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Executives

John Johns - Chairman, President and CEO

Eva Robertson – Vice President, Investor Relations

Rich Bielen – Chief Financial Officer

Steven Walker – Senior Vice President, Controller, CAO

Carolyn Johnson - EVP & Chief Operating Officer

Carl Thigpen - EVP & CIO

Ed Berko – EVP, Chief Risk Officer

Analysts

Steven Schwartz - Raymond James & Associates

Mark Finkelstein - Macquarie

Darin Arita - Deutsche Bank

John Fox - Fenimore Asset Management

Andrew Kligerman - UBS

Ed Spehar – Bank of America/Merrill Lynch

Chris Giovanni – Goldman Sachs

John Nadel – Sterne Agee

Protective Life Corp. (PL) Q1 2010 Earnings Call May 6, 2010 9:00 AM ET

Operator

Welcome to the first quarter 2010 Protective Life Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. John Johns. Chairman, President and Chief Executive Officer. Please proceed.

John Johns

Good morning everyone. This is John Johns of Protective Life Corporation and on behalf of our entire management team who are with me here in our home office in Birmingham we welcome you to the call.

I would like to turn the call for a moment to Eva Robertson who heads our Investor Relations group to read the forward-looking statement.

Eva Robertson

Good morning. Our earnings, press release and supplemental financial information were released last night and are posted on our website. Before we begin I have an important reminder, in addition to the information contained in the press release and supplemental financial information there is also a slide presentation available to accompany this call and help you follow our discussion. This presentation is currently being webcast from a link available on our website at www.protective.com. You can advance the slides independently in order to follow along our conversation.

Also this conference call and discuss includes forward-looking statements which may express expectations of future results. Actual events and results may differ materially from these expectations. Please refer to our press release and the risks and uncertainties as well as the risk factor section of the company’s most recent report on form 10-K and the subsequent report on form 10-Q for more information about factors that 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. Now I will turn it back over to John Johns.

John Johns

Thanks Eva. We are pleased to report for the quarter on an operating basis $0.78 per share. That compares to $0.86 last year. Realized gains and losses on mark to market derivatives were slightly positive for the quarter $0.02 so our net income number for the quarter is $0.80 and that compares to $0.31 last year.

Overall we thought it was a very good quarter. A very solid quarter and very much in line or perhaps even a bit ahead of our plan for the year. All the kind of basic fundamental metrics seem to be pointing in the right direction. We enjoyed very strong sales momentum in our life marketing group and we were particularly pleased by the fact that our strategy to shift our emphasis more towards UL products and away from the term products is starting to really get some traction for the quarter. Our UL sales exceeded term sales.

In the annuity segment again the results were strong and positive. Very strong sales momentum. Positive fund flows. We achieved a record account balance of about $10 billion in the annuity line during the quarter. In APD again the sales have been soft there because the U.S. economy has been soft and the auto sales and marine sales have been soft. Even though the quarter had a little seasonality and weather related effects the first quarter we still see some growing momentum there as well.

We are really starting to see some pickup in activity and we are encouraged by our direction we are going in APD. We did have a modest amount of sales in staple value and the spreads continue to be very healthy there and very much in line with our plans and expectations. Acquisitions came through in a very steady fashion. That continues to be a great source of strength for our company. Very stable statutory earnings and this continues to chug along.

In the investment portfolio we were pleased to see that as expected impairments are trending down. There is really nothing particularly noteworthy in the investment portfolio from a negative perspective in the quarter. We did report a slight tick up in delinquencies in our commercial real estate portfolio. Some of that is just accounting driven but again as we look at the problems there they seem very manageable and in fact we are hopeful during this quarter we might actually see those numbers start to trend more favorably down.

We haven’t quite finished up all the statutory work but from what we see I think our statutory total adjusted capital will go up again to a new record level at the end of the quarter. Likewise our RBC ratio will improve we think 5-10 points or something like that at the end of the quarter so we are very robustly capitalized at the present time.

I know a question that is always a tough one is $0.78 is a big number, ahead of our expectations and consensus numbers. The question is what is your real core number for the quarter. That is something everybody has to figure out for themselves and it is not real clear how much is one-time and what is not and all that but our best guess is that the core number is in the low $0.60 range. Somewhere from $0.60 to $0.65. Within that range the issue is how you look at favorable mortality.

