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The Phoenix Companies, Inc. (NYSE:PNX)

Q1 2012 Earnings Conference Call

May 2, 2012 11:00 AM ET

Executives

Jim Wehr – President and CEO

Peter Hofmann – Chief Financial Officer

Chris Wilkos – Chief Investment Officer

Phil Polkinghorn – Senior Executive Vice President for Business Development

David Pellerin – Chief Accounting Officer.

Naomi Kleinman – Head of Investor Relations

Analysts

Bob Glasspiegel – Langen McAlenney

Dan Alter [ph] – FBR

Steven Schwartz – Raymond James

Greg Drechsler - Metropolitan Capital

Operator

Welcome to the Phoenix First Quarter 2012 Earnings Conference call. (Operator Instructions) I would now like to turn the call over to the Head of Phoenix Investor Relations, Naomi Kleinman. You may begin Ma'am, thank you.

Naomi Kleinman

Good morning and thank you for joining us. I'm going to start with the required disclosures and then turn it over to Jim Wehr, our President and CEO, for an overview of the quarter. After that, Peter Hofmann, our Chief Financial Officer will provide a financial review and Chris Wilkos, our Chief Investment Officer will comment on the investment portfolio. Also joining us on the call, Phil Polkinghorn, Senior EVP for Business Development and David Pellerin, Chief Accounting Officer.

Our first quarter earnings release, our quarterly financial supplement and the first quarter earnings review presentation are available on our website at phoenixwm.com.

Slide 2 of the presentation contains the important disclosures. We may make forward-looking statements on this call that are subject to certain risks and uncertainties. These risks and uncertainties are discussed in detail in our first quarter earnings release and our latest SEC filing. Our actual results may differ materially from such forward-looking statements. We assume no obligation to update these statements.

In addition to generally accepted accounting principles, we use non-GAAP financial measures to evaluate our financial results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our press release and financial supplement.

Now, I'll turn the call over to Jim.

Jim Wehr

Thanks, Naomi, and good morning everyone. This morning I’ll give my perspective about the quarter and what we see for Phoenix, in the near term.

Looking at our operating income of $6.5 million, you can see the tax has continued to add volatility to our results, as Peter will discuss later. But if you focus on the fundamentals of our performance, the first quarter is a continuation of many of the favorable trends, we established last year. Let me walk you through a few of these trends.

The investment portfolio produced sound results with continued low impairments, and improved asset evaluations. In addition, net investment income increased 6% over the fourth quarter, and is up year over year. Policy persistency remained strong after returning to more normal levels in 2011. We continue to right size our cross structure and carefully manage expenses. While we are growing our businesses, we have been holding the line in uncontrollable expenses, and believe we can get more work done here.

Our mortality experience remains very good, statutory surplus grew further to $882 million, even after a $24 million dividend to the holding company. RBC improved a 371%, its worth reminding everybody that it wasn’t that long ago, that we aspired to 300% RBC, and now we are well beyond that. All these numbers say one main thing to me, and should to you, Phoenix has a very strong balance sheet, and we plan to keep it that way with sound management and a profit driven business strategy.

That statement, ‘profit driven business strategy’ brings me to the trends in our growth initiatives. We’ve guided to fixed index annuity sales of 1 to 1.4 billion for the year. We are not changing that guidance though, we will likely recommend at the lower end of the range.

First quarter sales of 227 million were consistent with our 2011 run rate, but put us slightly below our target for 2012. So what happened? We continued to stick to our profitable growth strategy, with a focus on preserving solid margins and do business. Even in the phase of price competition and the potential for a dip in sales. We have demonstrated that discipline with two reprising actions since October, and while these actions were prudently aligned with lower interest rates, they almost certainly caused us some sales. However, we are still competitive and we have seen other companies modify their pricing, subsequent to our changes. Also we are adding new benefits and features in June, which should broadly appeal of our product portfolio.

In short, we are confident our offerings will continue to generate strong sales that also meet our profitability targets.

Saybrus also showed steady progress, with increasing profitability. In fact, its results have improved every quarter, since there was established in late 2009, and we continue to believe that the Saybrus model has a lot of potential. As a final note, we believe it’s important for our long term success that we rebuild our life portfolio to balance our growing annuity and distribution businesses.

