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Protective Life Corporation (NYSE:PL)

Q4 2011 Earnings Call

February 10, 2012 10:00 am ET

Executives

John D. Johns – Chairman, President and Chief Executive Officer

Richard J. Bielen – Vice Chairman and Chief Financial Officer

Edward M. Berko – Executive Vice President Chief Risk Officer

Eva Robertson – Vice President, Investor Relations

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

Edward A. Spehar – Bank of America/Merrill Lynch

Mark Finklestein – Evercore Partners

Jimmy S. Bhullar – J.P. Morgan

Steven Schwartz – Raymond James

John Nadel – Sterne, Agee & Leach, Inc.

Christopher Giovanni – Goldman Sachs

[Alec] – Citadel

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2011 Protective Life Corporation Earnings Conference Call. My name is Lisa and I’ll be your operator for today. (Operator instructions) Later, we will conduct as question and answer session. I would now like to turn the conference over to your host for today, Ms. Eva Roberson, Vice President, Investor Relations. Please proceed.

Eva Robertson

Thank you, operator. Good morning, everyone, and welcome to Protective Life Corporation’s 2011 fourth 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 with us to help answer questions for you is Carl Thigpen, our Chief Investment Officer; Carolyn Johnson, our Chief Operations Officer; Steve Walker, our Chief Accounting Officer; and Ed Berko, our Chief Risk Officer.

Yesterday released our earnings press release as well as the supplemental financial information, and both are posted on our website at protective.com. In addition to this information, we are using a slide presentation with our discussion this morning and that deck is being webcast from a link in the Investor Relations section of our website at protective.com. The file is available for download at that location.

Finally, today’s discussion will include forward-looking statements which express expectations of future events and/or results. The actual events and results may differ materially from these expectations. 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 the factors that may affect our future results.

Our discussion also includes non-GAAP financial information and reconciliation to the GAAP measures can also 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

Thank you, Eva, and good morning everyone. We are very pleased to report a very strong fourth quarter as well as a very strong year. Operating earnings per share for the year are up 34% over last year. Net income reached a record level indicating that the earnings power of our franchise has returned to the level of pre-financial crisis. We continue to enjoy favorable mortality. Our investment portfolios performed very well and held up very well and were very resilient against the headwinds we see in terms of low interest rates.

Our recent acquisitions, Liberty Life and United Investors are coming along just fine, performed strongly in the quarter, and we’re very optimistic about those acquisitions going forward.

We did continue our commitment to a very prudent and rational and consistent capital allocation. 40% of our earnings during the year were returned to shareowners through a combination of dividends, as well as share repurchase. We maintained a very strong capital position in the quarter. We estimate that when we file our stat segments early next month, that our risk-based capital ratio will be in the range of 425%.

You will also recall that we set a goal to get our return on equity on a full year operating basis up in the double-digit range. We’re very pleased to say that in 2010 our operating ROE was 10%.

At this time, I’d like to turn the call over to our Chief Financial Officer, Rich Bielen. Rich will go through more detail.

Richard Bielen

Thank you, Johnny, and good morning. Operating income for the fourth quarter was $1.02 per share, compared to $0.62 in the fourth quarter of 2010. During the quarter, we had $0.04 of realized investment gains resulting in net income in the quarter of $1.06 in comparison to $0.90 in the fourth quarter of 2010.

If you turn to our reconciliation on slide five of the net realized investment gains and losses for the quarter, we recognize $24 million of gains related to our normal trading activity and portfolio rebalancing. We also have net realized gains of $9.4 million related to our ModCo reinsurance that related to the Chase transaction that we did in 2006. During the quarter we did take $22.5 million of impairments. $10 million of that related to residential mortgage backs that we continued to review the prepayment in loss severities there. That is very consistent with the prior quarters.

We also made the decision in the fourth quarter to liquidate some hybrid positions in the French banks, so we went ahead and took an impairment on those of approximately $12 million in the fourth quarter and have since liquidated those positions here in calendar year 2012.

The only other item of note is that we had $2 million of losses on commercial mortgages. The delinquency rate of our commercial mortgages continues to be very low at eight-tenths of one percent. That portfolio continues to perform very, very well in this environment given our loan types and our discipline.

Moving to slide six, shareowners’ equity per share was $51.68, up 33% from $38.88 a year ago. If you exclude accumulated other comprehensive income, we had book value per share at $39.85, up 12% from $35.46 a year ago. Our net unrealized gain ended the year at a record $1.835 billion. That’s up approximately $1.2 billion from the level of 2010.

