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Protective Life Corporation (NYSE:PL)

Q3 2011 Earnings Call

November 3, 2011 10:00 a.m. ET

Executives

Eva Robertson - Vice President, Investor Relations

John Johns - Chairman, President and Chief Executive Officer

Richard Bielen - Vice Chairman and Chief Financial Officer

Edward Berko - Executive Vice President Chief Risk Officer

Carolyn Johnson - Executive Vice President and Chief Operating Officer

Carl Thigpen - Executive Vice President and Chief Investment Officer

Steven Walker - Senior Vice President, Controller and Chief Accounting Officer

Analysts

Mark Finkelstein - Evercore Partners

Steven Schwartz - Raymond James & Associates

Ed Spehar - Bank of America Merrill Lynch

Christopher Giovanni - Goldman Sachs

John Nadel - Sterne, Agee & Leach, Inc.

Ian Gutterman - Adage Capital

Operator

Good day, ladies and gentlemen, and welcome to your Q3 2011 Protective Life Co. Earnings Conference Call. My name is Belleau and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards end of today's conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will now turn the presentation over to your host for today’s conference, Eva Robertson, Vice President, Investor Relations. Please proceed.

Eva Robertson

Thank you, operator. Good morning, everybody, and welcome to Protective Life Corporation’s 2011 third quarter earnings call. Our call today is hosted by John Johns, Protective’s Chairman, President and CEO; as well as Rich Bielen, our Vice Chairman and CFO. Here in the room also we 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.

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

Finally, today’s discussion does include forward-looking statements which are expectations of future events and results. Actual events and results may differ materially from what we’ll be talking about today but you can refer to our press release and the risk and uncertainties, as well as risk factors section of the company’s most recent report on Form 10-K and subsequent 10-Qs, for more information about factors that may affect future results.

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

At this time, I will turn the call over to John Johns.

John Johns

Yes, thank you, Eva, and thanks to everyone for joining us this morning to go over our third quarter earnings. We are very pleased to report strong financial results in the quarter. We think the results show that durability, resilience and strength of our core business franchise. Earnings for the quarter are up about 34% over the third quarter of last year. About 24% on a year-to-date basis.

Core segments are all solid, but we showed special strength in annuities, acquisitions and stable value. In life marketing the core earnings were strong, if you adjusted for some unlocking that occurred, which is normal in this third quarter of this year. Our plan is then to focus on improving returns in our life insurance business. Our sales slowed a bit but we are ahead of plan for the year in terms of sales and we do anticipate a return to growth next year in our life insurance business.

Annuities, very strong in the quarter. Sales were strong, earnings were strong, fund flows were positive for the quarter. We are very pleased overall with that segment. In acquisitions, the United Investors and Liberty transactions are now starting to be significant contributors to earnings. They are very much on track. The integration work is going just fine and we are very pleased with the progress we are making there.

Stable value, again, very good results in the quarter. We are pleased to see sales opportunities have come back. We are even seeing some interest in the traditional 401(k) pinch in business which is a good thing. It’s good business for us and we are optimistic about that segment as we look to the balance of the year. Asset protection, sales were up ahead of plan. Earnings right in line with plan. Overall a good quarter.

We did continue our share repurchase program in the quarter. We repurchased -- we spend about $34 million to repurchase about 2 million shares in the quarter. Year-to-date we’ve spend about $60 million to repurchase about 3 million shares. At our last board meeting, which occurred this week, our board authorized a new share repurchase program. They have authorized a repurchase of up to 300 million in shares, good through the end of 2014. That replaces the small remaining amount on our existing share repurchase program.

You may have seen an article this week in the Wall Street Journal dealing with AG 38, the actuarial guideline dealing with reserving of Universal Life products. Our name was mentioned in the article. As we have indicated, we believe that our methodologies are fully compliant with AG 38. We believe that our reserves are adequate. We have been subject to regulatory review and regulators have found that we are compliant with AG 38 and then our reserves are adequate.

We are involved in the industry discussions. They’re ongoing now with the regulatory community with the NAIC. Those are constructive and positive and we are very fortunate at this time to have some very strong and capable leadership and the NAIC and we are confident this issue is going to get resolved in a satisfactory manner.

