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Protective Life Corp. (NYSE:PL)

Q2 2011 Earnings Call

August 4, 2011 10:00 AM ET

Executives

Eva Robertson – VP, IR

John Johns – Chairman, President and CEO

Richard Bielen – VP and CFO

Carl Thigpen – Chief Investment Officer

Analysts

Spehar – Bank of America/Merrill Lynch

John Nadel – Sterne, Agee & Leach, Inc

Steven Schwartz – Raymond James Associates

Eric Berg – Barclays Capital

Edward Spehar – Bank of America/Merrill Lynch

Operator

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Q2 2011 Protective Life Co Earnings Conference Call. My name is Grant and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speaker’s remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is also being recorded. And now I would now like to hand the call over to for the host of today’s call, Eva Robertson, the Vice President of Investor Relations.

Eva Robertson

Thank you, Grant. Good morning, everybody. Welcome to Protective Life Corporation’s 2011 second quarter earnings call. Our call today will be hosted by John Johns, Protective’s Chairman, President and CEO; along with Rich Bielen, our Vice Chairman and CFO. Here with us we also have Carl Thigpen, our Chief Investment Officer; Carolyn Johnson, our Chief Operating Officer; Steve Walker, our Chief Accounting Officer; and Ed Berko, our Chief Risk Officer to help with questions and discussions that we will be having this morning.

Yesterday we released our earnings press release and along with the supplemental financial information and both of those documents are posted on our website at protective.com.

In addition to that information, we are using a slide presentation with our discussion this morning, and that slide that has been webcast from our link in the Investor Relations section of the website at protective.com. It is also available for download at that location.

And finally today, our discussion will include some forward-looking statements and those express our view of future events and expectations. Actual events and results may differ from what we – we’ll be discussing today. You can refer to our press release and the risk and uncertainties as well as risk factors section of the company’s most recent 10-K and subsequent 10-Q, for more information about what may affect future events.

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

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

John Johns

Good morning everyone and thank you Eva. We are pleased today to discuss what we view as very solid results for the second quarter of this year. Rich Bielen, our CFO will go through the results in detail in just a moment.

But I’d like to again noting that we were able in the quarter to restart our share repurchase program as those of you who follow us closely note that our Investors Conference of last year we laid out a comprehensive three-year plan for the company, the plan contemplated 50 basis points to 70 basis points of annual improvement in ROE leading to achievement of an ROE of in excess of 10% in 2013, double-digit growth in earnings per share. And just an overall approach to management of our business that would lead to less risk in products, investments and balance sheet.

I’m very pleased to say that we’re very much on that plan about three to first six months of this year actually we’re a bit ahead of it. But the repurchase program is a bit of a new – really wasn’t contemplated when we put that plan together that we would reinitiate the repurchase program at this juncture.

However, what has changed is that, when we were putting the plan together we assumed that as the other elements of the plan started to come together things that did the closing of the United Investor Liberty Life acquisition good results on our retail marketing units that our stock price would start going up. But instead it’s gone down. It’s now at a point where we found repurchase of our shares to be very compelling. And our intention is to continue to repurchase our shares at about this level through the plan period unless circumstances change.

We’ll note too that at this level of repurchase we’ll be able to maintain at a healthy cushion of capital to deal with any unexpected contingencies and also to take advantage of acquisition opportunities if they come along. But I would note that an acquisition opportunity would have to be very compelling to compete with repurchase of our shares at this level.

If you step back and look at what this really means, it means that as we continue to repurchase at this level and continue our current dividend, we’ll be returning to our investors a little bit more than 50% of our earnings or after-tax of earnings. And again and say we do believe we have the capacity to continue generate capital that will support those sorts of plans.

Also note that our results in our retail marketing units were very strong in the quarter very much in line with our plans for growth and return in – improvement in returns. At the investment income in the corporate and other segment was a bit less than planned due to lower than expected interest rates and higher than planned cash balances. But at the same time, this was largely offset in Life Marketing, Annuities and Stable Value are higher than plan sales and account balances and lower liability costs. So overall we’re very pleased with that result.

So, without further ado, let me turn it over to Rich Bielen, our Chief Financial Officer for more detail on the quarter.

Richard Bielen

Thank you, Johnny. And good morning, everyone. If you turn to slide 3 of the deck on our website, we’re reporting $0.94 of operating earnings or $82 million after-tax that is up 51% from last year at $0.62. Our net income per share is $1.06 or $93 million after-tax, that’s up 51% versus the second quarter of 2010.