During the quarter, we launched an indexed dual product for the middle market to be sold through IMO’s. As is the case with any new product launch, results in the initial quarter were quite modest. But we have selling agreements with eight distributors, and expect sales to grow incrementally over the next several quarters.

As we look towards 2013, we are currently pursuing additional product offerings and distribution relationships. In some you’re hearing a lot of the same themes today, as you’ve heard in the last several quarterly calls, solid balance sheet, good persistency expense management and profitable growth.

With that, let me turn it over to Peter.

Peter Hofmann

Thanks, Jim, if you’d please turn to Slide 3 of the presentation.

GAAP pre-tax operating earnings were 21.6 million or $0.19 per share and that included the $2 million item related to our New York Section 308 claims review. The net loss in the quarter was driven by the non performance risk factor, related to our variable annuity living benefit liabilities, as well as an unusually high GAAP tax rate, due to the strong statutory earnings. I will discuss both of these items more in a moment.

The tax rate also affected operating income, which as Jim said was 6.5 million or $0.06 per share. Statutory surplus grew to 882 million, we had a statutory net gain from operations at Phoenix Life of 43 million. We had another good quarter of solid insurance results with strong net investment income, and good mortality experience, favorable surrender trends and stable expenses.

Investment portfolio remained high quality in first quarter, credit impairments were better than our pricing expectations and in line with the 2011 run rate. Saybrus earned $700,000 with EBITDA in the quarter compared with an EBITDA loss of 800,000 in the first quarter of 2011.

Slide 4, shows our quarterly income statement. All of the historical periods on this slide reflect the adoption of the new DAC accounting guidance. Open block revenues increased modestly from the fourth quarter and a year ago, different primarily by higher net investment income. Good mortality experience reduced benefits, but this was offset by higher DAC amortization. Operating expenses were flat versus a year ago, and down versus the fourth quarter, which was elevated due to an $11.5 million adjustment, for certain pre 2001 retirement benefits.

The regulatory closed block contributed $11.3 million, consistent with the glide path of the block established at the time of the demutualization. This represents the expected quarterly level for the remainder of 2012.

Realized investment losses were driven by a15.1 million loss, from the non-performance risk factor. This is the discount applied to variable annuity living benefit liabilities to reflect Phoenix’s credit worthiness. It’s subject to credit market conditions and varies with the net amounted risk. It can result in large swings in that income, but does not have an economic impact on the company. On an economic basis, our variable annuity hedge program performed well with a loss of just $200,000 in the quarter.

Realized losses also included 6.2 million of credit and impairments, and a $5.7 million loss on our surplus hedge partially offset by 9.4 million of gains primarily in call auctions used to hedge fixed indexed annuity credits.

Slide 5, highlights the trends in operating income and spikes out discrete items that affect period-to-period comparisons. As a result of the adoption of the new DAC accounting guidance, the gaining stock holder’s equity as of January 1, 2012 was reduced by a 168.2 million. This slide shows the revised total stock holders’ equity book value per share, and operating income for the last five quarters.

Additional detail is available in our quarterly financial supplement. Relative to the old accounting, we estimate that back amortization in the first quarter was $7.5 million lower, and the full year impact will be approximately 27 million in 2012. This is slightly more than the guidance of 16 to 24 million that we provided, in the fourth quarter.

In the fourth quarter of 2011, as a result of a review under New York Section 308, we established reserves for expected unclaimed death benefits, and interest totaling 11.4 million. If you recall, this resulted in a $3.6 million charge to operating income last quarter.

As we process these cases over the course of the first quarter, the amount of claims expected to be paid declined, resulting in a reserve release of 4.4 million, which translated into a $2 million benefit to operating income this quarter.

Tax expense was $15.1 million in the quarter, which translates into an effective tax rate of 17% on operating income. We incurred higher than expected alternative minimum tax expense of 8.9 million, because of our strong statutory earnings. In addition, there is 6 million of tax expense, which is offset below the line by a tax benefit against realized losses.

Our best guidance for the remaining quarters of 2012, remains for an effective tax rate about 30%. Book value per share excluding AOCI declined $0.07, $9, and $0.31 due to the GAAP net loss.