I will come back and talk a little bit more about our outlook in a moment, but now I would like to turn it over to our Chief Financial Officer, Rich Bielen, for more detail on the quarter. Rich?

Richard Bielen

Thank you, Johnny, and good morning everyone. I would ask you turn to slide three of the show and we are pleased to report that our after-tax operating income this quarter was $84 million in comparison to $63 million in the third quarter of last year. Our earnings per share were $0.98 a share versus $0.71 a year ago. And our net income this quarter was $1.03 versus $0.80 in the year ago quarter.

On slide four, is a reconciliation of our net realized investment gains and losses. During the quarter we had approximately $21 million of gains related to our normal trading activity. We did have approximately $9.8 million of impairments. Again, the impairments continue to be very low as we look forward. That is all primarily attributable to our non-agency portfolio where we update loss severities and prepayment estimates.

As you recall, we have a Modco arrangement related to the Chase Insurance transaction of a few years ago. That resulted in a net gain of $14 million. We have some derivative activity on the books, primarily interest rate related. We have some hedges in place to protect against the spike in rates, and as a result of the drop in interest rates in the quarter, that resulted in $11 million loss. And then all the other items related to investment showed a loss of $8 million, resulting in a net realized investment gain for the quarter of $7 million.

We turn to slide five. Our book value ended the quarter at a record $49.30 in comparison to the year-end $38.88. If you take out accumulated and other comprehensive income, our shareholders equity ended the quarter at $38.61 versus $35.46 at the end of 2010. Our net unrealized investment gain continues to rise. It is now at a record $1.7 billion dollars. That’s up from $684 million at year-end and sequential is up from $982 million at June 30.

Turning to slide six. We will begin with the divisional analysis. In life marketing we had strong core underlying earnings during the quarter. We did have an unfavorable impact regarding unlocking and as we and most of the industry do during the quarter, we update our lapse assumptions, interest rates, mortality. The unlocking was primarily attributable to higher than expected persistency on some older vintage universal life product.

Our term mortality continues to be very good at 91% of expected versus 89% in the second quarter. Our life sales year-to-date are ahead of plan, and while we expect the fourth quarter as relatively flat sale, and then we expect those to begin to trend higher in 2012.

Turning to slide seven, the annuities business. Earnings exceeded plan at $43.8 million. It was held by a fair-value adjustment of $19.4 million favorable, what we saw during the quarter is our hedging program on our VA business related to interest rates, equity, while in currencies all performed very much in line with our expectations. And primarily the fair value relates to the credit spreads in our FAS 157 adjustment.

We did see some unfavorable unlocking during the quarter of $8.8 million as we trued up our expectations regarding lapse in market performance. But we also continued to see favorable spreads in our fixed business and we also saw a favorable mortality in our SPIA business. During the quarter it was about $6 million. As you recall, we wrote a series of cases of relatively large amounts a few years ago. The mortality year is lumpy and if we look at this on a year-to-date basis our mortality on this line is about equal to our expectation, but we will see it bounce up and down a little bit depending on the deaths.

Moving then on to the acquisitions division on slide eight. We are reporting $44 million of earnings. United Investors and Liberty Life contributed $18.7 million of earnings during the quarter. That’s about $1 million ahead of our plans during this period of time. The integrations are progressing on-schedule for both United Investors and Liberty, and that’s where all the heavy lifting goes on. So we are very pleased with how that is working.

Moving now to slide nine in stable value products division. We report $14.2 million of earnings for the quarter. We continue to see very strong spread performance with our operating spread at 210 basis points. We saw sales of $430 million in the quarter, the majority of which were the traditional distribution related to stable value business. We also saw a 10% growth in our ending account balance sequentially from the second quarter.

Our expectations for the fourth quarter is that spreads will remain in this elevated level of roughly 190 basis points during that period. Moving to slide ten, our asset protection division reports $6 million of earnings. Earnings are in line with expectations. Sales have improved 14% over the third quarter of last year. We benefitted from some industry sales improving, but we have also picked some mortgage share during the period.