For the first six months of this year, our operating earnings are $1.66 or $145 million that does include these repurchase schemes or notes that we’ve had in the first six months, and that is approximately $0.20 ahead of the initial plan we provided for you back at our Investor Conference.

Turning to slide 4, the net realized investment gains and losses for the quarter. We had net realized gains of $30 million, that really relates to our normal trading activity, but it also is somewhat elevated this quarter, because we closed the Liberty transaction at the end of April and it required a fair amount of portfolio rebalancing that elevated the gain in loss recognition during the quarter.

We did have impairments related to our residential mortgage bags of $9.5 million consistent with our plan. Our Modco related to the Chase Insurance Group actually added an $4.7 million of gains during the quarter. And then all the other realized gains and losses were a loss of $8.7 million resulting in net realized investment gains for the quarter of $15.8 million or $0.12 per share.

Turning to slide 5, our book value ended the second quarter at $42.59, versus $38.88 at the end of the year that’s up 10%, excluding the effect of accumulated other comprehensive income our book value ended the quarter with $37.26 up from $35.46 at year end.

On our unrealized gains and losses or net unrealized gains continued to improve in the portfolio. It is down $982 million, versus $684 million at December 31. And I would like to point out that our gross unrealized losses continued to decline moving from an unrealized loss of $382 million to $293 million, that is down 30% during the first six months for this year.

Moving to slide 6, this is a new slide we have talked about de-risking our portfolio. And what we wanted to point out to everyone is that, when you look at the underlying fixed income portfolio we have continued to reduce our below investment grade based on traditional rating agency ratings. So we moved that down to 10% here at the end of the second quarter. But what we’d like to point is that when you review our portfolio on an NAIC basis which includes the rewaiting of the non-agency in CMBS, that our below investment grade is only 4% of the portfolio. In addition in the supplement, there was a table that shows you that has got historical trend. And we think our 4% compares very favorably to the industry.

Moving to slide 7, Life Marketing reported $33.7 million of earnings for the quarter, result to on plans at a year. Second quarter term mortality with 89% of expected versus 94% in the first quarter of 2011. The second quarter does have some positive seasonality compared to the first quarter. And our $38 million of sales were ahead of our plan for the year.

Moving to slide 8, on the annuity side. We are reporting $24 million of pre-tax operating earnings in the quarter. Our sales continue to be a very healthy level with $950 million. We see our record account balances of $14.2 million up 27% versus the second quarter of 2010. We’d also saw a higher spreads in our fixed annuity business and higher VA fee income with the increased as in balances.

Moving to slide 9, on the acquisition front. We reported $39.4 million of earnings during the quarter. As you noted – as we’ve noted previously we closed the Liberty Life transaction at the end of April. The integrations for both Liberty Life and United Investors are progressing on track. The two combined transactions contributed $12.6 million of earnings in the second quarter, and we would expect that in the third quarter was a full quarter of Liberty will contribute an addition of $3 million during that period.

Moving to slide 10, the stable value products division. We report pre-tax operating earnings of $19 million. Those earnings due include $7.1 million of participating mortgage and bank loan fee income in the quarter. And as you may recall, we expected to record more – participating mortgage income that was part of our plan for the year. The reason of the income that’s here is that the associated assets that were sold were starting to this line of business and so the income is flowing through in the stable value area.

Even excluding the participating income, we had improved operating spread moving to a 197 basis points. We had sales during the quarter of $261 million and our ending account balance was $2.6 billion. Looking towards the second half of the year, we expect the account balance to stabilize at $2.6 billion and we expect our operating spread to be approximately 180 basis points.

Moving to slide 11 with asset protection report $5.5 million of earnings during the quarter a very favorable movement in sales, where we saw our sales improved 23% over the second quarter of 2010. We are seeing a pickup in market share. Earnings are in line with expectations. We did have some elevated expenses related to some contingent commission in some of our new initiatives but very much on plan.

And with that I’m going to turn it back to Johnny for some of the other highlights.

John Johns

Yes. Thanks, Rich. Again I think the real highlight is that we believe we are well positioned to continue our share repurchase program and we do see our retail businesses performing well. We did see our investment portfolio continuing to perform very well. We believe we are very well insulated. We invested candidly on anything going on over in Europe. And as we look to the second half of the year we’re very optimistic that we’re going to continue to track right along the plan for the second half of the year that we previously outlined.

