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Protective Life Corporation (NYSE:PL)

Q3 2010 Earnings Call Transcript

November 4, 2010 9:00 am ET

Executives

Eva Robertson – VP, IR

John Johns – Chairman, President and CEO

Rich Bielen – Vice Chairman and CFO

Carl Thigpen – EVP and Chief Investment Officer

Analysts

John Nadel – Sterne, Agee & Leach

Mark Finkelstein – Macquarie

Darin Arita – Deutsche Bank

Eric Berg – Barclays Capital

Alex [ph] – Credit Suisse

Chris Giovanni – Goldman Sachs

Vlad Artamonov – Coastal Investment Management

John Nadel – Sterne Agee

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2010 Protective Life Corporation earnings conference call. My name is Shawnell and I will be your operator for today. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ms. Eva Robertson, Vice President, Investor Relations. Please proceed.

Eva Robertson

Thank you, operator and good morning, everyone. Welcome to Protective Life Corporation’s 2010 Third Quarter Earnings Call. Our call will be hosted by John Johns, Protective’s Chairman, President and CEO; and Rich Bielen, Our Vice Chairman and CFO. But also here with us today, we have got Carl Thigpen, Chief Investment Officer; Carolyn Johnson, our Chief Operating Officer; Steve Walker, our Chief Accounting Officer and Ed Berko, our Chief Risk Officer.

Yesterday, we released our earnings press release and the supplemental financial information and those are posted on our website at Protective.com. I want to remind you that in addition to our press release and the supplemental financial information, there is a slide presentation we are using with today's call and that slide presentation is available there on the website on a web cast link.

And finally, today's discussion does include some forward looking statements, which express our expectations about future events and results. The actual events and results may differ materially from what we’ll be talking about today. You can refer to our press release and the risk and uncertainties as well as our risk factor section of the company's most recent form 10-K and subsequent form 10-Q for information about the factors that can affect the future events. This discussion may also contain non-GAAP financial information and you can review the supplemental financial information on our website for reconciliation to GAAP measures.

At this time, I’d like to turn the call over to John Johns.

John Johns

Thank you and good morning everyone. We are very pleased to report another solid quarter this morning. Net income was $0.80 cents per share, up materially from the same quarter last year. Operating earnings for the quarter were $0.71 per share, up 29% from the same quarter last year. Our book value per share excluding unrealized gains and losses was up 11% from a year ago. Sequentially, we had strong sales of variable annuities, Universal Life and asset protection products.

Our investment portfolio has also performed very well in the quarter. Our impairments are down. Our problem commercial real estate loans are also down. Our capital position remains very strong. We estimate that our RBC ratio at quarter end will be in the range of 435% to 440%. We’ve also made good strides here in the last several quarters in enhancing our enterprise risk management capabilities as evidenced by the fact that we’ve just completed our annual top to bottom review of our debt calculations for our Universal Life and annuity products. And as you can see in the numbers are a result of all that, it was slightly positive but pretty much a push or a wash.

In addition, there is a very little noise this quarter from our variable annuity fair value calculations due to the implementation of our hedging program. Of great importance, we announced in the quarter two very significant acquisition transactions, United Investors and the life business of Liberty Life of Greenville, South Carolina, which affect both transactions to be strongly accretive to earnings and return on equity in 2011 and for years beyond.

Both transactions bring to us a very seasoned, solid and predictable source of GAAP and stat earnings. We believe we have acquisition capabilities that are unmatched in the life insurance industry based on, among other things, our experience and know how. We have now completed more than 40 successful block of businesses or small company acquisitions.

Number two, our operational and transition capabilities. As you know, these transactions can offer some challenges in that respect. And we think we do that as well better than anyone. Number three, our capacity for structuring innovative transactions and doing it in conjunction with other parties as was the case of the Liberty Life transaction where that transaction was structured in conjunction with a Athene Reagan [ph] affiliate of the Apollo Group.

And lastly and probably most importantly, our reputation in the industry for following through on what we said we were going to do in closing. Needless to say, we are very excited about these two transactions.

Overall, we think we are well on our way to executing successfully the business plan we laid out for investors for the year at our March investors meeting. And we do believe we are well on our way to regaining the solid momentum for the future that was the theme of that presentation.

With that, I'm now going to turn it over to Rich Bielen, our Chief Financial Officer. And he will walk you through our segments and give you more details about the quarter. Rich?