Our original plan for the year was to have about $370 million of sales in this division, and based on what we are seeing we expect a number of approximately $400 million for the year. Moving to other highlights, we had gain our notes repurchase that was (incorporated a number) of $6.3 million. As Johnny mentioned, we continued to repurchase stock and the combination of repurchasing shares and our dividend payments during the quarter returned $47 million to shareholders.

Our estimated RBC at the end of the quarter is roughly 405% to 410%, and our estimated total adjusted statutory capital is flat in approximately $2.8 billion. Couple of other points to note. And we one question we saw in the lot of the notes this morning relates to interest rates, and we expect to have a more robust discussion at the industry conference at the end of the month. But as we look forward to 2012 and to 2013, based on current rate levels, we see this more as a growth retarder then any major impact to the company or the balance sheet or income statement wise.

What we would expect today is that the impact of these lower rates might impact our initial plan of about 1% to 2% next year. And then if we look out to 2013 you would see another impact of 1% to 2%. Again, it is a growth retarder, but we continue to grow earnings and proceed growing earnings regardless of the rate environment.

The other item that comes up is where are we with respect to our plan for the year. As you recall, given the deal of Liberty we had estimated that our plan for the year would be about $3.10. As we review the first nine months we are approximately $0.35 ahead of that plan and although we are not giving earning guidance, the initial estimate estimated that the plan would have $0.82 of earnings during the fourth quarter.

I will now turn to slide 12. The final topic relates to the impact of the DAC accounting change EITF 09-G. And what I would like to do is give you some preliminary estimates as what we expect the impact of the company to be. As we look at the DAC asset as of January 1, and we would assume retrospective adoption. We would assume that our DAC asset will be reduced by approximately 20% to 22% or roughly $650 million $725 million.

Our book value based on that change would be reduced by approximately 13% to 15% or $5 to $5.80 and that the estimated impact to our 2012 operating EPS in combination with the change is approximately 8% to 10% versus our previous plan or $0.29 to $0.36. If you combine all that we would estimate that our estimated 2012 ROE would improve by about 50 basis points.

And as we look at the industry numbers, we think our DAC adjustment is very much inline with the industry, but given our model of business for primarily life marketing and annuities, we have a slightly larger DAC asset without having other businesses, so we see a slightly larger impact of book value.

And with that I am going to turn it back to Johnny for some closing comments.

John Johns

Yes, thanks, Rich. Let me just wrap it up here quickly and then we will open the call for questions. Those of you who follow the company closely will recall that at our investor’s conference last year we laid out a three-year plan. The plan calls for us to grow earnings at a double-digit clip over the three-year period. To increase ROE each year with the target of getting the ROE up above the 10% level at the end of the period.

In that plan, we really emphasize acquisitions as one of the drivers of earnings growth that would be the primary place we would put our redundant capital, deploy our redundant capital. But we did show some scenarios where would engage in share repurchase. To-date this year, as Rich indicated we are very much on that plan.

As we indicated our earnings are up nicely this year even on an adjusted basis, when you adjust out for some of the unusual or non-recurring items, we are still very much on plan. ROE on a trailing month basis is about just over 9%, it’s at 9.2%. We continue to have a focus on getting that ROE up into the double-digit territory, and of course, we’ll adjust our target up 50 basis points by virtue of the impact of 9G. So that we’re thinking up closer to 11% now over the three year period as our target.

We really didn’t anticipate at the time of the plan that we would have the opportunity to go ahead and start repurchasing stock, but we see the implied IRR on share repurchase is very high. Given the discount to book value at which our stock is trading we are very pleased to repurchase shares as we think it’s a very good use of shareholder capital. And we keep as long as our statutory capital generation continues according to our plan and our stock price stays in this level, we are going to stay on track to repurchase shares.

Rich talked about interest rate sensitivities. It is true that there are indeed some challenges presented by the macroeconomic environment, historically low level of interest rates, volatility in the capital markets, all the uncertainty around where Europe is headed. But nevertheless, as you see our businesses were performing very well on this environment. And we expect them to continue to do so. We think we have got a disciplined approach to how we run the business. We have got a very experienced management team here that are very energized, focused on continuing to drive the kind of results that we know our shareholders should want to see from us.