I’ll note that our – but we haven’t closed, completely closed our statutory books as you heard our estimate is and our RBC ratio at the end of the second quarter will be about 420%, which is tracking bit above plan. And we got to remember too that’s after the Liberty acquisition closed in the quarter. Our total adjusted statutory capital we believe were in the quarter about $2.8 billion.

So again every time it seems to be tracking here nicely to plan and, we’re optimistic as we look to the second half of the year that will continue with a kind of performance we’ve enjoyed. And with that I think we’ll stop and turn the call over to you for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, our first question comes from the line of Ed Edward Spehar from Bank of America/Merrill Lynch.

Edward Spehar – Bank of America/Merrill Lynch

Thank you. Good morning, everyone.

Richard Bielen

Good morning Ed.

Edward Spehar – Bank of America/Merrill Lynch

Can you. A couple of questions I mean, I think it’s obviously positive that you’re buying back stock. But, I guess the question would be, why the implication from your comments Johnny, I think was that we should think about maybe $25 million a quarter is sort of a run rate. And I guess I was wondering, why wouldn’t we expect it to be double this level?

And, my math I guess my math is, is that if you look at your RBC ratio I think you probably fall in the category of one of those companies where there is a lot less uncertainty about how much capital you need to hold? And I think that you’ve recently said in different venues that a 375 RBC is probably a good number for you guys, which would suggest that you have about $300 million of excess capital today. And I think Rich, when he gave the plan at the Investor Day, had suggested that there was $600 million of capital generation for deals over a three-year period and then if it was to be used for share buyback I think the number was maybe around $400 million.

I mean that could be a little off there, but it seems like you’re generating at a 125 to 150, let’s say that you could buyback a year from free cash flow plus the $300 on balance sheet today. Stock at half a book value I would hope that we’re not going to have this opportunity for long. So I guess longwinded but love to hear your response. Hello, you guys there?

Operator

Apologies ladies and gentlemen just please bear with us while we get our speakers’ back.

Richard Bielen

Ed can you hear us now?

Edward Spehar – Bank of America/Merrill Lynch

Yeah did you guys did I go on and on and you didn’t hear anything.

Richard Bielen

No, no actually we heard your question that was when we...

Edward Spehar – Bank of America/Merrill Lynch

Oh now you guys are gone again. Hello? Are you guys back?

Richard Bielen

Yes.

Edward Spehar – Bank of America/Merrill Lynch

You guys didn’t leave did you?

Operator

Please bear with us ladies and gentlemen our speakers still appears to be having some technical difficulties. Please stay on the line.

Operator

And ladies and gentlemen, please bear with us is because we’re having some technical difficulties. We’ll back shortly.

Operator

Again ladies and gentlemen, please bear with us. We are hoping to get our speakers (inaudible). Again, please stay on the line and please bear with us.

Edward Spehar – Bank of America/Merrill Lynch

Are we back?

Richard Bielen

We – we are back Ed.

Edward Spehar – Bank of America/Merrill Lynch

Listen, you know I have the ability to clear room and this is little ridiculous.

Richard Bielen

That was not because (inaudible).

John Johns

Our apologies to everyone. We’re sorry we did have technical difficulty herewith.

Edward Spehar – Bank of America/Merrill Lynch

You ran out the door to put the trade tickets, and is that what happened?

John Johns

No, we didn’t do that. Get go ahead Rich.

Richard Bielen

Well Ed, you did have a relatively long question I’m going to blow it down to a couple of points. I think we’ll go back to the Investor Conference. If you recall at that conference we had a number of scenarios out in 2013 that contemplated whether or is small acquisition merger or share repurchase and so, we at time said we could buy back about $300 million of equity where we’re going ahead and done is started to accelerate that process the $25 million a quarter.

And if you look over a three-year period that would equal the $300 million and the combination of the repurchase plus our dividends equal about $40 million. And so, we would be returning to shareholders 50% of our after tax operating earnings and yet at the same time, give us some flexibility to deal with this economic environment and maybe some other opportunities that they come along for our core business.

Edward Spehar – Bank of America/Merrill Lynch

Rich, I guess though it just a follow-up on that I mean with the question though is this is that, with the 15% earnings yield on new company and, a $300 million on balance sheet number today that I would think is much more of a real sort of excess capital we can have versus the numbers we hear from some other companies where it’s a little bit unclear actually what the RBC requirement is.