Rich Bielen

Thank you, Johnny. I might ask that you turn to slide three of the presentation. For the third quarter, we report operating income of $0.71. We also had $0.09 gains serving the quarter, that results in net income available to our shareholders of $0.80.

For the first three quarters of the year, our operating income is $2.11 and our net income is $2.07. On slide four, we’ve broken down for you the net realize investment gains and losses for the quarter. Our impairments for the quarter were $7.6 million, all attributable to our non-agency residential mortgage backed portfolio for the year. We have now recognized $36 million of impairments.

In the third quarter, we also, as a result of the Modco arrangements, we created a few years ago. We had $11.3 million of gains. In our normal trading activity, we also recognized $17.9 million of gains as we continue to rebalance the portfolio. We also have a series of interest rate swaps on a macro basis to hedge us against rising rates as a result of the declining rates in the quarter that actually generated a mark-to-market loss of $4.7 million and then all the other kinds of items totaled a $5.2 million loss including a $3 million reserve that we set up on the commercial mortgage portfolio.

Turning now to slide five, our book value per share is up strongly to $41.69 from $28.96 at year-end. Excluding AOCI, we ended the quarter with a book value of $34.66 versus $32.72 at year-end 2009. I know that everybody always looks at the gain and loss on the portfolio. So we have broken down for you that our net unrealized gain at the end of the third quarter is now $1.2 billion and that compares to an unrealized loss at year end 2009of $400 million.

Turning to slide six in the investment portfolio, you can see the recent trend in our mortgage loans that we have continued to see a decline in our delinquencies. We – at the end of the quarter, we had four-tenths of 1% in our traditional portfolio. As you may recall, we now consolidate on our balance sheet some securitized loans. Including those securitized loans, our delinquency rate is now 1.1%, both down about two tenths of 1% percent from the second quarter.

Updating you on liquidity, we ended the quarter with $635 million of cash, that's a decline of about $500 million from the end of the second quarter. We are now nearly fully invested and will retain about this level of cash for the fourth quarter in preparation for the closing of our two transactions that we’ll complete around year end.

Our new money purchase yield in the quarter was 4.99%. There have been a lot of questions over the past few weeks about the impact of long-term low interest rates. Based on a new money purchase rate of 5%, we see no significant impact to Protective on earnings in either 2011 or 2012. If this trend were to continue into 2013, we would see a reduction in our net investment income of approximately $13 million.

In the third quarter, our trading account realized a benefit to us of about $8 million but that really offset the strain we had from the extensive cash balance during the quarter. We also had during the quarter some elevated expenses regarding our acquisition activity during that quarter. You would also note that our trading portfolio was now down to $133 million at the end of the third quarter.

Turning now to slide seven and life marketing, we report $30.9 million in the quarter versus $26.5 million in the third quarter of 2009. The third quarter tends to be somewhat of a seasonal low for us related to some insurance that we have. We recognize our income based on those patterns and that held down income by about $2 million.

Our actual-to- expected term mortality during the quarter was 94% that is a $3.2 million favorable variance. As we look back over the last five years, the actual-to-expected mortality in the term business has been approximately 85%. The increase this quarter was a result of some large claims that we saw late in the quarter.

As everyone in the industry does, we reviewed all of our unlocking assumptions during the quarter and we saw a positive perspective unlocking of $2.7 million on all of our life business. We also see that in the third quarter, our UL sales now represent 79% of total sales.

Turning to slide eight, our total sales for the quarter were $40 million, including $32 million of Universal Life sales. In the $32 million includes $5.4 million of sales related to our assured guarantee UL product that we introduced in the second quarter. We expect that sales in the fourth quarter will range between $40 million and $45 million. So the positive trends will continue.

Now, turning to slide nine, we are reporting operating earnings during the quarter of $22.7 million. If we exclude the impact of both fair value and perspective unlocking, we report $20.1 million. During the quarter, we had positive perspective unlocking on the business of $5.1 million, but that was offset by two fair value items. The GMWB was a modest $1 million unrealized movement negatively and also the indexed annuity which we are not currently selling had a $1.5 million negative fair value.

We had record VA sales in the quarter. And turning to slide 10, our total sales for the quarter were $677 million, including $436 million of VA. sales. Year-to-date, we’ve sold just under $2 billion of annuities and we ended the quarter with an $11.9 billion account balance. We continue to monitor the balance between both our fixed and variable sales and continue to see positive segment fund flows.