So again as we look to the end of the year, we are very focused on completing our plan for this year and then continuing on in the next year. As Rich indicated, we are hosting an investor’s conference, November 30, in New York at the Intercontinental Hotel. It’s from 9:00 to 12:30, and please contact Eva Robertson if you would like to attend. And we hope you would because we are going to once again kind of take a deeper dive into our fundamentals and lay out three year plans be a little more granular in terms of our assessment of this issue around interest rate sensitivity.

So with that I think I will stop and we’ll open up the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Finkelstein, Evercore Partners. Thank you.

Mark Finkelstein - Evercore Partners

Good morning and nice quarter. I've got a couple of questions. I guess I'm really trying to get my arms around the annuity segment. If I adjust for what you put in the press release, you get to -- what is it -- $33 million of annuities. And then I think you mentioned about $6 million of favorable mortality related to that large block of -- or that block of, I think it was like 20 or something large policies. So that would kind of get you down to $27 million. Were there other items in there that we should be thinking about? I mean how does that -- I guess my adjusted $27 million relate to what we should be thinking about for a run rate?

Richard Bielen

Mark, I think you nailed it, and thank you for your comments as you started. We saw exactly what you saw, low 30s, including the mortality. The mortality was a little lumpy with a positive six million coming back to 27. The remaining underlying trends were there in the core. And just to remind you, it’s about 200 lives where the average reserve is about $2 million. So, one death, just gives us $2 million and so as a result we get a little bit of lumpiness in there. But year-to-date that mortality is on track. We actually got hurt in earlier quarters this year.

Mark Finkelstein - Evercore Partners

But I mean -- I guess if I adjust for that, you'd end at $27 million. Is that -- should we be thinking about that as the right number? Or should we be thinking about it more in line with the low 20s that maybe's been a little bit more...?

Richard Bielen

I think this high 20s number is the appropriate number to be thinking about.

Mark Finkelstein - Evercore Partners

Interesting. Okay. And then maybe just to talk about universal life and universal life sales a little bit. You talked about, kind of maybe growth into 2012, but I guess my question is what is the pricing strategy on UL? Obviously we're in a very low rate environment right now and my guess is you're probably going to want to go through some kind of a repricing action. Can you just talk about the strategy there, and what the plans are and what are the IRRs that you're seeing today versus maybe if you do re-price?

Carolyn Johnson

This is Carolyn Johnson, the Chief Operating Officer. On the UL sales, we have been successful in improving our returns on that business and repositioning that portfolio. So our strategy is continuing along that line. That has resulted in a planned decrease in sales, but as Johnny and Rich mentioned earlier, our sales are above plan. We do are continuing to evaluate how to price the products in a interest rate environment that’s a little lower. But we think we are in good shape at this point and continue to see good returns on that product. And we expect to see a little bit better sales level in 2012 from where we are today.

Mark Finkelstein - Evercore Partners

I guess, what is the return that you see today at this interest rate environment on the current product set that you're selling?

Richard Bielen

Mark, that’s a question that always comes up on these calls. And we were comfortable that we are adding to our ROE by selling the product at this point. But I think a final return based on everybody’s own assumptions around the product. I won't make any further comments.

Operator

Thank you. And the next question comes from Steven Schwartz from Raymond James.

Steven Schwartz - Raymond James & Associates

Good morning, everybody. It's nice to note that the IRR and share repurchase is going to be a little bit lower. If you could, a couple. I'm wondering -- sticking with the -- it’s actually three, I think, sticking with the annuities for a sec. Could you talk about sales a little bit? I know you guys are big in Edward D. Jones. A couple of competitors have taken action there, introducing O shares. I'm wondering if that’s affected you at all in that channel?

Carolyn Johnson

Yeah, this is a Carolyn Johnson again. We have -- we are introducing an O share product in the fourth quarter and Jones and we have been working closely with them there. We will be competitively positioned within the firm. We have a very long relationship with them and continue to see good sales from Jones with the O share product. And that we will be introducing this fourth quarter.