I think there is a bit of a difference here and I’m just wondering beyond the $300 million of free cash flow why not work down and accelerate even more and work down at least some of this I mean even 20 points of the cushion of the 50 RBC point cushion?

John Johns

Ed I think you can see by our action in the second quarter, we’ve already started to accelerate what we’ve thought previously we’ll do. And I’ll tell you that every quarter as we look forward, we’ll evaluate what’s the best opportunity and we do find our stock to be compelling at this price and that’s why we initiated this certainly.

Edward Spehar – Bank of America/Merrill Lynch

Yes and I mean I think it’s about 10% lower than where you brought it even. I mean I agree it was compelling then I think it’s even 10% lower now. I guess the other question though I had was on the run rate earnings number if we’re trying to think about kind of the underlying run rate earnings number for this quarter appreciating that the $7 million of kind of good investment income was in line with your plan but is above the sort of the kind of level we would normally anticipate I think for those two items. How do we think about a run rate quarter?

John Johns

We actually think the run rate if you exclude the repurchase of the notes, which contributed about $0.15, is about right and we had anticipated that we would see roughly $5 million or so of participating income during each quarter. So we’re right on track. We had no participating income if you recall in the first quarter.

Edward Spehar – Bank of America/Merrill Lynch

Okay, thank you.

Operator

Thank you for your question. Our next question comes from the line of John Nadel.

John Nadel – Sterne, Agee & Leach, Inc

Hi well see if we can get this question in without knocking the conference call apart. Good morning I have a couple for you. Thinking about the Acquisitions segment maybe I was wrong or got some things wrong as it related to the UIL and the Liberty transactions. But my expectation was that those two acquisitions combined would contribute about $20 million of pre-tax quarterly earnings.

And I guess my comment my question is from your opening remarks it sounds like maybe Acquisitions you get an extra $3 million from the extra month in the third quarter from Liberty, which would put the total contribution at about $15 million to $16 million pre-tax. Did something change or am I – did I just misread the original announcements?

Richard Bielen

The GAAP range pattern is slightly lower than we expected but it is consistent with the stat I largely expected. And so what we would contemplate for the rest of the year is Liberty will be about $10 million for quarter and United Investors is about $5 million for quarter if you recall that includes our integration expenses during 2011.

John Nadel – Sterne, Agee & Leach, Inc

And can you remind us...

Richard Bielen

(Inaudible).

John Nadel – Sterne, Agee & Leach, Inc

Can you remind me – remind us how much the integration costs were?

Richard Bielen

They can be a little lumpy but when we model out it about is about $3 million a quarter between the two of those.

John Nadel – Sterne, Agee & Leach, Inc

Okay so about $12 million for the full year of 2011 or $12 million for the first 12 months?

Richard Bielen

$12 million for the first 12 months.

John Nadel – Sterne, Agee & Leach, Inc

Okay. Thank you. Then I guess my second question maybe a follow-up on Ed’s question. I recognized that historically Protective Life is operated under or maybe is operating even in lower risk based capital ratio. But then the 350% target. But given the ramp up and the size of your variable Annuity business today and the level of growth that it is achieving, is it safer for us to think about the ongoing risk-based capital ratio for Protective Life at least until there is some real sanity in the world again has been more towards the 400% level more similar to other larger peers?

Richard Bielen

Yes John I mean that – the rating agencies will have their different views on that. I’d say in light of all the volatility in the market until this settles down, managing the company closer to 400% is probably the prudent thing to do.

John Nadel – Sterne, Agee & Leach, Inc

I completely appreciate that comment especially in light of the recent couple of weeks here. And then the last one for you is just – is just can you give us a sense where the holding company cash level is at the end of the quarter and what your dividend capacity is for the remainder of 2011 from the insurance subs?

Richard Bielen

John at quarter end we had about $17 million of cash at the holding company. Our intention is to actually raise that to between $60 million and $70 million by year end, which will provide one-time interest coverage. I don’t recall exactly what our dividend capacity but I know it’s over $200 million at least for the balance of the year maybe as high as $300 million.

John Nadel – Sterne, Agee & Leach, Inc

That’s perfect. Thank you.

Richard Bielen

Thanks a lot.

John Johns

Thanks, John.

Operator

Thank you for your question. Our next question comes from Steven Schwartz from Raymond James Associates.

Steven Schwartz – Raymond James Associates

Hey guys, good morning.

Richard Bielen

Good morning.