Turning now to our insurance fundamentals, slide 6 shows mortality cost ratios for the open and closed blocks. Note that this does not include the impact of the New York Section 308 claims, and it’s presented before DAC offsets. Experience in the open block was better than expectations, however, given the incidents of claims in our various blocks of businesses quarter, after DAC offsets experience was in line with expectations. Closed block experience was modestly favorable to trend. As a reminder because we have a positive policy holder dividend obligation, closed block mortality experience does not affect GAAP earnings. The closed block PDO as of March 31, improved to 87.3 million versus 53.7 million, as of March 31, 2011.

Slide 7 shows 5 quarters of life and annuity surrender rates along with full year rates for 2008 through 2011. Surrenders do fluctuate quarter to quarter, however you can see that the important life surrender rates are approaching pre-financial crisis levels. Annualized life surrenders were at 6.4% in the first quarter, the closed block, they were at 5.6%. Annuity surrenders were at 12.1%, this reflects the combination of our older variable annuity block, which has somewhat higher surrenders and lower surrenders in the newer fixed index annuity business.

On slide 8, you can see the trend and annuity deposits, as Jim indicated the decline in sales from the fourth quarter was driven by product adjustments that we’ve made in October, which reduced sales in the early part of the quarter. We also made further product adjustments in February.

The low interest rate environment continues to present headwinds for this product but the business, we have written, has continued to be profitable. The embedded value created by sales in the first quarter is estimated at about 2 million using a 10% discount rate. The right side of the slide shows the trend in Saybrus’s EBITDA. The increase is driven by top line growth and lower expenses. Revenues were 5.1 million in the first quarter compared with 3.8 million, a year ago. EBITDA margin in the first quarter was 14%.

A roll forward of our estimate RBC ratio is shown on slide 9. The improvement in the estimated RBC came from growth in our core life insurance results and strong alternative asset returns. Also, Phoenix Life paid a $24 million dividend to the holding company, which lowered the ratio by 18 percentage points.

We ended the quarter with $119.7 million of cash and securities at the holding company, which meaningfully enhances our capital flexibility overall. We have remaining regulatory dividend capacity of approximately $48 million for 2012, although we will continue to balance appropriate capitalization of the Life companies with holding company liquidity.

With that, I will turn it over to Chris.

Chris Wilkos

Thanks Peter. As Jim described, our investment portfolio continued to sustain favorable trends in the first quarter, despite the low interest rate environment. Let me start with investment income, which is summarized on Slide 10.

Net investment income increased quarter-over-quarter, driven by higher returns and alternative investments. Income for the open block increased by $3.5 million due to higher alternative asset returns and higher returns from fair value option investments. Closed block income increased by nearly $8 million as a result of higher returns from private equity partnerships. Given the large increase in the equity markets in the first quarter of 2012 and the one quarter lag in partnership accounting, we would expect the first quarter equity market increases to translate into strong alternative asset returns in the second quarter of 2012.

Let’s turn to credit impairments on Slide 11. In the first quarter, credit impairments declined compared to fourth quarter results. Impairments in the quarter were driven by a number of small impairments primarily on residential mortgage-backed securities. These impairment levels remain below our long-term assumption for credit losses. Over the past year, we have seen a decrease in CLO and CDO impairments, as that segment of the portfolio benefits from sharply lower default rates and credit upgrades. The corporate bond portfolio has also been solid, with a declining trend of impairments over the last three quarters.

Our private placement bond portfolio, which totals over $3 billion, continues to perform very well. In Q1, we had a small impairment of $600,000 in that segment of the portfolio.

As you can see on Slide 12, we had an increase in the percentage of below investment grade bonds in the quarter, as we added to our below investment grade position based on attractive valuations. After a multi-year period of de-risking the portfolio, we selectively added to our high-yield position based on the attractive spreads available in the high-yield market during the last two quarters.

Our investment policy range for high-yield bonds is 6% to 10% of the portfolio and we are comfortable with our current position, given positive fundamentals in the economy and the high-yield market. Going forward, we will continue to actively manage our high-yield bond position within our previously-stated range.