Steven Schwartz - Raymond James & Associates

Okay. And Carolyn, did you think that that may have affected you at all this quarter, the lack of one or the introduction of others?

Carolyn Johnson

No, I don’t think the lack of an O share affected us this quarter. We did raise the minimum age level for our GMWB within the VA product. And so we were higher, less risk in the product but higher in the firm. And that really was the impact in the sales in the quarter.

Steven Schwartz - Raymond James & Associates

Okay, good. That's good info. Rich, sticking with annuities, how deeply -- can you help us with the unlocking? I know it's more than one line item. Can you possibly guide us in the right direction for what we should be looking for?

Richard Bielen

I think the unlocking was a combination of market performance in the VA and updating the last assumption there which was a negative number during the quarter. And then offsetting that is what we have seen is better than expected spreads in our fixed annuity business. So we had a positive unlocking as we look forward on our spreads in the fixed annuity business. So those two netted down to roughly this $9 million that we saw in the quarter in updating those assumptions.

Steven Schwartz - Raymond James & Associates

No, I was actually thinking more in lines of -- if you could -- of modeling the line items, adjusting things out if necessary to be adjusted out. So maybe premium was affected or maybe benefits were expected. DAC was obviously expected -- affected.

Steven Walker

This is Steve Walker, Chief Accounting Officer. The lines that are affected by this unlocking are the benefit and settlement expense line and the amortization line. We also have the realized gains or loss in derivatives is where our change in our DMWB and hedges all run through. So those are the three lines that would have been impacted by this unlocking. So I think it would be difficult to go through that on this call.

Steven Schwartz - Raymond James & Associates

Okay. No, that was good info. And then just one more, returning to the SGUL issue, that just got put in front of the NAIC. I guess I'm kind of interested in understanding at least within -- how much in reserves that you have of this 2-tier charged product, which seems to be of issue.

Richard Bielen

Steve, I am not sure this is going to be a technical discussion at the NAIC among the actuaries. We think we are well reserved with a fair amount of redundancy around our SGUL product. And so I don’t think you want to speculate as to what changes may or may not come down the road on this product.

Operator

Thank you. And the next question comes from the line of Ed Spehar of Bank of America Merrill Lynch. Thank you.

Ed Spehar - Bank of America Merrill Lynch

Thank you. Good morning, everyone. I think you said on the call that your earnings are $0.35 ahead of plan at this point, is that correct?

Richard Bielen

That’s correct, Ed.

Ed Spehar - Bank of America Merrill Lynch

And I think last quarter you said they were $0.20 ahead. Am I remembering correctly?

Richard Bielen

That’s correct.

Ed Spehar - Bank of America Merrill Lynch

Okay, so does that -- I guess that suggests that you were assuming you would earn $0.83 in your plan in the third quarter, right?

Richard Bielen

That was the plan.

Ed Spehar - Bank of America Merrill Lynch

And that didn't assume any note repurchases or anything, right?

Richard Bielen

We assumed about $0.04 of extraordinary income from some source or other.

Ed Spehar - Bank of America Merrill Lynch

But that included participating mortgage income.

Richard Bielen

Yes.

Ed Spehar - Bank of America Merrill Lynch

Okay. So I guess the other question is on the impact from the accounting change -- I mean, I think I know the answer, but I just want to hear it. Is there any -- because of anything you've learned from this analysis, any work that you've done, any change in how you're going to run your business, how you're going to price your products, etcetera?

John Johns

Yeah, of course. I mean, I think the whole industry will be looking at this. As you know one of the major changes in the past was you could basically take your underwriting and issue costs and spread it across all apps you receive. Not just those where you actually place the business. And now unplaced business, you basically expense the cost of that. So I think there will be an effort made across the industry to try and to be more efficient, improve placement ratios. But I don’t think you will see any sort of dramatic shifts in product pricing or design or industry practice. It will just be an ongoing kind of process improvement effort to get a little sharper in terms of how you run your business.

Ed Spehar - Bank of America Merrill Lynch

But, I guess, my assumption has always been you've priced these things based on the expected cash flows, the statutory IRRs, etcetera. I mean I wouldn't -- I guess I'm surprised to hear that you would be changing anything.