We have seen a trend over the last several years of better and better and better mortality. Over the last 13 quarters it has been about $50 million better than our historic expectations and we had a very good quarter this quarter. Our view is that it is more of a secular trend than just volatility but I guess time will tell as we play all of that out. Also we did make some good progress in investing our excess liquidity. Towards the end of the quarter we got closer to having all that liquidity invested. We do see that as a source of future for the rest of this year as the full effects of that starting to play out and we see that as an opportunity for our earnings to grow over the next several quarters.

Those are just kind of some high level highlights. Let me turn it over now to our Chief Financial Officer, Rich Bielen. Rich will walk you through the segments in more detail.

Rich Bielen

Thank you Johnny. Good morning. As we reported last night operating income was $0.78 and we were pleased to see that net income actually exceeded net income at $0.80. On a dollar basis in this quarter we reported $68 million of earnings versus $62 million a year ago on an operating and on a net basis we reported approximately $70 million versus $22 million a year ago.

Turning to slide four in your presentation, when we presented to you back in March we gave you a plan as to what we expected for the company and our internal plan had us at about $0.59 for the quarter so we think we came out about $0.19 better than the plan we presented to you. What we are trying to do is break down for you what we thought were some non-core items and the other items that were core.

To walk through with you the first was if you recall back in 2006 we had taken a charge related to a program we called Lenders Indemnity in the asset protection division. We have also referred to it sometimes [Centrics]. We have basically resolved all of those claims now. It has taken us 3.5 years but those were fully resolved here early in this year and as a result we were able to release a reserve of $7.8 million or $0.06.

In the annuity line we continue to see good results there as we will talk about when we get there, but we do see the volatility for fair value items and in this quarter that was a positive adjustment to earnings of $4.1 million or about $0.03. Then as we always do we review all of our tax provisions and contingencies and in that review we were able to release a reserve of approximately $3.9 million or $0.03. So we see those as being non-core items. When we look at our company and look at the core items including mortality and investment income. So what we wanted to highlight is where our mortality came out versus that plan.

In the life marketing division it came out $11.5 million better than planned as Johnny had indicated and most of that was really in the term business where we started to increase our retention a couple of years ago and we continue to see that playing out. We did have some negative mortality that held down earnings a little bit in acquisitions. It was about $1 million each in the legacy blocks and in Chase block so that held down earnings about $2 million. Also in annuities there is a block of life annuities we have, some [inaudible] we wrote a few years ago and we really didn’t see any deaths in the quarter. That held down earnings of about $800,000 versus our plan.

Then investment income, and we will get to that a little bit, but when we look at the cash deployment and all of the moving parts for the quarter what we saw is although we reduced our short-term investments by the end of the quarter by about $400 million from the end of the year we were slightly below where we expected to be. So that held us down about $700,000 or $0.01. Then all of the other little items that go along with fluctuations actually helped earnings by about $1 million.

To break it all down, when you go through those items we would suggest the non-core items at the top were about $0.12. The bottom items were about a positive $0.07 but obviously mortality can fluctuate.

Turning to slide 5, to give you a breakdown of the net realized investment gains and losses, the impairments continue to drift down. In the first quarter it was $11.9 million which is the lowest quarter we have had now in a couple of years. Things seem to be stabilizing in the market. As you know, we do have some [modca] relationships related to our Chase transaction. That actually generated $14 million of gains. Our own trading account had about $6.7 million of gains and that is just our typical rebalancing activity during the quarter.

There were some derivative gains and losses of negative $2 million and some other items of $3.7 million. The net result was we had net realized investment gains for the quarter of a positive $3.2 million or $0.02 per share.

Moving to the balance sheet and share owner’s equity I would like to point out a couple of things. First is our book value increased $4 or about 14% from year-end. At year-end it was $28.96. Here at the end of the first quarter it has now moved to $32.96 and now book and basically traditional book and book with AOCI are almost the same at this point at around $33. I will also point out to you the components of AOCI. I think there are a couple of significant items there.