The five metrics on Slide 13 demonstrate the significant improvements in our portfolio and balance sheet over the last three years. Portfolio market values stands at 105% of book value, having experienced steady improvement from a low of less than 86% of book in 2008. This improvement in market value over the past several years gave us the flexibility to reduce our high-yield holdings with minimal loss, reduce our highly liquid assets and better manage our asset liability profile.

Our below investment grade bond holdings have been reduced from a peak level of nearly 11% of bonds down to only 8.4% of bonds today, even with some active buying during the last several quarters. This reduction was accomplished in a measured manner without incurring unnecessary capital losses. Credit impairments have dropped substantially and consistently over the last three years, reflecting both the improvement in the credit markets and the underlying strength of our portfolio. Our structured bond holdings, which were under tremendous pressure during the credit crisis, are very highly rated and concentrated in senior and super senior securities. The market value of these securities has appreciated substantially since the end of 2008.

With that, I will turn the call back over to Jim.

Jim Wehr

Thanks Chris. Clearly, you heard a lot of the same themes from all three of us today. More of the same is a good thing for this company right now. That’s not to say we are complacent, only that we are focused on the right items and making steady progress. At the same time, we are committed to taking further actions in all of these areas, strengthening the balance sheet, focusing on conservation and streamlining service, reducing expenses and growing the business profitably.

Thanks for your time and attention today. And now, Laurie, let’s open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bob Glasspiegel with Langen McAlenney. Your line is open, sir.

Bob Glasspiegel – Langen McAlenney

Yes, good morning everyone. I was wondering how nervous we should be about what you are saying on the pricing actions you are taking in a new release. It is just normal response to a competitive market, or is there a sense that maybe you misjudged what interest rates were going to do when you price the product originally?

Jim Wehr

Bob, I am going to turn it over to Phil to get into some of those specifics around the repricing and the competitive landscape, but I want to re-emphasize a couple of points we made repeatedly and have followed and will continue to follow in a disciplined fashion. First, we said that growth, and this is fairly obvious, the growth in order to be sustainable has to be profitable. And second, that we are likely to be more active in revisiting product features, including price than some of our competitors have typically been. And third, we are all dealing with the same low interest rate environment. So, others although they may have not moved as frequently as we have, are likely to reprice at some point.

And I guess the last point is, the low interest rates are a challenge in this space, but it’s really a double-edged sword. They present some challenges, but they are also a significant reason why there is so much demand in the marketplace for this product.

So, I want to give you a little bit of a high-level and I will let Phil give you a little bit of the details around what we have done and what we are likely to do going forward.

Philip Polkinghorn

I wouldn’t characterize it as having missed a prediction on rates more adapting to changes in rates. And I think it’s important to make it clear, there are two types of rates. One is the general market rates available on investments that we can rate, but the other is that for statutory valuation purposes, the valuation interest rate for this business is determined based upon the moving average of rates that won’t be set until June. But since it’s a moving average by the end of last calendar year, you kind of have insight into where it’s going for calendar year 2012.

And late last year, we became pretty convinced and that is one area, that’s a prediction, pretty convinced that the valuation industry used the value of these liabilities was going to go down for 2012, meaning that the reserve per dollar deposit you have to put up for the same level of benefits would go up. And since that’s set in June and we are sitting here in May, we are even more confident that we have got the right call on that, the valuation industry with this business will drop in June, and it applies retroactively to January 1.

So, our changes were a combination of general market interest rates and the valuation rate for this type of business, dropping – our relative competitive positioning is still strong in many areas where we are concentrating and still above average in a lot of different areas. So, we are kind of really just doing what it is that we said we would do is adapt to the environment on a relatively responsive basis.

Bob Glasspiegel – Langen McAlenney

If I could, just a follow-up, the rate increases are really for new business that you write today, or is there an element to recover for a little bit of a hole in the old stuff?

Peter Hofmann

Well, there’s two elements to most of the business that’s sold. One is the credited rates of a cash value, and that we can adjust for in-force and due from time to time. The other, though, is the writers which provide a guaranteed lifetime income. That level of income can be sensitive to investment rates of return, but cannot be changed for in-force business, only for new business going forward. And our view is that we are investing for an intermediate duration for this business. So, the investments that we make sort of lock-in our return for the immediate future, and the long-term guarantees are sensitive to the rates of return you can expect. So, we feel it’s important to adjust those on, perhaps a less frequent basis than the credited rate, but nonetheless on a frequent basis as investment returns on new money vary.