Now moving to the individual business lines on slide seven, life marketing, we report $36 million of earnings in the quarter compared to $40 million a year ago. Our term mortality in the quarter was 86% of expected versus 91% in the prior quarter. We continue to see a favorable impact from spreads. As you recall, the fourth quarter had some positive seasonality in it related to reinsurance agreements, so that helped earnings during the quarter. We did have a one-time item of some higher-than-expected legal expenses. We were the plaintiff in a law suit that we lost and that cost us approximately $4 million, so that was a one-time event we do not expect to repeat.

Sales for the year have been on plan. Sales in the fourth quarter were $25 million. As you recall, we have been taking pricing actions over the last couple of years. We have now started to see some competitor response recently, so what we are now seeing is a positive uptrend in our apps and we would expect to see a sequential uptrend in our life sales in the first quarter of 2012.

Moving to slide eight and the annuities segment, we have a record account balance of $14.8 billion, up 17% from the fourth quarter of 2010. The fair value impact was relatively immaterial at $800,000 in the fourth quarter versus $19 million in the third quarter.

We continue to see strong spreads in our fixed annuities. The earnings for the quarter were $29.5 million versus $12.4 million a year ago. Our sales for the quarter were $690 million, very much on our plan and consistent with what we expect for calendar year 2012. We launched a new VA product in the month of December and we continue to see good adoption that is consistent with our plan.

Moving now to acquisitions, acquisitions earnings were $41.5 million in the quarter versus $21.7 million a year ago. United Investors and Liberty Life contributed $20 million in the quarter, which exceed plan. The integrations are continuing to progress on schedule and we are very pleased with both of these transactions as we’ve brought them on the books.

Moving to slide ten, stable value products reported $14.2 million of earnings and an adjusted operating spread of 200 basis points, which is a new record. We continue to see strong spread performance. We continue to have a steady account balance. Our expectation for the first quarter is that the account balance will remain relatively flat and that our spreads will decline to a range of approximately 170 basis points.

Moving to asset protection, we report $6.6 million of earnings in the quarter versus $5.1 a year ago. The earnings were in line with expectations. Sales in the fourth quarter improved 24% over the fourth quarter of 2010, and as you may have noted in the press this week, there is an upward trend in expectations for US car sales during calendar year 2012, and we’ve already seen a strong start to our January sales in this division.

Now I’d like to move to slide 12 and just some other highlights. We will end the year with approximately $2.9 billion of total adjusted statutory capital. We expect that that will be a new record as we complete the year. The holding company at year end has $64 million of cash, which is approximately one times our interest expense, so that is now a permanent item that we are including at the holding company.

Corporate and other investment income was stronger by approximately $7 million in the quarter, compared to the plan we laid out at the November Investor Conference. We did have approximately $1 million of participating income and prepayments that had not been expected at that time, but we think that the big piece of the positive variance relates to the fact that we have now been able to maintain a fully invested position as we have integrated all these acquisitions, so there continues to be some positive trend there on investment income.

Moving to the first quarter, the first thing I’d like to note is that we have had the opportunity in the month of January to continue to repurchase some of our notes. During this first quarter we are going to recognize a $35 million gain on the repurchase of the notes due to the discount that we are buying them at.

I will point you back to the investor conference where we had laid out a plan indicating that we would earn somewhere between $3.20 and $3.30 during calendar year 2012. That plan already included approximately $15 million of these extraordinary items, so the $35 million that we now recognize is showing a positive variance to that plan of $20 million, or approximately $0.15 per share. I just will remind you that we are not providing guidance, but what we are trying to do is show you what our internal plans are, and as we identify variances to them, point those out to you.

The second item that I’ll point out in the first quarter, as a reminder, is where the fourth quarter had positive seasonality, the first quarter had negative seasonality. We see it in two places. First we see it in life marketing because of the timing of our reinsurance payments. The run rate that we would expect for next year in life marketing is in the low $30 million to $32 million range. We would expect the first quarter to be somewhere in the high 20’s.

The other item that we see is we just see a pickup in our seasonal accruals in the first quarter, so when you combine the effects of the two items, we would expect a reduction in first quarter earnings of $0.05 to $0.07 in comparison to our run rate.