You can see our gross unrealized losses from year-end declined from a little over $1 billion to just under $700 million. Then you can see if you look at the net unrealized gain and loss line the portfolio now is in a positive mark to market of $61 million versus a negative $403 million at year-end. So we have seen a lot of progress here over the last year in terms of mark to market in the portfolio and today it is actually at a positive number as we end the first quarter.

Moving on to the next slide, slide 7. We get a lot of questions regarding our residential mortgage backed portfolio. Here is really just a breakdown of that portfolio. What you will see is the unrealized loss in this portfolio is now down to about $300 million and is roughly half of that gross unrealized loss I just mentioned at this point. You can see the breakdown. There were some questions we saw this morning about our below investment grade. We are not purchasing below investment grade bonds at this time nor have we for the last roughly 1.5 years or so. We did see the ratings migration of these bonds and that is impacting that ratio at this point.

Turning to slide 8, this is just a reminder and a breakdown that basically the entire portfolio is either super senior or senior at this point. We continue to see relatively rapid pay downs and you can see at the bottom we had $261 million of pay down and we are giving you the amortization rate for the quarter. You can also see the average life by each class. The portfolio has slowed down a little bit during the first quarter. Typically that is a seasonally low quarter just because people are not moving as much during that period of time so we did see a slight extension to the average life to a little longer than 2.5 years from where it had been previously.

New money purchases in the quarter. That is a big question we get. Our average yield was approximately 4.7% as we purchased assets. Obviously with the big headlines in the news right now is sovereign exposure. If you turn to slide 9 you can see the countries that are in the news in Europe right now; Greece, Portugal, Italy, Ireland and Spain, we do not have any exposure to them on a sovereign basis. We looked at the bank exposure and we have $24.5 million in Ireland, $58.5 million in Spain.

The Irish bonds will be tendering this week so that exposure will be going away. With the Spanish bonds $26 million of that is some senior bonds of Banco Santander which mature in July 2010. So the exposure to the European countries in the headlines is relatively low to us at this point.

Moving to slide 10, the commercial mortgage loan portfolio. I will comment for everyone if you recall FAS 167 now requires companies to consolidate their securitizations on to the balance sheet. This table now represents the consolidated portfolio on a GAAP basis which includes the loans we previously held plus the loans in the securitization. The total portfolio is $4.9 billion consists of 860 loans. Average loan size is $3.3 million with an amortization of $20.9 million. Coupon is 6.4 with a debt service coverage of 1.33 and a loan to value of 53%.

The ratio of delinquent loans and foreclosed properties is 93 basis points on the overall portfolio and that does include one loan we are currently in the process of restructuring that is in the securitization under the terms and [inaudible] servicing agreement. So the delinquencies continue to be under 1% and we hope that actually declines as we go through the second quarter here.

Moving onto the individual divisions, in life marketing we saw pre-tax earnings up 28.8% over the fourth quarter of 2009. We had favorable mortality overall in both the term and the UL business of $14.5 million versus $6.2 million in the fourth quarter. You can see our earnings are down slightly year-over-year from $42.5 million to $40.7 million but the one thing we have talked about strategically is continuing to reduce our reliance on term sales and increase our reliance on UL sales.

If you turn to slide 12 you can see that total sales for the quarter were $43 million. Term sales according to our plan have been coming down but UL sales actually exceeded term sales in the quarter at $21.3 million versus $20.8 million of term sales. As we see the trends here in the second quarter that momentum in UL continues to be very strong and we expect to continue to see this mix favor UL going forward as we go through the process.

I would also point out usually our fourth quarter is our seasonally strong quarter of sales and for our sales to maintain a pace that was very similar to the quarter here in the first just shows you a lot of momentum we have as an organization on this. We continue to put out a lot of new products into the marketplace. We have been doing that over the last year or so and we are really seeing that gain traction on the UL side.

Turning now to the annuities business earnings for the quarter were $18.2 million. If you exclude the fair value item it was $14.1 million which was really a little ahead of our plan and we had a very big quarter there. We continue to see positive segment fund flows and we had record VA sales. The disruption of last year actually gave us some opportunity to increase our sales there. We have seen that continue on and as you know a lot of the products have been de-risked, prices have been able to be moved up more appropriately in the marketplace and we are taking advantage of that.

If you go to slide 14 you can see sales for the quarter were $568 million in total. $350 million of that were VA In the first quarter. If you go to the bottom the account balance for this segment is now almost $10.9 billion and the total VA account balance counting the fixed component is about $3.5 billion.

