able to point to dramatic deductions in unrealized losses, improvements in the balance sheet. This quarter we’ll have a turnaround in the statutory RBC, which was in line with the predictions that we made to them.

So I think we’ll pick up credibility with them. We still have the job of executing and getting the sales from those organizations, so I’m not going to say we’re there yet, but I think it is notable that these organizations signed on with us during the period of uncertainty, sort of knowing what the picture was and it’s not that the counter party issue is not an issue. It’s a hurdle, but not an absolute barrier for these markets and these organizations.

We’re also encouraged that in addition to the outreach we’ve done, we’ve been approached by organization who have expressed interest in working with us. So we believe that you’ll see some traction right away. Our ambitions for the near term are not at sales levels compared to our historical levels.

With our reduced expense footprint, we don’t need to get to those levels and we believe that we’re putting the right building blocks in place to begin to add sequentially quarter over quarter to sales results.

Eric Berg – Barclays Capital

Are you talking on the annuity side or the life side?

Philip Polkinghorn

The annuity side first and then the life will follow. As I mentioned, we were a bit quicker to see opportunity on the annuity side and put a couple of products in place. We have another one in the pipeline that will come out.

On the life side, the differences between the demands and the positioning that we needed were enough different, and we wanted to make sure that we’re very thoughtful in putting the right thing out there and we’re in discussions with some of these same organizations with prototypes on is this the right positioning for us to sell in the marketplace and meet your needs.

James Wehr

I think Saybrus is a good example here of the ramp up. We signed on with them in November. We really started to write business with them in the first quarter, taking applications, but dimineous revenues associated with those applications.

And now second quarter, we’re seeing the revenues start to come through the pipeline. So even as we sign on with these folks, you can see a quarter or two lag before it starts to translate into revenues and then clearly those revenues should ramp up over time.

So I think that’s a good example of where we’re at right now and why some of this stuff is taking a bit longer than it might if we were up and running so to speak.


You're next question comes from

Robert Glasspiegel – Langen McAlenney

Do you have the asset figures backing the alternative asset returns on 13? I can’t calculate the ratios from what’s on the balance sheet. Venture capital, mezzanine funds, joint venture, real estate and other. I just wanted the denominator.

James Wehr

It’s in the ballpark of again, Peter do you have that number?

Robert Glasspiegel – Langen McAlenney

Like venture it says $200 million at one point, but –

Peter Hofmann

It’s between $500 million and $600 million.

Robert Glasspiegel – Langen McAlenney

That’s for the total?

Peter Hofmann

Can we get you that figure offline by type of asset?

Robert Glasspiegel – Langen McAlenney

If you can disclose it offline that’s great.

Peter Hofmann

It will be in the Q, which we’ll publish very shortly, but we can get it to you today.


You're next question comes from Andrew Kligerman – UBS.

Andrew Kligerman – UBS

I’m wondering just M&A environment with respect to Phoenix, are you getting inquiries into the company for a potential sales and secondly, from your vantage point in terms of strengthening the RBC and the capital position in general, are there any assets or additional properties that you can dispose of to strengthen these levels?

James Wehr

In terms of inquiries, I really can’t comment on that. I think the results of the quarter demonstrate the progress that we set out to make and we’re making. As you can hear, our management team is extremely focused on turning this company around by executing the pillars in our strategy, and that is obviously what we have control over.

That said, it’s a fact that our Board will always consider what is best for our shareholders and policyholders, but I can’t go beyond that.

Andrew Kligerman – UBS

And how about in terms of any potential properties or capital, ways to raise capital from asset disposal?

Peter Hofmann

PFG was really the one separable asset that we had remaining that was of any meaningful size. There’s always the opportunity to look at reinsurance of different blocks of business, but the pricing that we found on some position reinsurance transactions hasn’t been terribly attractive, but it’s something that we will continue to assess if the market environment changes.

James Wehr

And the investment portfolio, I’ll allow what we’ve done in the last few quarters for those will be very small slivers that maybe in aggregate will have some meaningful effect as they did in the first quarter.

Well I think that satisfies the questions that we had in queue. I’d like to thank everybody for their time and attention today and enjoy the rest of your day. Thank you.

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