John Johns

Yeah, really, I don’t think there will be any significant changes. All our pricing is done on a statutory and not a GAAP basis. But I think if you just focus, it will highlight the issue a little bit more, make people a little more sensitive to the importance of being efficient and how you run your business to make sure that your placement ratio is optimized. I’m not saying you will even see that, I just think that’s probably an internal issue for us here.

Ed Spehar - Bank of America Merrill Lynch

Okay. And on the unlocking, there was no unlocking this quarter for any change in interest rate assumptions for any products either -- other than -- short-term or long-term?

Richard Bielen

No.

Ed Spehar - Bank of America Merrill Lynch

And I know you gave some comments, Rich, on 12 and 13 and suggested you're going to talk more about this. But can you -- considering this sensitivity of this whole topic, is there any way to give us some feeling for -- without going into the details of how you get there, of what the impact is beyond '13?

Richard Bielen

When we look out and continue to model, we see this incremental 1% to 2% effect from the -- retarding the growth rate. We never see earnings coming down. So if you keep going each year, if we assume 360 next year then we are down 1%. Assume something higher the following year, you are down 2%. It’s kind of, that kind of effect.

John Johns

And modeling, Ed, would indicate that we kind of flatten out overtime. But the impact of current interest rates under our modeling is not ever that we go backwards in earnings from one year to the next. That makes sense.

Ed Spehar - Bank of America Merrill Lynch

It makes a lot of sense. I appreciate it. Thank you.

Operator

Thank you. And the next question comes from the line of Chris Giovanni from Goldman Sachs. Please go ahead.

Christopher Giovanni - Goldman Sachs

Good morning. Thanks so much. In terms of room to reduce crediting rates on the fixed annuity book as well as UL, can you give some color in terms of what you have in that capacity?

Richard Bielen

Chris, we are going to go through more of this at the investor conference. But at a high level we think on the annuity side the aggregate book probably has about 70 basis points of room, because we have a lot of newer vintage business that has very low rate guarantees on it. On the universal life side, when we look out at all of our spread we are probably down to about 25 basis points in the aggregate, but we have a non-duration portfolio against our life reserves. So it is well matched with respect to that credited rate strategy.

Christopher Giovanni - Goldman Sachs

Okay, that's helpful. And then the DAC accounting change impact, can you provide some context in terms of where you see the most strain, either from the equity portion or in the ongoing earnings basis?

Richard Bielen

I am not sure I understand your question, Chris.

Christopher Giovanni - Goldman Sachs

I guess, in terms of what business segments or product lines do you see the biggest strain for the DAC accounting changes?

Richard Bielen

It’s primarily the life marketing area. And it’s what Johnny referred to as -- the placement rates now, we’re really on a successful efforts basis. And so if you assume your placement rate is in the 65%ish range you are not going to be able to do that, in addition to other costs you can no longer capitalize.

Christopher Giovanni - Goldman Sachs

Okay. And then maybe one just for Johnny in terms of capital management. I guess given the new buy-back authorization, how are you thinking about the path of share repurchases? And you mentioned the IRs you generate at current share prices. I mean at what level does -- from a valuation standpoint, do you start to say you know what we need to start really reviewing M&A again? Potentially as a bigger source of capital rather than share repurchases.

John Johns

Yeah. Very good questions, Chris. As we envision today, continuing down the path we have been on to the last couple of quarters which is repurchasing something in the range of $25 million of stock or about $100 million a year. We anticipate the current dividend is about $50 million, continuing that. So essentially we would be returning to shareholders under that model about half of our after-tax earnings under that plan. And just a very simplistic way to look at our return on share repurchases is just look at our earnings yield. Look at our discount to book value and our ROE and the math there would tell you that we are getting mid-teenish or higher kind of returns. Right now when we repurchase shares you can do the math as the share price continues to climb then that goes down and you reach a point where -- a crossover point where M&A starts to be appealing again. It really depends on what the M&A market is like. I mean in terms of what kind of returns you can get, but that’s the way we look at the world. We want to do what's the best with the capital and right now we think it’s share repurchase.