Turning now to the acquisitions division, in acquisitions we reported $31.4 million. It continues to be very stable and earnings are on plan. What we did see this quarter as I mentioned is we saw a slight negative mortality in both the legacy and the Chase block of about $1 million each so that held down earnings a little bit. We did see some improvement in the Chase annuity block that is incorporated in here in the marketplace with a little better spreads. We are really on plan here at $31.4 million and if you all recall we expect this to run off at the pace of about 6-7% on an annual basis.

Turning now to slide 16, stable value. We are reporting $11 million of earnings here in the first quarter with a spread of 126 basis points. That is versus $10.4 million in the fourth quarter with a spread of 116 basis points. The ending balance is consistent with our expectations. We expect it to drift down but we are trying to stabilize it here closer to the $3.4-3.5 billion rate at least in the short term as we wind up seeing going on. We did sell approximately $151 million of contracts during the quarter on an institutional basis and that is helping us sustain the balance at this point. I would comment that we probably expect the balance to stabilize a little bit more. We may see spreads decline a little bit here in the second quarter as we work our way through.

Turning to slide 17, asset protection we are reporting $13.1 million in earnings versus $6.3 million in the year-ago quarter. This quarter does include the $7.8 million from the lenders indemnity settlement. The important thing is we saw our service contracts improve 9.3% over the first quarter of 2009. If you turn to slide 18 you will see total sales were $72 million versus $68 million a year ago and what we saw in the division was that sales started to get better in the month of March. We continued to see sales improvement in the month of April. We are hoping as the economy improves and you can [watch] auto sales we will continue to see some momentum.

Turning to the last slide in corporate and other. This is kind of our catch-all. Our plan was to see a loss in the quarter of approximately $14.9 million. What we actually saw was a loss of $16.1 million and I will really just spend time on one item. The quarter did include $7.5 million from the trading portfolio. That portfolio declined over $50 million during the quarter. It is now down to $217 million at the end of the first quarter. Offsetting that as we looked around is we update our prepayments on our mortgage backed on a quarterly basis with the slowdown in average life the FAS 91 adjustment actually had a negative impact to us for the quarter of $4.5 million.

So a lot of the trading portfolio offset was offset by the FAS 91 adjustment. We also saw when we were allocating investment income we actually saw a little bit more investment income in the lines of business than we expected and a little less here in corporate and other. So overall when we looked at the company and we looked at our budget for investment income for the quarter we thought with the trading and the FAS 91 offset we were short about $700,000 or about $0.01 per share.

A couple of other things to note, as you may have seen last week we closed our securitization and are now completing the restructuring of Golden Gate and we will refer to our new securitization as Golden Gate 3. With that we have basically closed the process we started last fall when we did the $800 million refinancing at that point. We have paid down our bank line $180 million with the closing of that transaction. So our outstanding is only $80 million on a $500 million bank line. That bank line matures in 2013 and we have no other material maturities until that date.

With respect to RBC Johnny mentioned we do see some improvement in RBC. We would say it will be a little north of 435 as we end the quarter at this point. The cash investment process we have been going through Carl and the team have really done a fabulous job and we would expect a completion of all of the restructuring between Golden Gate and the portfolios to really be on track to be completed by the end of the second quarter which is what we indicated.

With that I am going to turn it back over to Johnny.

John Johns

Thanks Rich. Let me summarize by saying the good trends and positive trends we enjoyed in the first quarter we actually see continuing into the second quarter. Life sales were strong ad actually are accelerating. Annuity sales were strong for the first month of this quarter. It is too early to make a call on mortality but the very early indicators are that the claims trends seem to be positive there too.

As I said a moment ago and Rich did as well the impact of getting more fully invested is really not fully reflected in the first quarter numbers. We see that as some upside for the rest of the year. Overall we are feeling very good about our prospects going forward. We expect to see continued growth in earnings and we expect to see continued good performance even in our investment portfolio as things settle down there as well. We have a lot of capital. We have seen some activity in the acquisitions front and we expect to see more as the year plays out.

With that I think we are done with our comments so we are ready for your questions. We will turn it back to you for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Steven Schwartz - Raymond James & Associates.