Turning to slide 11 in acquisitions, we report $27.9 million of earnings during the quarter. A review of the assumption there resulted in a negative perspective unlocking of $2 million during the quarter. We also are on track to insource our business from CSC and we expect to complete that at year end 2010.

Turning to slide 12, I thought we would just go back over the impact of our two proposed transactions. We are expecting to invest $570 million of capital between both the United Investors and the Liberty Life transaction. We estimate the EPS accretion for the company in 2011 will be between $0.37 and $0.46 and in 2012, it will be between $0.52 and $0.60. And that, those assumptions are not accretioned to assume that otherwise we will just held the capital in our corporate and other accounts. So this is truly incremental for earnings. The estimated ROE improvement is 100 to125 basis points in 2011 and 125 to 150 basis points in 2012 and the estimated Stat IOR on this invested capital of $570 million is approximately 12%.

Now, turning to slide 13, we report $8.3 million of pre-tax earnings in the stable value business and in an operating spread of 100 basis points. The earnings and the ending balance are consistent with our expectations. We had a program a few years ago, where we sold a number of retail notes that are currently callable.

During the quarter, we have begun to call those given their higher coupons that did result in a DAC charge of $700,000 as we have to write off the unamortized issuance expense. We also saw that we were able to write $66.5 million of traditional gifts [ph] during the quarter. And so we ended the quarter with a $3.1 billion balance. And if we don't sell any further business in the fourth quarter as we are preparing for the acquisition, our target balance at year end will be approximately $2.8 billion.

Turning to slide 13, the asset protection division reports $5.2 million of earnings versus $5.7 million a year ago. The good news here is that we have seen sales improve 13% over the third quarter of 2009. And as you can imagine, since this is an extended service contract business, the third quarter tends to be the peak driving season in the summer, so we see elevated claims. So this quarter tends to be seasonally a little lower than the other quarters in terms of our earnings.

If you turn to slide 14, you can see that our top line sales improve from $86 million a year ago to $97 million this quarter. And the bulk of that was in our service contracts going from $65 million to $71 million and then in our other products running from $11 million to $16 million.

And with that I will now turn it back over to Johnny for the outlook.

John Johns

Okay. Rich, thank you. I guess, as you would infer from our reports thus far, outlook for the rest of the year is positive. Our focus will be on delivering the results that we we’ve planned for the year. Our capital position is strong and actually improving. Our marketing franchises are healthy and active. We do expect the positive trends in our business segments to continue to produce high results during the fourth quarter.

We have just completed a complete review of our strategies for the next three years. We plan to share our specific plans with investors on December 1 at our Investors' Conference in New York. The central elements of the plan will be first how we plan to achieve a double-digit ROE within this period and maintain it.

Number two, our plans for ensuring the capital is deployed at returns that will create and not destroy shareholder value. Number three, our plans for reducing risks throughout the corporate enterprise including in our products, our investments, our balance sheet and even our business models.

So with that we’re going to conclude our plan remarks and move forward to responding to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Nadel of Sterne, Agee & Leach.

John Nadel – Sterne, Agee & Leach

Hey, good morning, everybody. Couple of quick question for you guys. On life marketing, the 28 or so million dollars this quarter if I stripped out the favorable mortality, I understand for your comments, rich the roughly $2 million of maybe lower earnings from seasonality. I thought – I thought as I recalled from maybe prior quarter conference call that we should be expecting something in the sort of low 30s quarterly. Maybe it was low to mid30s quarterly run-rate from life marketing. Has that changed at all?

Rich Bielen

No, John.

John Nadel – Sterne, Agee & Leach

Okay. And then just separately the 12% IRR I believe you said status and statutory IRR is 12%. How does that translate directly to 12% on GAAP or does that translate to something higher given amortization?

Rich Bielen

John, it should translate to 12% on GAAP, but the patterns maybe slightly different as you go through purchase accounting and the form of the transactions.

John Johns

John, this is Johnny too. It’s an after tax on leverage return.

John Nadel – Sterne, Agee & Leach

Thank you. Okay. That's all I have. Thanks.

John Johns

Thank you.

Operator

Your next question comes from the line of Mark Finkelstein from Macquarie.

Mark Finkelstein – Macquarie

Good morning. First question is, I guess how sustainable is the annuity earnings of 20 million? I mean, it’s a pretty big increase over the last several quarters?

Rich Bielen

Mark, the 20 is – we did have a little improvement in our steel [ph] mortality during the quarter. Had we not seen that and you prepare to prior quarter we would have been about $18 million, but as you can see the sales have been very strong this year and our spreads continue to holdup very well and the account balance continues to grow. It’s a couple billion over the next year. We’re optimistic about how those earnings continue.