Steven Schwartz – Raymond James Associates

A couple of follow-ups and then a couple of my own I just unclear here Rich, were you suggesting that the $20.7 million from the share repurchase would be which you would have considered excess investment income in the plan?

Richard Bielen

No Steve, you’re saying that no repurchased, yes.

Steven Schwartz – Raymond James Associates

So no – so that would not have been there, right. That was not contemplated?

Richard Bielen

That was not contemplated. We thought we could see $15 million to $20 million of participating and other types of investment income.

Steven Schwartz – Raymond James Associates

The $7.1 million now that would be kind of what you would have expected?

Richard Bielen

Yes.

Steven Schwartz – Raymond James Associates

Okay good. I just wanted to make sure I was clear on that. And then, the numbers that you just gave, that you just gave John on Liberty Life and UI and in the expense numbers, were those pre or post-tax?

Richard Bielen

Those were our pre-tax.

Steven Schwartz – Raymond James Associates

They were all pre-tax. So, we’re looking at $15 million may be $10 million post-tax and there is $8 million or something like that with the integration. Okay. And then, if I may on my own questions. The positive seasonality that you saw for that you think it is in the second quarter I was under the impression that the second and third quarter were kind of normal, first quarter was poor, fourth quarter would be better than the average is that, is that not accurate?

Richard Bielen

That is correct. That was just pointing out the sequential nature between first and second quarter.

Steven Schwartz – Raymond James Associates

Okay. So looking at the 89 AE, would you suggest that, so you would not be suggesting that the entire 6 points versus the planned 95 would be seasonality.

Richard Bielen

No.

Steven Schwartz – Raymond James Associates

Okay and how much would you suggest?

Richard Bielen

$2 million, $3 million.

Steven Schwartz – Raymond James Associates

$2 million, okay. Okay. And then well Carl can you give us a little bit of update on the RMBS portfolio and kind of speeds and the things that you normally give us on that?

Carl Thigpen

Yes I mean, we – during the quarter we continue to have very good pay downs. The whole investment grade portfolio due to pay downs came down well over $100 million. And then we also took the opportunity to sell $700 million of the prime portfolio at a gain. So we continue to feel very good about that portfolio and the direction it’s moving.

Steven Schwartz – Raymond James Associates

Okay and what’s the average life now?

Carl Thigpen

The average life is probably around two years, two and a half years. It continues to pay downs and the actuals speeds are in the 30% CPR ranges. So it’s coming down pretty quickly.

Steven Schwartz – Raymond James Associates

Okay. And then, finally if I may Rich could you talk about the core net investment income in corporate and other it was I think below everybody’s expectations. You mentioned that the rate was lower than you are looking for maybe you could talk to that? And also how much excess liquidity you have got in there?

Richard Bielen

Steve the investment income in corporate and other was really less than planned due to the lower than expected interest rates in the market and we had higher than planned cash balances with all the trading activity on the rebalancing of Liberty. But this was offset by lower costs in Life Marketing, Annuities and Stable Value credited rates. So the net result was about neutral.

Steven Schwartz – Raymond James Associates

Okay. So you don’t want to address corporate and other by itself?

Richard Bielen

No, I think we are with little more than expected cash balance right now. I think we’re about $600 million where we like to around about $300 million so that’s hurting. But, you’ve also seen yields have come down this year. So we’re seeing lot more yields than we originally expected. But, in a real length process we’re also getting lower credited rates in other parts of the business which is neutralizing that.

Steven Schwartz – Raymond James Associates

Okay. All right great. I mean around about $300 million number. Okay, great. Thanks. I appreciate it.

Operator

Thank you for your question. Our next question comes from the line of Eric Berg – Barclays Capital.

Eric Berg – Barclays Capital

Thanks very much. Good morning to everyone.

Richard Bielen

Good morning.

Eric Berg – Barclays Capital

Thank you. Rich, could you explain to us build on your just your some recomments as to why under NAIC’s approach, your below investment grade exposure percentage-wise is so much less than what the rating agencies think it is?

Richard Bielen

Eric, in the rating agencies if there is even a possibility of $1 million principal loss. They break the securities as below investment grade. In the NAIC approach they have looked at that the full possibilities of those securities that written by BlackRock and Kimco. And also look at your purchase price of those securities. And then judge whether you’re going to get your dollar recovery on that. And so, based on the prices we know and the models are a little different they’re seeing that our securities are all investment grade.