Steven Schwartz - Raymond James & Associates

Could we delve a bit into life marketing? Maybe this has to do with mortality and how we are defining it. If I have done this right I am looking at some numbers that don’t make a whole lot of sense to me. Benefit and settlement expense was 74.6% of net premiums, policy fees and net investment income as I track it was 76.6% this quarter. If you take out your estimate of favorable mortality I am looking at 75.4% versus 81.7%. That just doesn’t seem to jive with what you are saying. Maybe you can explain what is going on there?

Steven Walker

The one thing I would point out is the gross premium line for our UL product is not run through gross premiums. It is basically treated as a deposit on the income statement and then you have credited interest running through the benefit settlement expense line. That is going to cause some distortion in these ratios particularly with our ramp up of our UL sales in recent quarters.

Steven Schwartz - Raymond James & Associates

So we are looking at something that is no longer comparable maybe?

Steven Walker

That’s right.

John Johns

That is an interesting question because we struggled here with whether we can come up with a way of reporting mortality that would be in the format of sort of a loss ratio. It just doesn’t work very well when you combine term and UL. The accounting is different.

Steven Schwartz - Raymond James & Associates

Maybe this is all associated as well. Other operating expense of $13.7 million that was up a lot from the first quarter. It was kind of flat with the fourth quarter but you had the issue with the pre-XXX [lapsation] in the fourth quarter so I am not sure that is comparable.

Rich Bielen

That line includes allowances we received from our reinsures that are not capitalized. As that business runs off the older block prior to 2005 where we had reinsured about 90% on a co-insurance basis on our term business you are seeing those allowances kind of drop off over time. That causes the base expenses to be a little higher on this line. Basically we are on track with our budget in terms of our plan for this year on expenses.

Steven Schwartz - Raymond James & Associates

This hasn’t come up yet on any of the conference calls but how are you dealing with the fact that Pimco is not re-rating the RMBS quarterly? What are the assumptions you are making?

Rich Bielen

We are using the same ratings we had at the end of the year on all of the securities that are there.

John Johns

By mid-year there will be another update and we will use those updated ratings at mid-year.

Operator

The next question comes from the line of Mark Finkelstein – Macquarie.

Mark Finkelstein - Macquarie

One question just to get back to the deployment of capital and the block acquisitions I think Johnny you had made some pretty specific comments about larger deals, nontraditional partners and I guess it sounded a little bit broader in terms of the comments you made in the closing. What is the pipeline? What are the things you are currently seeing right now? Can you benchmark any kind of thoughts on execution?

John Johns

That is always a hard question and we are not at liberty generally to be very specific about acquisition opportunities. I can say we were very active and busy in the quarter looking at things. We hear anecdotally there are more things to come. The things that are out there are smaller companies which we have traditionally done. Smaller companies that are suffering from lack of scale, expense issues or lack of distribution opportunities or lack of strategic direction and also perhaps even a block of business or two more traditional type life blocks. Those are the categories of things we either see or hear are heading to market. Again it is always very speculative. I just want to caution you and everyone not to overreact to that. You just never know what is going to come to fruition.

Mark Finkelstein - Macquarie

Has there been any change in your pipeline?

John Johns

It is always changing. The answer is it is continuously evolving. Some things fall out and some things come in. Yes there has been change.

Mark Finkelstein - Macquarie

Rich on the restructuring of the XXX facilities can you remind us of what the quarterly impact or hurt to earnings emanated from floating rate assets as opposed to the fixed rate. If I heard your comments correctly do you expect that to be fully addressed by the second quarter so we should be at more of a run rate quarterly impact for the rest of the year?

Rich Bielen

There is a lot of moving parts to that but what we told you back in the fourth quarter was it is about $5 million a quarter that the impact is coming from all the elevated costs of securitization. Our plan is to complete the restructuring of Golden Gate here by the end of the second quarter. I don’t have the number offhand what that will net down to but it was all part of the plan we presented to you back in March.

Operator

The next question comes from the line of Darin Arita - Deutsche Bank.

Darin Arita - Deutsche Bank

Continuing with Mark’s question on Golden Gate can you tell us the total amount of assets that need to be restructured? What are the rates you are seeing on the floating side and do you think you could get on the fixed side?