Mark Finkelstein – Macquarie

Okay. And just on the same segment, I guess you implemented the hedging strategy. Can you just talk about, I mean what kind of coverage we are now at by the end of the third quarter and maybe even where we are in to the fourth quarter in terms of the overall account balances of the VA and GMWB product?

John Johns

You know Mark, it’s a complicated topic. We can give you some high level commentary, but why don't we save it for the investors’ conference and we’ll give you a comprehensive look at how we’re hedging. Essentially, we’re close to fully hedged. We may be a little unheeded on some volatility but not materially. So we are essentially hedged.

Mark Finkelstein – Macquarie

Okay. And I guess the – just going back to the life marketing segment, if my memory serves me, you historically kind of, suggested that a $4 million favorable mortality relative to the original pricing expectations is kind of what’s in the expectation, you’re kind of around that for this quarter. But I guess I'm trying to understand what you were trying to get at with the 85% actual to expect and I understand that’s the historical number which would imply a higher favorable mortality level. But you’re kind of suggesting that the $4 million that you historically used is maybe needs to increase, in that when you think about an increased level that this was a little disappointing relative to that baseline?

Rich Bielen

Mark, I think the answer to your question is yes. And that's why we have tried to now report on an actual to expected and we have some credible experience now for five years and so our original $3 or $4 million was our first estimate. But as we look now over this period, our actual to expect is about 85% and that's about what it was in the second quarter of 2010.

John Johns

Yeah. You can look at the glass is half full or half empty. I actually thought it was a little disappointing as a mortality quarter, I would actually go the other way from a lot of people looking at it, time will tell. It will be what it is.

Mark Finkelstein – Macquarie

Okay. And finally, how much of the – if any of the production between UL and term in the quarter was UL under the new chassis that’s essentially kind of – is really kind of a term product on a UL chassis?

Rich Bielen

It was $5.4 million, mark.

Mark Finkelstein – Macquarie

Okay. All right. Thank you.

Rich Bielen

Thank you.

Operator

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

Darin Arita – Deutsche Bank

Thank you. I just wanted to go back to the liquidity. I think you had given some numbers saying you ended the third quarter at $635 million. And was I correct in understanding that that's around the level of cash you’d like to keep even post the closing of these acquisitions?

Rich Bielen

Darin I think that's the level of cash we need to keep for the fourth quarter because we’re going to close the two acquisitions. After that we would suggest that about a 1% balance maybe $300 to $400 million would be appropriate. And once we close the acquisitions, we don't believe there’s cash drag would be impacting us in 2011.

Darin Arita – Deutsche Bank

Got it. And just to reconfirm, I think this came up on your call before, but the creation that you expect from these acquisitions that's based on the capital in the corporate segment earning the portfolio yield?

Rich Bielen

That's correct. It was estimated to earn about five and a quarter percent or so.

Darin Arita – Deutsche Bank

And then just in terms of the VA sales, what is your estimate of the ROE on the sales today with all of your hedging fully implemented here?

John Johns

You know, Darin we don't give out that kind of information because of competitive sensitivities, but I can assure you that we believe is well above our cost to capital.

Darin Arita – Deutsche Bank

Okay. Is that assuming any reversion to the mean on say interest rates or volatility?

John Johns

Now, that's one thing we don't do generally is we don't assume reversion to the mean on interest rates for purposes of pricing products. We pretty much use current yields; I mean current new money rates. Maybe with a bit of a lag because we don't re-price products – strictly true of UL products, but we don't reprice products every month, obviously, but our view is we can't really forecast future interest rates. The best idea we have is what interest rates are today. We’re actually getting, me invest money so that's been part of our discipline here for a longtime.

Darin Arita – Deutsche Bank

All right. Thank you.

John Johns

Thank you.

Operator

Your next question comes from the line of Eric Berg of Barclays Capital.

Eric Berg – Barclays Capital

Thanks. Good morning, Johnny and Bielen. My first question will take effect to a question by John Nadel. Are there appreciative differences between an IRR and a stat IRR? I mean, I don’t say are they – in your mind are they essentially one in the same? Essentially it’s the rate of return overtime or is there important different that I should be sensitive to and then when you talk about – or I am just not even familiar with the concept of the GAAP IRR because IRR is a cash concept and GAAP is all about accounting? So, I will follow-up, but the two-part question is, is there an important difference that I should be sensitive to between a Statutory IRR and an IRR and then this whole concept of GAAP IRR if you could define it for me please? Thank you.