Eric Berg – Barclays Capital

I understand. So in other words, if you were to buy bonds at a significant discounts from par, you would it credits for that under the NAIC model and not under the rating agency model.

Richard Bielen

That’s correct.

Eric Berg – Barclays Capital

My other question will take us back to the discussion about the participating income. And I just want to check my understanding is the idea that this $7.1 million pre-tax of participating mortgage loan and bank loan fee income sort of lifted the earnings in stable value above a run rate level by that amount but that consolidated earnings were not affected because this was in line – this is more of a geography issue in other words than anything else?

Richard Bielen

Yes.

John Johns

Yes, that is.

Eric Berg – Barclays Capital

So thinking about the – and thinking then about the earnings perspectively in stable value it sounds like a question we would probably want to take that out is that right?

Richard Bielen

Yes as I stated we expect operating spreads for the balance of the year to be about 180 basis points and that does not presume any participating income.

Eric Berg – Barclays Capital

And so just to finish up this will be my final question. Just to finish up on the outlook for stable value I don’t know whether you have indicated where you expect but you just indicated again where you expect the spreads to be in the second half of this year I think you said a 180 basis points? Do you see this though as sort of a growing business for Protective the answer to which obviously depends on your ability to grow overtime account balances that’s really what I’m interested? Will this contribute to growing earnings at Protective? Thank you.

Richard Bielen

Eric, we’ve seen sales here over the last couple of quarters including over $200 million in the second quarter. We’re continuing to see sales in the third quarter. And so we expect that balances down – for the rest of the year to be $2.6 billion in stabilizing at that level. And we’ll see Eric the opportunities make sense to whether we can grow the balances in the future or not.

Eric Berg – Barclays Capital

Okay. Thank you.

Operator

Thank you for your question. Our next question comes from the line of Ed Edward Spehar from Bank of America/Merrill Lynch.

Edward Spehar – Bank of America/Merrill Lynch

Thanks. Just a follow-up on the VA business and the RBC comments Rich in response to John’s question. I guess when we think about the VA business what is that when you think about the capital that you need to hold for that business? How comfortable are you that, that the number you are assuming for pricing is really the number that you are going to have to hold from a practical standpoint?

And what I mean is that, without the VA business you probably have rating agencies comfortable with you at a 375 RBC. Maybe the way to think about the VA business is it’s a higher capital requirement than the rest of your businesses but what’s the risk that being in the VA business just as a blanket consideration leads to a 400% consolidated RBC ratio requirement? And I would assume that if that’s the case then the pricing assumptions that you have are probably not what they should be. Could you comment on that?

Richard Bielen

Ed I’m not sure exactly how to answer that question. We do look at what we think the economic capital is required for that business and we’ve contemplated that into the ratios. And we’ve looked at stress test to make sure our capital ratios are healthy regardless of the economic environment.

Edward Spehar – Bank of America/Merrill Lynch

Yes. I guess the question is though that is to what extent do you risk falling into the rating agencies VA bucket of companies, which maybe I’m being too skeptical but I’m not so sure that if you fall in that bucket you get treated like VA company. I guess that question is, what the risk that that could occur?

Richard Bielen

I don’t think that in our core business being wise in fixed annuities and the VA, but the percentage of VA we have in the books is about 15% or 16% of reserves. I don’t believe we would fall into the companies that have a significant level of VA relative to the rest of the book.

John Johns

And this is John. And so I think that the capital allocation of the VA business we think it’s consistent with the rating agency view and those capital should be allocated to the VA business. So, there may be some notion of being in a VA bucket, but we don’t know about that if it is we’ve just allocate capital by product, and we think we got it right?

Edward Spehar – Bank of America/Merrill Lynch

Well let me ask you the question this way, I guess even the response to John’s question Rich you suggested may in the current environment and maybe it’s prudent to be more like a 400 RBC ratio. If you didn’t have the VA business would you still make that same comment?

Richard Bielen

Yes.

Edward Spehar – Bank of America/Merrill Lynch

Okay. Thanks.

Operator

Thank you for your question (Operator Instructions).

John Johns

Well thanks everyone. Again we apologize for the technical problem we had that we hope we’ve been able to answer everyone’s questions. And we appreciate very much your participation in the call. Thanks a lot.

Operator

Thank you ladies and gentlemen, we have no further questions. That concludes your conference call for today. And you may now disconnect. Thank you for joining and have a very good day.

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