Rich Bielen

We will kind of walk through where we were in the 8-K if you look. The first thing we had to do out of Golden Gate was liquidate about $180 million to pay down the bank line. You will also see in there there is a dividend to come out of Golden Gate for $250 million and we are in the process of freeing up that cash. That will be just moved to Protective Life Insurance Company and reinvested at that level. If you look at the notes we did at Golden Gate last year the coupon on that on average is about 8% and our hope over time is that the portfolio will be rebalanced to a yield north of 5 on that basis.

We are probably 2/3 of the way done with that process of moving out the floating rate assets. It may take us a little longer to finish that but we are pretty much on track and monitoring it pretty carefully.

Darin Arita - Deutsche Bank

The floating rate asset yield is around 1%?

Rich Bielen

LIBOR is currently 30 some odd basis points so it is less than 1%. The real key is for us to sell of the floating rate assets as they recover in price and move them into longer assets to match off against the notes much better. We think the yields on those longer assets can be in the 5+% range.

Darin Arita - Deutsche Bank

Outside of Golden Gate, what is the other excess liquidity that needs to be reinvested in the investment portfolio?

Carl Thigpen

At this time we are fully invested in the lines of business and the Golden Gate is our primary focus.

Darin Arita - Deutsche Bank

In terms of the universal life product sales that has been strong. Can you give us an idea of what is different in these new products you are putting out versus what was offered before?

Carolyn Johnson

In terms of some of the new products we have come up with we have products with differing premium patterns so it allows people to buy in at a lower rate and increase over time. That is something that is not in the market currently from other carriers besides us. That is creating some attraction. It is just a broad portfolio of a lot of different universal life products, current assumption and secondary guarantee products.

So other than that there are some special riders that attract producers to our sales like a return of sub-standard charges. I think one of the nice features of all the new things we are coming out with on riders and the product I mentioned with the different premium patterns is it does attract business to us that because no one else has products like that and those products all have higher margins than products we have sold previously.

Operator

The next question comes from the line of John Fox - Fenimore Asset Management.

John Fox - Fenimore Asset Management

Both of you mentioned I guess some optimism or hope on the commercial mortgage side this uptick in delinquencies is going to tick down in the second half of the year. Could you address the reasons for why you feel that way?

Carl Thigpen

The issues we are having in our commercial mortgage portfolio are more borrower related than property related. The largest property we are dealing with we have come to an agreement with the borrower. She was just not making the payments even though the property was cash flowing adequately. The borrower problems are easier to solve than property problems.

John Fox - Fenimore Asset Management

On the slide on the corporate segment you showed the $16 million loss but also there was $7 million offset from the traded portfolio. Is the message that the losses there are higher than the $16 million run rate or do you expect that as kind of a run rate going forward and expect gains out of the trading portfolio throughout the year?

Rich Bielen

The offsetting trading portfolio I mentioned was the FAS 91 on the mortgage backed prepays which is [otherwise] $4.5 million. So really when you looked at the impact of investment income it wasn’t very big. We would expect that $16 million according to our plan to be coming down somewhat as the year goes on and we fully deploy this liquidity.

John Fox - Fenimore Asset Management

Could you talk about life segment? What is a normalized run rate in earnings? I saw some reports this morning that are subtracting out all of the mortality gain and saying potentially the run rate is much less. How do you think about the favorable mortality and the run rate of earnings power in life?

Rich Bielen

I think if you go back to where we were at the beginning of the year and looked at our plan we were seeing a run rate at the low 30’s at the beginning of the year and then trending up as the year goes on. I think we think that continues but we are trying. We are just not sure how to quantify the positive mortality. We keep seeing the trend. It seems to be positively going. I think what we told you six weeks ago continues to be on track which is we are kind of in the low 30’s, up to a seasonal high in the fourth quarter at the end of the year it will probably be up in the high 30’s I would think.

John Johns

One thing to keep in mind is you have been a shareholder long enough to recall this but pre-2005 we were reinsuring about 90% of mortality and then we changed and increased our retention in 2005. The next couple of years we were retaining 92% of the mortality. Then we increased our retention again and now we are reinsuring about 4% the other way. If we have got our underwriting right and we are getting increasing confidence that we do, the benefits of favorable mortality are going to really build as the expected comes up. You don’t have much mortality in the early years of any life insurance product. Now this business is starting to season and the expected mortality is going way up.