Unidentified Speaker

My name is Bill [ph], I am sitting here with – essentially when you price on a stat IRR essentially it is close to (inaudible) – it is like a cash almost calculation. But one thing you have to remember is that under statutory rules you have this assigned capital that you have to stick aside and invest at portfolio rates. So, you have to think about RBCs being sort of trap capital until it is released, but essentially that's pretty close to it.

Eric Berg – Barclays Capital

Bill, is that okay?

John Johns

Steve, is that okay?

Steve Walker

At the end of the day Stat and GAAP are equal in terms of cash from cash flows looking at our earnings margin. It’s just the timing difference as Rich mentioned earlier that will…

John Johns

Stat and GAAP will converge and will be the same numbers over the life of a block, but the pattern may be a little different just because of the way profits [ph] emerge under debt.

Eric Berg – Barclays Capital

Okay. The other question I have for you relates to the future of your mortality experience, again returning to building on an earlier question. I would think that given the competitiveness of your markets, which is very high, that over time – that because you are getting results better than you priced for – I don't know what you expected, but better than what you priced for, that in highly competitive markets, this would be sort of arbitrage through a – meaning you would not be able to continue to charge customers materially more than their mortality costs, the true mortality cost that you are experiencing. And then on new business you are going to be experiencing close to 100% actual to pricing. And so accordingly this 85 will drift up over time. At least that would be my thinking. How would you, Johnny or other members of your team think about the future of this actuals to expected mortality?

John Johns

Well, Eric, we are not cutting prices in our price competitive segments and we suffered. We are not trying to maintain market-share leadership. Our strategy is to be one of the two in these very competitive product lines. I suppose your thesis might play out, but we are trying to have strategies to sell products that create shareholder value and don’t destroy it. And so to the extent we are enjoying mortality improvements now, we are not reflecting that in price cuts, just to try to maintain a position in a market. Again, that's something we will get into at the investor’s conference. We really like that kind of hybrid business model, where we have very robust retail capabilities, but we also have very robust acquisition capabilities. And we can sort of have some more control over when and how we invest capital as a result. So, we are not forced to arbitrage away benefits in products over the near term.

Eric Berg – Barclays Capital

Thank you.

John Johns

Thank you.

Operator

Your next question comes from the line of Thomas Gallagher of Credit Suisse.

Alex – Credit Suisse

Yeah, good morning, guys. It is actually Alex [ph] from Tom’s line. Just a couple of questions for you guys. The first is, if you could just briefly maybe mention what the terms of the renegotiated commercial mortgages are and whether or not that has an associated RBC impact or drag? And the second question is, you talked about your $300 to $400 million in terms of cash. Is that all of the insurance companies’ or is it a portion of that’s going to be maintained at the holding company?

Carl Thigpen

Yeah, this is Carl. Concerning the renegotiated mortgages, due to accounting change, we had to consolidate those on our balance sheets. The actual cash –

John Johns

Those are in our securitization –

Carl Thigpen

They were in our securitization structure. So, they do not have any impact on RBC. And the actual modifications are very minor. On a great part of that, we just want the interest only for six months and we are just going to get our full contract terms and then the other one, I think, we gave up 10 basis points of yield. And they are both performing as renegotiated. So, it’s a very insignificant impact on our income.

John Johns

Again, these were not in our general account. They were in the securitization structures we did a long, longtime ago. And they were there and the accounting rules just changed. So now we consolidated those into our reported numbers.

Alex – Credit Suisse

Okay. Great. So no RBC impact.

Rich Bielen

And for your second question about cash, that is cash at our operating subsidiaries. Our holding company has some fee arrangements that cover our debt service. So we don’t hold a lot of cash in the holding company. And we don’t have any debt maturities to speak of until 2013.

Alex – Credit Suisse

Great. Thanks so much for the answers.

John Johns

Thank you.

Operator

Your next question comes from Chris Giovanni, Goldman Sachs.

Chris Giovanni – Goldman Sachs

Thanks so much. Question on stable value, Rich, you talked about year-end account balances of $2.8 billion as it falls as you look to integrate and complete the deal. How should we think of this as we go forward in 2011? And then the operating spread outlook for that business as well?