Bob Glasspiegel – Langen McAlenney

Okay. Last question, Jim, I assume that you are managing the company for statutory earnings as the higher priority than GAAP earnings. And I mean, this AMT hit from sort of better than modeled statutory earnings, if I understood the explanation correctly, how sensitive is the relationship between the statutory earnings and the GAAP tax rate?

Jim Wehr

Bob, I am going to let, let me address the first part of your question around stat versus GAAP, obviously they are both important. Statutory results, I think do have the benefit of being more directly aligned with the economics of the business. So, from that perspective and clearly important with regulators and that’s a very important constituency. So, yes, statutory results are very important, but we certainly can’t ignore our GAAP results, although the challenge is, as we are discussing on this call, the challenge is of GAAP reporting including taxes are not insignificant. So, that’s kind of my high-level reaction to your first statement, but let me turn it to Peter to talk to the specifics of the tax issue.

Peter Hofmann

Bob, I mean, the short answer is it’s really the statutory earnings that much more closely attract actual taxable income, which is really what drives taxes ultimately. The GAAP earnings don’t, because of all the GAAP items that don’t exist in taxable income. So, what happens here is that we really have the AMT tax due based on statutory earnings and then that dollar number against whatever pre-tax GAAP income we have is what falls out as the tax rate, which is why it’s so difficult for us to give you a good prediction of the effective tax rate, because it can just both on the realization of statutory earnings and GAAP pre-tax income.

Bob Glasspiegel – Langen McAlenney

Okay. I will follow up offline, spare the audience more discussion. Thank you.

Jim Wehr

Thanks Bob.

Operator

Thank you. Our next question comes from Randy Binner with FBR.

Dan Alter – FBR

Hi good morning. This is Dan Alter [ph] in for Randy. Just following up on, Peter, to your comment about the 30% tax rate and following stat earnings, if we think forward to statutory earnings power, could we kind of use, kind of this guide, what we saw this quarter of $43 million versus almost 70% tax rate and kind of adjust to think, well, what statutory earnings power can be on a go-forward basis using a 30% tax rate?

Peter Hofmann

The way I would think about it, we are guiding like I said, for GAAP purposes, if you are going to just apply a tax rate to GAAP, pre-tax of roughly 30%, the alternative way to approach it would be, if you have a statutory projection to apply the minimum, alternative minimum tax rate to that, which is a 20% tax rate, and then take that dollar tax expense and put it against the GAAP pre-tax number.

Dan Alter – FBR

Okay, great. Also a follow-up on the fixed index annuity sales, first of all, thanks for breaking out the flow detail, now that was really helpful to see that on its own. But it looks like also that maybe that bonuses are coming down as well. So, within the pricing adjustment, is there also changes to bonuses as well?

Jim Wehr

You are referring to the policyholder bonus?

Dan Alter – FBR

Yes.

Jim Wehr

In some products, yes, in others, the bonus level has stayed the same in one product. I think it went up by 1%. So, it varies from product to product. We are getting the substantial increasing amount of sales on our non-bonus products, but the bonus products did have anywhere from a 2% drop in the bonus rate to a 1% increase in the bonus rate.

Dan Alter – FBR

Okay, yes, that makes sense. And then just one more if I may, as we think about stat capital going forward, can you kind of give us a sense or a flavor of how much required capital growth is required for every dollar of fixed index annuity sales, and with that in mind, the RBC is really turning up nicely, holding company liquidity is turning up nicely, what are your thoughts around that as there is capacity to upstream more cash to the holding company, but is there really a need to do that as opposed to trying to drive the RBC higher or maybe achieve ratings upgrades?