Christopher Giovanni - Goldman Sachs

Okay. And are you seeing anything on the M&A side currently. I know...?

John Johns

Yeah, it’s all quiet. We are looking at a few things but it’s sort of quiet right now.

Operator

Thank you. And the next question is from the line of John Nadel, Sterne, Agee. Please go ahead.

John Nadel - Sterne, Agee & Leach, Inc.

Hey, good morning, everyone. So I guess I'm intrigued by the -- I think just in response, it might have been the response to Chris's or Ed's question when you're talking about the 1% to 2% pressure from rates. You sort of made a, maybe a throw away comment on the 360 number for next year. Any follow-up you would like to do with respect to that.

Richard Bielen

John, we are not providing guidance, let's make that clear. And if you go back to the investor conference a yea-ago, prior to the changes in accounting, 360 was a number that was in that plan we presented last December.

John Nadel - Sterne, Agee & Leach, Inc.

Okay. So the point in asking the question was to clarify whether that was before the DAC accounting change. Thank you. Rich, even with some of the adjustments that you guys picked out, the spreads in the quarter were exceptionally strong. Is there anything, maybe I missed it in some prepared remarks, but is there anything you can point to that's -- I mean, how sustainable is this? In some -- in stable value, for instance, your spreads are double what I think most people would have been expecting.

Richard Bielen

Let's deal the two places where we see the strong spreads flowing through. First, stable value, I will just remind you that about a year-ago we had called a series of retail notes that were very long in duration that had coupons on them of 5% and 6%. We in those quarters were being forced to write-off the unadvertised extent. And that was holding down spreads. But we had assets supporting those liabilities, that 5% to 6%, and those have now gone away and being replaced with the new liabilities we have been able to write over the past few quarters. Our credited rate has dropped far more dramatically than our yield on the portfolio. And so your strong spread -- maybe not at this level -- we expect to be able to continue into 2012. On the annuity side we have been managing that portfolio and remember it’s an ALM match, it’s not just the investment side. Where we have been very careful about our (inaudible) strategy, our investments. And we really have been repeating the message to you and to all the shareholders that we are trying to improve returns. And so we have been able to extract some slight marginally better returns then what we have originally expected.

John Nadel - Sterne, Agee & Leach, Inc.

Okay. And then on life marketing, could you just remind us, 1% -- there's a lot of feedback on this line -- 1% better or worse than priced for mortality. About what is that in terms of a quarterly or annual contribution to earnings?

Richard Bielen

The number over time’s been shifting a little bit but is probably around $0.5 million, if so as 1% moves.

John Nadel - Sterne, Agee & Leach, Inc.

I'm sorry, $0.5 million?

Richard Bielen

Yes.

John Nadel - Sterne, Agee & Leach, Inc.

Okay. In the quarter. I think that's it. Thank you.

Operator

Thank you. We do have a question from the line of Ian Gutterman from Adage Capital. Please go ahead.

Ian Gutterman - Adage Capital

Hi, guys. Good morning. First, Rich, on the 09-G impact, how much of that was from VOBA from the acquisition segment?

Richard Bielen

Ian, there is no impact from VOBA on acquisitions. This only related to the life marketing, the annuities and a little bit in APD.

Ian Gutterman - Adage Capital

I guess that's what I meant. The fact that you can't do VOBA. If you had DAC instead of VOBA in the acquisitions segment, how much lower could it have been?

Richard Bielen

Ian, you wouldn’t have any effect. You don’t have any of these expenses regarding marketing or you don’t have any of the successful effort issue, because we expense all of our upfront, kind of R&D fees, everything else on doing the deals. And so VOBA is just the number, there would be no impact.

Ian Gutterman - Adage Capital

Okay. Got it. Also you usually only have average market conditions, you end up having a loss in operating income in the corporate segment from the trading portfolio. That didn't happen this time? Can you talk about why?

Richard Bielen

Trading portfolio is down to, I believe, less than $30 million now. So it was just a small -- it was a small negative but it wasn’t worth mentioning.