Rich Bielen

Chris, I think with respect to 2011, we will talk about what our plans are at the investor conference. I think it’s really going to be dependent on market conditions as to whether we keep the balance at that level or allow it to decline. We would expect after we complete calling these notes which will be some more in the fourth quarter and a little in the first quarter that our actual operating spreads will improve during 2011.

Chris Giovanni – Goldman Sachs

Okay. And then one final one. In the release you talked about successfully executing on the plan for 2010 and part of that at the March investor day, they said getting upto to $0.77 in terms of run rate by year end fiscal feeling comfortable about that given the results?

Rich Bielen

The answer is yes.

Chris Giovanni – Goldman Sachs

Okay. Great. Thanks so much.

Operator

Your next question comes from the line of Vlad Artamonov of Coastal Investment Management.

Vlad Artamonov – Coastal Investment Management

Hey, good morning, guys. Questions for you, you think you have a pretty high ratio of DAC on the balance sheet to tangible book value as well as annual capitalization of DAC compared to sort of pre-tax income. So, when I look at it this September – as the changes to DAC accounting, sort of, is that effective January 1st of 2012? And, the new rules are basically tightening the standards of what can be capitalized into DAC, so a lot of things are explicitly prohibited from being capitalized wherein direct costs like rent and research and training, marketing, research, lots of other things. And, I wanted to get a sense from you guys what percent to show DAC capitalization can be effected by that?

John Johns

We are still analyzing the impact. The FASB has not provided any implementation guidance. So we are still working with the information that’s out there right now and will be working with our auditors on interpreting exactly how to make those calculations, but for right now we don’t have any estimates.

Carl Thigpen

We are well aware of what’s coming and it is certainly in our minds as we go through our plans for next year and beyond.

Vlad Artamonov – Coastal Investment Management

Right, but I think they provided enough data to say what categories of costs – are not going out to be capitalized respectively. So, if I look at your annual capitalization of DAC which sort of an annual basis runs from $400 million. And I look at the analyst projection for, let’s say 2011 pre-tax income which is like a little bit about $400 million as well, are we talking about 10%, 30% of DAC that’s going to be basically be going to expensed of the $400 million as opposed to be capitalized. So, I think the categories are very well outlined already.

Steve Walker

This is Steve Walker, chief accounting officer. I just wanted to follow-up on that answer I gave earlier and basically to say we are still in the early stages of analyzing the affect. The standard that was issued by FASB allows for retrospective, if elected, application of this rule, so that could impact previously capitalized DAC and amortization on that. And so we have not developed a view as to whether we would elect retrospective or prospective application and really that would both of those decisions would drive how we would look going forward. So we are not prepared to really provide any estimates at this point.

John Johns

One thing to keep in mind too, we don’t do a lot of advertising and that sort of thing. We are not into the brand building business. So I think that's a kind of positive for us to extend those kinds of markets and experience everything. It would not be a big part of our business model.

Vlad Artamonov – Coastal Investment Management

Are you going to provide some sort of an estimate on your December 1st analyst day?

John Johns

I think at this point we are still going through the beginning stages of a fairly extensive project to analyze this. I would suspect that we would not be in a position to provide information at that point.

Vlad Artamonov – Coastal Investment Management

Right, but there is no way you are going to adopt a retrospective method here – just be here?

John Johns

We have not made any accounting policy decisions in that regard.

Vlad Artamonov – Coastal Investment Management

All right, thanks.

John Johns

Thank you.

Operator

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

John Nadel – Sterne Agee

That was interesting. Just a quick question. And I know you guys said that insourcing is coming in the fourth quarter. I think you guys gave us an estimate previously on what that would cost. And I think that cost was going to come in all or almost entirely in the fourth quarter? Could you just remind us – and is that – is that $0.70 or we should think about that $0.70 excluding this costs, correct?

Rich Bielen

John, the estimate that we gave you for the insourcing was $7 million. And so we should see six plus of that in the fourth quarter.

John Nadel – Sterne Agee

Okay. Yeah, I thought it was…

Rich Bielen

And the $0.70 excludes that one-time charge. The question that we got was what was the run rate.

John Nadel – Sterne Agee

Yes, understood. Thank you. Thank you.

Rich Bielen

Thank you.

Operator

And there are no further questions. I would now like to turn the call back over to management.

John Johns

Well, great. Thank you so much for participating in our call. We hope it has been helpful to you. As always, we are available to fill in any gaps in the story that we have told today. And we really hope that you will join us for our December investors’ conference. We think we have some really interesting things to talk about then. So, thanks again.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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