Peter Hofmann

I will try to address that. The per unit sales capital charge that we priced for is under 4 to 5% [ph] in that range, 4 to 5%. In terms of upstream in capital, our view is that we want to maintain certainly a solid RBC and we have talked about at 325% to 350% range at the operating company, but on the margin, a dollar of capital at the holding company affords us greater flexibility across the group than within the operating company. It allows us obviously to downstream it if we need to, but it also allows us to deploy it elsewhere if we choose to do that. And so, if we have the ability to dividend and we have capital cushion and strength that the operating company on the margin, we are going to have a bias to upstreaming the incremental dollar of capital.

Dan Alter – FBR

Okay. Yes, that’s great. If we continue to see these results, some sort of capital management from the holding company, something that would be in consideration?

Jim Wehr

That’s right.

Dan Alter – FBR

Okay. Great, thanks so much.

Operator

Thank you. (Operator Instructions) Our next question comes from Steven Schwartz with Raymond James.

Steven Schwartz – Raymond James

I thought it was going to be me. Hi, how are you doing?

Jim Wehr

Yes, good morning. Good.

Steven Schwartz – Raymond James

Good morning. I got some follow-ups, I got a bunch, I apologize, ahead of time. Peter, just on the question of capital banking, FIA sales, I have got two on that. You said 4 to 5% right? That’s at what RBC level?

Peter Hofmann

325%.

Steven Schwartz – Raymond James

At 325%. And that’s the number that’s going to go up and down. I mean, that’s high initially because of the premium that’s being written, there is no premium written in the second years and going on. So, it comes down a lot and then it goes back up again. Does it not when the surrender charge wears off? So, is that kind of an average over the life of an annuity?

Peter Hofmann

Actually, that’s kind of like the initial stream and there are some differences in the required capital formula based upon a number of factors, one is which you mentioned the surrender charge level. The other is the presence or not of a market value adjustment, ours has a market value adjustment. And the other is the separate account or general account product. So, yes, that 4 to 5% is sort of our initial strain and takes into account some reserve relief you might get on, because you have surrender charges and takes into account also – it’s a blended across a big book of business where you get a little bit less strain at some of the older issue ages because it’s convention in this market. To grade the commission rate down with advancing issue age, but not the surrender charge. So, that’s kind of like a blended statutory strain number taking all of that into account. We could maybe offline get you the factors, see one, all that sort of stuff. But that’s what that 4 to 5% represents.

Steven Schwartz – Raymond James

Okay. All right. Great. And then just to stay off (inaudible) I guess.

Peter Hofmann

It might stop now, Steven.

Steven Schwartz – Raymond James

I am loving it here. The minimum valuation rate, my recollection is that, that’s based on the five-year CMT or is that the minimum guarantee rate?

Peter Hofmann

The valuation rate is, we will get you the specs, but I think it’s a Moody corporate bond index and it’s a moving average.

Steven Schwartz – Raymond James

Okay. And then, this is – just so I understand what’s going on here, if I remember correctly, this is the rate that’s used to discount your, I guess your modeling of potential payments under these, right? And therefore the reserve that you are getting on a statutory basis could be actually greater than the account balance. Is that an accurate statement?

Peter Hofmann

It could be. I guess the main thing is, is that for the exact same benefits, lowering the rate is going to create a higher reserve. If it was below the account value, it might still be below the account value but a higher number.

Steven Schwartz – Raymond James

Okay.

Peter Hofmann

You just count at lower rate.

Steven Schwartz – Raymond James

So the idea here is that you need to lower your crediting rates or participation rates, your cap rates in order to keep your statutory earnings at a proper level?

Peter Hofmann

Right. To keep the present value profits at the same rate, right. If they are going to emerge a bit slower, the reserve is higher.

Steven Schwartz – Raymond James

Right. Okay, alright. Okay, I will get off the statutory now. Peter, just a few for you. The tax in this quarter, is that cash?

Peter Hofmann

It is. Yes, you can think of it as cash. So it’s an alternative minimum tax payments and with the full valuation allowance we are not able to recognize the deferred tax asset that we would normally have against any alternative minimum tax, which is why it actually affects our tax rate. But it is a cash payment assuming that it holds (inaudible) tax here.

Steven Schwartz – Raymond James

Okay. With the 30% kind of the number that you are guiding to for the remaining quarters, would that be cash as well?

Peter Hofmann

That’s the same phenomenon.