Ian Gutterman - Adage Capital

Got it, great. And then the last one on this whole thing about the AG 38. I'm trying to remember history, and tell me if I'm off, but isn't the reason this whole thing came up five or six years ago, with sort of a battle between the mutuals and the stock companies, where the mutuals felt they were disadvantaged on whole life because of secondary UL. Is that how we got to this point in the first place, and is what's going on now just an extension of that, or is it really something new?

John Johns

Ian, this is Johnny. That is the history of it but I don’t think that is the current posture of it. I think it’s just a debate among regulatory actuaries as to how much redundancy is appropriate. It’s really as simple as that.

Ian Gutterman - Adage Capital

Okay. I was just curious. So you don't feel this is something that the mutuals are lobbying for at the expense of the stock companies?

John Johns

No, really don’t.

Ian Gutterman - Adage Capital

Okay. Just checking. Thank you.

Operator

Thank you. And we do have another question from the line of Ed Spehar, Bank of America Merrill Lynch. Thank you.

Ed Spehar - Bank of America Merrill Lynch

Thank you. Two quick follow-ups. Rich, I think maybe what Ian is getting at is the idea of, if companies are being disadvantaged that have acquired businesses because there's no retroactive restatement on the insurance intangible. So I think the question was sort of, if for some reason you could put yourself in the position that you had generated all that acquisition business yourself internally, wouldn't there be some retroactive adjustment to that intangible asset?

Richard Bielen

Well, I will just repeat, I don’t think it has an effect. On VOBA asset in our acquisition block net as of the end of the quarter is approximately $850 million.

Ed Spehar - Bank of America Merrill Lynch

Yeah. I know. It's the idea that companies -- doesn't this accounting with the retroactive adjustment, doesn't it penalize companies that have acquired businesses relative to companies that have produced businesses or is that not the case?

Richard Bielen

We wouldn’t deem that to be the case.

Ed Spehar - Bank of America Merrill Lynch

Okay. And then the other question I had was, I think last quarter you had said that your kind of revised expectation for the GAAP run rate for the two recent acquisitions was about $15 million a quarter in total. In this quarter you had, I think it was, $18.7 million. Was there favorable mortality there? Was there some change in the pattern? How do we think about that?

Richard Bielen

We saw a little better performance in Liberty then we what we originally expected and our transition expenses are being moved out a little bit because we had delay it until April. So we had it all in this year, now it’s next year a little bit.

Ed Spehar - Bank of America Merrill Lynch

The 15 is still kind of a -- it's just a little bit of a timing issue?

Richard Bielen

Yeah, it’s a little bit of a timing issue, as we work through those numbers.

Operator

Thank you. Our next question comes from Steven Schwartz from Raymond James. Please go ahead.

Steven Schwartz - Raymond James & Associates

A couple of things. I wanted to ask about the tax rate. Was that a little low in the quarter, and if so, what was up with that?

Steven Walker

This is Steve Walker, Chief Accounting Officer. The tax rate was little lower in the quarter. In the third quarter every year we true up to our filed tax returns so there was a little bit of a pickup regarding that. But other than that everything else is pretty much as expected.

Steven Schwartz - Raymond James & Associates

Okay. So looking at an average for the three quarters, would that be good for 4Q and for the full year?

Steven Walker

We usually have the planning assumption around 34% to 34.5% as the effective tax rate each quarter.

Steven Schwartz - Raymond James & Associates

Okay. And then, if I may, going back to the VOBA question, I think what's confusing people and maybe what makes you different is that outside, I think of Chase, your acquisition segment is not generating new sales. Therefore, you're not deferring less because you're not deferring anything.

Richard Bielen

That’s correct.

Steven Schwartz - Raymond James & Associates

Okay. All right. I just wanted to make sure that's what was going on here. All right. Thanks.

Operator

Thank you. I would now like to turn the call over to Mr. John Johns for any closing remarks.

John Johns

Well, again, thanks again everyone for your participation in the call today. We are pleased with the quarter and we hopefully will see you at our investor’s conference coming up here in few weeks. Thank you.

Operator

Thank you ladies and gentlemen, that concludes your conference call for today. You may now disconnect and enjoy your day. Thank you.

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