I think the other question that we’ve seen in the analyst notes this morning really revolves around investment income. I’d like to point you back to our cash flow matching that we talked about at the investor conference. We are very well matched in our portfolios against the in force block of business. As we see things moving forward, our investment needs really revolve around new business sales, which will have new money rates to them, so we’re pretty comfortable about the issues surrounding our spread management and our investment income going forward.

With that, I’d like to turn it back to Johnny for some closing comments.

John Johns

Thank you, Rich. Just briefly, I will say that, again, it was a very strong quarter with the company. We were very pleased with the results across the board. We attribute a lot of it to the improvement in our performance, to the approach we take, very disciplined and careful allocation of our capital among various uses that we have for it.

We intend to continue down that path and we hope to see continued good results on into 2012. So, with that, we’ll stop and turn it back to you for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Finklestein with Evercore. Please proceed.

Mark Finklestein – Evercore Partners

Good morning. A question on capital management in 2012. The RBC finished the year a little bit higher, I think, than what you expected back at the investor day, so 415 to 425. You’ve got this extra gain. It sounds like it’s $20 million above what you were anticipating. How should we think about capital management in ’12 vis-à-vis the $100 million that you’ve talked about?

Operator

Your next question comes from the line of Ed Spehar with Bank of America/Merrill Lynch. Please proceed.

Edward A. Spehar – Bank of America/Merrill Lynch

Thanks. I don’t know if it was just my line, but I didn’t hear any response to Mark’s question. I’m not sure if that was just --

John Johns

I’m sorry, Ed. We had a technical glitch here. Can you hear us now?

Edward A. Spehar – Bank of America/Merrill Lynch

I can hear you. I didn’t hear what you said to Mark’s question, though.

John Johns

Okay, let me re-answer Mark’s question. Mark’s question is some of our outlook for capital allocation and deployment. The answer is that back in December when we presented at the investors’ conference that we held, we basically pointed out the obvious, which are four things we can do with capital. We can invest in organic growth acquisitions, debt repurchase or stock repurchase, and currently, we continue to view share repurchase as an attractive use of our capital.

Our plan looking forward is to continue to return about half of our after-tax GAAP earnings to shareowners through share repurchase and dividend.

It could change, but that’s currently our outlook.

Edward A. Spehar – Bank of America/Merrill Lynch

Okay, that’s great. The question I had, first, the earnings in the fourth quarter, and I’m sorry if I missed this, but if you make the adjustments for some of these items, the legal expenses and whatever else you want to adjust for, how did that compare to what your plan was?

Richard Bielen

Ed, I would say that we would probably be in the mid-90 range if you back out the tax effect, the note repurchase gain, and the litigation expense.

Edward A. Spehar – Bank of America/Merrill Lynch

How is that relative to what you were planning?

Richard Bielen

I think at the investor conference we planned about $0.92, so we were somewhere $0.10 to $0.13, $0.14 better than planned.

Edward A. Spehar – Bank of America/Merrill Lynch

And, in terms of that difference relative to plan, how much of that is items that you would consider to be good news for the future and how much of it is just a very good quarter?

Richard Bielen

Ed, I think as we look through the reconciliation, we think all of those items were good operating performance on our side, so things this time all fell our way, little million dollar items, whether it was in spreads, investment income, or expense management.

Edward A. Spehar – Bank of America/Merrill Lynch

Okay, and then just on the annuity line, specifically, and I’m sorry if I missed this, too, but how was mortality versus your long-term assumption for that SPEA block?

Richard Bielen

It was about $2 million less than what we had expected in the plan during the quarter.

Edward A. Spehar – Bank of America/Merrill Lynch

And the plan that you contemplate in terms of mortality in life marketing, is that in the low 90’s?

Richard Bielen

That’s correct.

Edward A. Spehar – Bank of America/Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Steven Schwarz with Raymond James. Please proceed.

Steven Schwartz – Raymond James

Hi. Good morning, everybody. A quick follow up just so I’m clear here. The SPEA mortality was $2 million better or $2 million worse?

Richard Bielen

$2 million worse.

Steven Schwartz – Raymond James

$2 million worse, okay. And then just following along on hits and misses, the investment income that was received in corporate and other due to the fact that you were fully invested, I don’t remember, Rich, was the assumption that you would be fully invested by the end of the year in your plan from December?

Richard Bielen

We did not have that in the plan, just with all the uncertainty that’s been in the market and the friction of having to rebalance portfolios. We have a more conservative view in the plan.