Steven Schwartz – Raymond James

Same deal, okay. Alright then. Just a couple of more. Were you saying that you had a $7.5 million benefit from 20/10, 20/06 versus the old accounting?

Peter Hofmann

$7.5 million in the first quarter, $27 million estimated for the full year, so operating down over the remainder of the year.

Steven Schwartz – Raymond James

Okay. And that’s versus 16 to 20 previously, right?

Peter Hofmann

Versus 16 to 24.

Steven Schwartz – Raymond James

16 to 24 previously, okay.

Peter Hofmann

Yes, we had given that pretty mild rate.

Steven Schwartz – Raymond James

Okay. Then if I can, on page 6 of the presentation where we are talking about mortality experience, can you explain again how 60.6% actual is equal to 70.4% expected, I didn’t not get that at all?

Peter Hofmann

Naomi has the answer.

Naomi Kleinman

Steven, it’s Naomi. On that chart the mortality is reported before reinsurance and it was the incidence of the losses and how much is reinsured versus how we talk about our mortality being consistent with our expectations. So there was some experience in an older block of open block business that has no reinsurance on it, which is really what drove the dichotomy between what you see on that slide and how we talked about it.

Steven Schwartz – Raymond James

Okay. So the expected is after reinsurance, the 70.4% is after reinsurance, I guess where you would expect the reinsurance to eat up and the 60.6% is pre-reinsurance, did I get that right?

Naomi Kleinman

I am sorry. I was talking about the expected being how we talked about it in our press release. The raw mortality is actually more than we would have expected, but after reinsurance it was consistent with what we expected.

Peter Hofmann

After re-insurance and DAC?

Naomi Kleinman

And DAC.

Peter Hofmann

But the earnings impact was in line with expectations, the actual incidents of mortality was better than expectations as indicated here.

Steven Schwartz - Raymond James & Associates

So incidents was, is this a mixed thing, is that what I am getting here?

Peter Hofmann

It’s a mix thing and that the most adverse aspect of the mortality wasn’t an air in a block that has virtually no DAC offset?

Naomi Kleinman

And not as much reinsurance.

Peter Hofmann

And not as much reinsurance.

Steven Schwartz - Raymond James & Associates

Okay, alright great.

Jim Wehr

Steven, have you punched yourself out yet?

Steven Schwartz - Raymond James & Associates

Apparently so.

Operator

Sir, Thank you, our next question comes from Greg Drechsler with Metropolitan Capital.

Greg Drechsler - Metropolitan Capital

Hi, what have you learned as you monitor your exposure to the senior market over the last quarter?

Jim Wehr

I’m going to turn it to Phil and kind of think about it from a competitive positioning standpoint, Phil?

Phil Polkinghorn

Hi, one of the things that we’ve learned that this has sort of been in big and proved quite well, is the detailed levels that you have to go through, in order to ensure suitability. It’s the carrier’s responsibility and so we have a multifactor screen that does some auto testing, which kicks out a very high percentage which goes to human review one level which has a second level of human review, so one of the things we’ve learned is, that the issue process versus, say variable annuities to a similar market is a little bit more complex given that instead of the broker dealer having responsibility for suitability, we do. So we have to go through more data, it requires more human touch of it in the issue process.

Jim Wehr

Greg, is that responsive to your question there, it was a little bit open ended, and we just want to make sure we are getting at what you’re asking us to get at?

Greg Drechsler - Metropolitan Capital

I think over the last quarter, you said you would monitor and I just didn’t know if you’d learnt anything, I guess even higher level as to your exposure to that market?

Phil Polkinghorn

Nothing to report since,

Jim Wehr

Hopefully that’s responsive. Maybe we could connect offline if you want to pursue it further.

Greg Drechsler - Metropolitan Capital

Very good, thank you.

Operator

Thank you. I would not like to turn the call back to Mr. Wehr, thank you.

Jim Wehr

Well, thanks everybody, we wrapped up fifteen minutes ahead of schedule, which I think given everybody’s busy schedules, is generally a good thing. Once again as always, thanks for your time and attention, and we’ll talk to everybody soon. Have a good day.

Operator

Thank you. That does conclude today's conference call. Thank you all for joining. You may disconnect at this time.

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