If we have it right then the dollar bottom line benefits are going to be very favorable to us. We can’t really predict mortality. Our judgment and it is subjective, not objective, is that we are on a secular trend here of improving mortality. The good news is though we are disappointed that the expense of securitization is higher than we expected and that is eating into returns and margins in our life line we are seeing this countervailing phenomenon of improving mortality which is somewhat offsetting that.

Operator

The next question comes from the line of Andrew Kligerman – UBS.

Andrew Kligerman - UBS

The investment portfolio RMBS of $3.2 billion, any thoughts on divesting a fair amount of those securities? If so what are you thinking?

John Johns

That is an interesting question too. I think, Carl correct me if I am wrong, but the unrealized loss on that entire portfolio is about $300 million as we sit. If we wanted to bite the bullet and just be out of the RMBS business we could take a $300 million pre-tax realized investment loss and move away from it. We have stress tested that portfolio and we don’t come up with projected losses and approach that number. It seems to us the last thing to do is just hang onto it particularly in light of the fact that as you know it is virtually all right at the top of the securitization structure and it is prepaying very, very rapidly. It gives us some comfort we could capitates the exposure there for a number within the range of our excess capital. Does that answer your question?

Andrew Kligerman - UBS

I know there has been a lot of back and forth on this call about your acquisitions unit. I guess at the investor day a month or so ago you seemed quite optimistic about a potential transaction. Is the optimism still there?

John Johns

We are very optimistic but not with respect to any particular transaction. We just don’t comment on particular deals. I think you are seeing some optimism, if you are picking that up from us it is real. We are very optimistic that we are going to have some opportunities to deploy this capital.

Operator

The next question comes from the line of Ed Spehar – Bank of America/Merrill Lynch.

Ed Spehar – Bank of America/Merrill Lynch

I think when you have talked about investing excess liquidity on prior calls it was an expectation that would ultimately be about a $0.10 per share benefit on a quarterly basis? Is that correct?

Carl Thigpen

That is correct.

Ed Spehar – Bank of America/Merrill Lynch

How much of that $0.10 was in the first quarter?

Carl Thigpen

Probably 2 to 3. We are not anywhere close because we still had a lot of cash at year-end and it is just a slow process of getting it deployed during this period of time.

John Johns

As Carl indicated we are pretty close to fully deployed in the lines of business but we weren’t the entire quarter. It took us the whole quarter to kind of get to that position and we have a long way to go on some of these securitization structures.

Rich Bielen

A fair amount of that happened in April.

Ed Spehar – Bank of America/Merrill Lynch

How much more of that is left to invest?

Carl Thigpen

We have Golden Gate 3 that we have talked about and that is going to take towards the end of the quarter and that is a couple hundred million of restructuring. Then we have normal cash balances we have to maintain of about 1% of our overall portfolio. To answer your question it never gets fully invested because of the structural requirements in the company.

John Johns

Back to your original question we think we are still tracking the plan with respect to the impact of investing excess liquidity. We really didn’t see too much of that in the first quarter just because of timing.

Ed Spehar – Bank of America/Merrill Lynch

On mortality Rich the page where you show the core unusual or whatever the title of that is, those are mortality variations relative to your normal, favorable mortality expectations is that correct?

Rich Bielen

That is correct.

Ed Spehar – Bank of America/Merrill Lynch

So it looks like it was $3 million in life marketing favorable is considered normal and $2 million in acquisitions?

Rich Bielen

Actually the variance in acquisitions was a negative versus what we thought was our kind of plan. So we will say that was favorable previously. As we look at it we continue to see favorable just bleeding through acquisitions...

Ed Spehar – Bank of America/Merrill Lynch

I didn’t hear that last part.

Rich Bielen

It is all relative to plan.

Ed Spehar – Bank of America/Merrill Lynch

Is the normal in acquisitions something in a couple million range a quarter isn’t it? Or is it less than that?

Rich Bielen

Yes like $1-2 million a quarter.

Ed Spehar – Bank of America/Merrill Lynch

On the acquisition side, the comments you made sounded like you may be more active thinking about small companies versus closed blocks. I am wondering, am I reading too much into your comments or is that a correct interpretation?