Steven Schwartz – Raymond James

Okay, great, and then, if I may, one more. One of the things that’s been noticed is the split of income and annuity between VA and fixed. The VA number was very, very big, much bigger than in the third quarter. If you could talk about that.

Richard Bielen

I think the big item there to the positive was the good market performance in the fourth quarter, so we had gone through all of our unlocking at the end of the third quarter and that good market performance, I believe, contributed in almost $4 million of earnings to the variable business in that period and that was a positive variance versus our plan there.

Steven Schwartz – Raymond James

That wasn’t only through fees, though. Was that through reserves and DAC as well?

Richard Bielen

Yeah, we didn’t have to amortize as much DAC because we had the better fees and better market performance than what was built into expectation.

Steven Schwartz – Raymond James

Okay, so nothing running through reserves, though?

Richard Bielen

No.

Steven Schwartz – Raymond James

Okay, thank you, guys.

Operator

(Operator Instructions) Your next question comes from the line of Jimmy Bhullar with J.P. Morgan. Please proceed. Mr. Bhullar, your line is open. Please present your question.

Jimmy S. Bhullar – J.P. Morgan

Can you hear me?

Richard Bielen

Yes, we can hear you fine.

Jimmy S. Bhullar – J.P. Morgan

I don’t know how I came up. I didn’t press for a question, but I’ll ask one anyway.

Richard Bielen

Fair enough. Make it a good one.

Jimmy S. Bhullar – J.P. Morgan

On the individual life business, you’ve been raising prices a decent amount and I just want to get an idea on how much of this is because of the environment changing, whether that’s reinsurance prices going up or just interest rates being low versus you just wanting to improve your returns.

Obviously, your sales have been weak, but what I’m concerned about is how comfortable are you with the profitability of the business that you’ve written the past few years since you’re drastically pulling back from the market?

Richard Bielen

Jimmy, this is Rich. We’ve been sending a clear message now for a couple years about making sure we improve returns, so we have continued to re-price the book in order to get returns that we’re very comfortable with and we are comfortable with the sales we have.

Now we’re seeing competitors moving prices up, so we see a positive trend here in terms of how we go forward in our sales, but we’re comfortable with the levels that we’re pricing for the current rate environment.

John Johns

Jimmy, this is John. You may recall, too, from the investors’ conference, that we gave you a range of our expected returns across the various product lines for new business and you can see that we indicated there what we were hoping to achieve and expect to achieve in our life lines.

Jimmy S. Bhullar – J.P. Morgan

Okay, and then just another one on the annuity business. It seems like fixed annuity sales industry-wide are going to be weak given where rates are. What’s your expectation for your variable annuity business, because that had been going at a very fast pace and recently sales have slowed a little bit?

Richard Bielen

Our plan for 2012 is that we will sell $2 billion of variable annuities.

John Johns

That was an explicit assumption, I believe, Rich, in the plan we presented at the investor conference.

Jimmy S. Bhullar – J.P. Morgan

Thank you.

John Johns

I would also note that, again, we’ve been very responsive to market in terms of de-risking our products this year and we feel very good about that, too, that not only do we think sales are going to be acceptable, but we think we’ve got a good, strong lineup of products, as well, both from the risk and return standpoint.

Jimmy S. Bhullar – J.P. Morgan

Okay, thanks.

Operator

Your next question comes from the line of Christopher Giovanni with Goldman Sachs. Please proceed.

Christopher Giovanni – Goldman Sachs

Thanks so much. Good morning. I guess the first question, I’m curious a little bit around how you’re thinking about capital allocation from here. I guess the question stems from your aggressive push towards share repurchases when you know your stock was just too cheap here, no better alternative, but given the move up in your stock, did that make M&A opportunities more of a viable option, especially if you think about potential restructuring that could take place in the industry?

Richard Bielen

Chris, we’re very pleased by the fact that we think we’ll have substantial capital flexibility going forward to either capitalize on opportunities to repurchase our shares at attractive levels. We think that’s where we are right now, or, in the alternative, if we see M&A opportunities coming along where the return characteristics are compelling, we’ll be able to do that as well, so we like where we sit on that run.

Christopher Giovanni – Goldman Sachs

Okay, and then just two variable annuity questions. First, a number of your competitors have either pulled out or shown a strong desire to pull back in the space and you know that you’re out there with a new product in December, so wanted to see if you’ve seen a pickup in your share, and if so, how much you attribute that to your new product versus maybe changes in the competitive landscape?