John Johns

I think you are reading too much into my comments. We have traditionally done both and we are still open to doing both.

Operator

The next question comes from the line of Chris Giovanni – Goldman Sachs.

Chris Giovanni – Goldman Sachs

I wanted to see given the results this quarter if there are any changes to your expectations that the core quarterly earnings power will be $0.70 by the end of the year? If there are changes what do you believe is the earnings power?

John Johns

Again we are not giving earnings guidance. We stated our plan at the beginning of the year and so on. As I said earlier on in the call I think we are tracking to plan except for these items we have identified here all our metrics seem to be pretty much in line with our thinking when we developed that plan.

Chris Giovanni – Goldman Sachs

Have you assessed what impact the potential changes in the NAIC regarding commercial mortgages what impact that might have on the RBC?

John Johns

We think it is about 20 RBC points.

Chris Giovanni – Goldman Sachs

On the annuity sales particularly the VA which has been very strong, can you give us a sense of your hedging strategy at this point?

Ed Berko

We are actually finalizing a hedging strategy that we are going to implement in about two weeks to support the VA line. We think it is a strong opportunity given the pull back in the market over the last year with some of the big players. Some of them with big presence did not apparently have very good hedging strategies and have been burned so we think a lot of the product has been de-risked. We have some pricing strength there and strong retail demand. So we have a hedging program we are just about ready to kick off to support the growth.

Chris Giovanni – Goldman Sachs

Can you give us a sense at all of what that strategy may be?

Ed Berko

Well I don’t want to give too much. It is going to be basically hedge our delta, gamma and vega exposure.

Operator

The next question comes from the line of John Nadel – Sterne Agee.

John Nadel – Sterne Agee

Maybe a question on stable value for you. I think your comments were stabilized here around 3.4-3.5 billion of account values. That would suggest you are going to replace maturing business with new business. How should we think about that as it relates to the overall spread on that particular segment right now? Should we expect spreads to remain relatively stable or is there some pressure?

Rich Bielen

I think you will probably see because we are rebalancing all of the portfolios and making sure they are matched individually you will probably see a little spread pressure to the downside but we should be able to stay in that low triple digit number range. We will probably see it come down.

John Nadel – Sterne Agee

What would it take in terms of sort of the overall environment for you to think about the stable value business as actually a growth business again?

Rich Bielen

I think it is a little too early to start looking at it as a growth business in the marketplace. I think there were some opportunities for us maybe to issue but I think overall as you are well aware I don’t think financials by themselves are a place where you want to see a lot of growth at this point. That is not really part of our plan to grow that at this time.

John Johns

You may recall from our investors conference part of our overall macro strategy is de-leveraging and focusing on underwriting profits like mortality gain and making money the old fashioned way and not through sort of operating leverage plays. We think over time it is higher quality to get your earnings growth out of your traditional retail businesses and not from leverage sort of activities like stable value.

John Nadel – Sterne Agee

Finally I wanted to follow-up on the cash deployment and the business lines being essentially fully deployed at this point. I guess on the margin investment income to come here in the forward couple of quarters is that really more of through the corporate segment or is there an allocation that is going to take place? How do I think about net investment income when I am thinking about the segments?

Rich Bielen

I think the answer is predominately right now we are just buying investment grade corporate bonds, some of the Build America bonds in the marketplace. We have a limited amount we will do in commercial mortgages at this point. As you look I think that will be on the margin, our asset mix going forward. We are not sure exactly what question you are [answering] but our marginal investment is really in the investment grade corporate market.

John Nadel – Sterne Agee

I am asking more about geography of where I should expect to see that come through in terms of which segments. Is it really more of a corporate line item or is going to be allocated to life marketing, etc.?

Rich Bielen

It will be predominately in the corporate line.

Operator

There are no more questions in the queue. I would now like to turn the call over to Mr. John Johns for closing remarks.

John Johns

I think we have said what we needed to say. Thank you all for joining us. We appreciate your questions and as always if there are little bits and pieces we didn’t fill in the overall matrix please feel free to give us a call. Thanks a lot.

Operator

Thank you for participating in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Protective Life Corp. Q1 2010 Earnings Call Transcript
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