Richard Bielen

Chris, this is Rich. We have not seen a pickup in our sales. The product that we rolled out has an asset transfer feature to it that was part of our de-risking and we expect our sales to be at about the plan level.

Christopher Giovanni – Goldman Sachs

Okay, and then just lastly, maybe one for Ed. As you continue to execute on the hedging strategy, have you seen any changes maybe to counterparties given what’s taking place with some of the European financials, whereas maybe other US-based companies work through Dodd-Frank?

Edward Berko

Hi, Chris, it’s Ed. We use a combination of exchange trade and over-the-counter hedges and most of our, in fact, all of our counter-parties are US. We don’t have any exposure to European counterparties currently.

Christopher Giovanni – Goldman Sachs

Okay, thanks so much.

Operator

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

John Nadel – Sterne, Agee & Leach, Inc.

I got that all the time in school, too. Good morning everybody. I guess my question is with the fourth quarter numbers coming in so strong, and I understand your pointing out a couple of things that may not be trendable, and maybe you don’t want to necessarily specifically speak to guidance or any potential change in guidance, but I’ll ask it this way. To the extent that you were going to hold your Investor Day instead of November 30th, if you were going to hold it tomorrow and speak to 2012, ’13, it seems to me, my sense is that the numbers would be better than what was presented even just a couple of months ago, and I’m just trying to understand where that’s coming from.

I understood the idea that you’re fully invested sooner than you expected, but I would imagine that that was something that you had already embedded in your guidance looking out a little bit further. Do you understand what I’m -- I’m struggling with how to exactly ask the question.

Richard Bielen

John, this is Rich. I think the plan we laid out in December is one that is our internal plan and we’re benchmarking ourselves against going forward. We’ve seen a very good quarter during the fourth quarter.

I would say the one item where there’s probably a level of conservatism was around investment income and we just see what the headwinds have been on interest rates, what the friction we’ve seen in managing cash and, as you recall, when we laid that out, we told everyone that we baked in the impact of the lower rates.

We’ve been a little more successful here on managing our investments than we originally projected at that time, but we still have those headwinds out there.

John Nadel – Sterne, Agee & Leach, Inc.

Okay, and could you just remind us—I’m sorry if I missed it earlier in your comments. Could you just go back through the comments on your repurchase of non-recourse funding obligations? I think you made some commentary about being ahead of expectations already early this year. Maybe I’m getting that wrong.

Richard Bielen

You’re getting that right, John. What happened is in January we have repurchased approximately $110 million of those non-recourse funding agreements that were outstanding and we have generated a $35 million gain and recognized that here in the first quarter of 2012.

The plan we had laid out at the investor conference presumed that we have maybe $15 million of those types of gains during calendar year 2012, so we’re already $20 million ahead on that execution.

John Nadel – Sterne, Agee & Leach, Inc.

And just as a follow up to that, so that’s a big upside, maybe not necessarily something we should expect to repeat, so it sort of begs the question is it an environmental thing where something out there in the macro environment is making this easier to accomplish, and we should expect more of this, Rich, and how much more is out there to go after?

Richard Bielen

First, on the macro environment, I think it is a macro environment. These notes were issued back in 2007 when spreads were a lot tighter, so as a result, they now trade at a discount and we’ve taken those opportunities. You can see over the last two years that we have been repurchasing these notes, but we do it opportunistically when they become available to us. We’re not searching for them.

John Nadel – Sterne, Agee & Leach, Inc.

Okay, and how much more is out there?

Richard Bielen

There would be approximately $300 million of remaining notes outstanding in that securitization.

John Nadel – Sterne, Agee & Leach, Inc.

I appreciate that. Thank you very much.

John Johns

John, this is John. I’d like just to add a quick editorial comment. I know there’s a lot of concern, as there should be, on the part of investors about the macro environment that all financial services companies face right now, but there are some opportunities that are presented by that, as well, and this is a good example how on an opportunistic basis we can take advantage of some of the headwind kind of issues we face in other areas of our business.

John Nadel – Sterne, Agee & Leach, Inc.

Absolutely. I appreciate that comment, Johnny. Thanks.

Operator

Your first question is a follow up from the line of Ed Spehar with Bank of America/Merrill Lynch. Please proceed.

Edward A. Spehar – Bank of America/Merrill Lynch

Thank you. Two questions, the first on the competitor response in life insurance. Can you give us some sense of what types of price increases you’re seeing? And, maybe if you think you’re going to be more competitive now and you’re targeting 10% to 13% return on capital targets, how much of these price increases do you think raising the returns that others have been looking for?

Richard Bielen

Ed, this is Rich. It’s hard to make generalizations, but we have seen price increases across different products that range from 5% to 15% in that space, and I think they’re responding to the same thing we responded to earlier.

I think, as you know, a company of our size, we believe we’re probably a little more nimble and we took the reality of where we saw returns are and acted appropriately at the time earlier and now people are following us.

Edward A. Spehar – Bank of America/Merrill Lynch

Just across the board if you think about 5% to 15% price increases, how does that equate to IRRs?

Richard Bielen

It’s hard to quantify, but it’s a couple hundred basis points.

Edward A. Spehar – Bank of America/Merrill Lynch

Okay, and then a follow up to John’s question on the notes remaining for repurchase, if there $300 million out there, can we assume that if that’s something that if you were able to do, all of those, that that’s somewhere in the neighborhood of a $30 million to $60 million pre-tax gain-type number?

Richard Bielen

I won’t speculate on what the market prices of those notes will be if those opportunities come along.

Edward A. Spehar – Bank of America/Merrill Lynch

Could you tell us on the one that you’ve just completed, with the $35 million, what the note amount was?

Richard Bielen

The note amount was $110 million and we recognized the $35 million gain.

Edward A. Spehar – Bank of America/Merrill Lynch

Okay, thank you.

Operator

Your next question is a follow up from the line of Steven Schwartz with Raymond James. Please proceed.

Steven Schwartz – Raymond James

Hi again. On the notes, what’s the yield on those notes? What interest rates are they at?

Richard Bielen

Those notes, there are two different series of notes outstanding. One currently has a coupon of LIBOR plus 30. The other note had coupons of LIBOR plus 200.

Steven Schwartz – Raymond James

Which were the ones that you bought back, or was it a combination of both?

Richard Bielen

It was a combination of both.

Steven Schwartz – Raymond James

Okay, so LIBOR plus 70, LIBOR plus 200. And then, I guess you mentioned a little bit about it, the new VA product. I was wondering if we can go into what that is and what changes were made.

Richard Bielen

The big change that we made on the VA product is that we have rolled out in our major distributions an asset transfer product which then has the policyholder, if the market starts to decline and hits certain triggers in their individual funds, we will transfer them from being in an equity fund to a money market fund in order to reduce their own volatility to price, but it also then reduces our risk regarding the GMWB benefits that we offer.

Steven Schwartz – Raymond James

Okay, so kind of an HD type of product. Okay, thanks.

Operator

Your next question comes from the line of Mr. [Alec] with Citadel. Please proceed.

[Alec] – Citadel

Hi. Good morning. A couple questions. The first one, your VA hedge program has performed pretty well, so can you just describe any changes you made, because you recognized pretty nice gains last quarter, and then this quarter, results were stable again.

Edward Berko

Hi, Al. It’s Ed. Really, no changes to the VA hedge program. It’s performed well, as you’ve indicated. In 2011 we were very pleased with the performance of that program and it’s just business as usual.

[Alec] – Citadel

No changes from futures to options or what market levels you’re hedging?

Edward Berko

That’s a good question. We are moving more towards an option-based strategy as volatility comes down, but still, volatility is high. It’s not as high as it was, let’s say mid-, late-2011, but if volatility in interest rates and equities continues to decline, we will shift more to a long-term option-based strategy.

[Alec] – Citadel

Okay, thank you, and on the corporate investment income, I’m just trying to understand what the size of the investment portfolio is there relative to the $6 million of better run rate investment income you’re speaking to.

Richard Bielen

Al, the portfolio there really represents our capital in surplus, which is approximately $2.9 billion, so that income is based on the capital in surplus that exists.

[Alec] – Citadel

Okay, and my last one, the tax rate was low this quarter relative to your guidance, and is there a change there in terms of future tax rate expectations?

Richard Bielen

There is no change to our future tax rate expectation. That was just a true up for the entire year as we saw our taxes come through.

[Alec] – Citadel

Okay, thank you very much.

Operator

There are no additional questions at this time. I would now like to turn the conference back over to Mr. John Johns for closing remarks.

John Johns

Thanks again, everyone, for joining our call. As you can tell, we feel very good about the quarter and the year and we’re optimistic as we look forward to 2012. Thank you very much.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation and you may now disconnect. Have a great day.

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