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Executives

Eva Robertson - VP, Investor Relations

John Johns - Chairman, President & CEO

Rich Bielen - Vice Chairman & CFO

Carl Thigpen - EVP & CIO

Analysts

Christopher Giovanni - Goldman Sachs

Sean Dargan - Macquarie

Mark Finkelstein - Evercore Partners

Jamminder Bhullar - JPMorgan

Ed Spehar - Bank of America-Merrill Lynch

Steve Schwartz - Raymond James & Associates

Dan Berman - UBS

Protective Life Corporation (PL) Q2 2012 Earnings Call August 8, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the second quarter Protective Life Corporation earnings conference call. My name is Dominic and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to, Ms. Eva Robertson. Please proceed.

Eva Robertson

Good morning and thank you operator. Good morning everyone and welcome to Protective Life Corporation's 2012 second quarter earnings call. The call today is hosted by John Johns, Protective’s Chairman, President and CEO as well as Rich Bielen, our Vice Chairman and CFO. Here with us we also have Carl Thigpen, our Executive Vice President and Chief Investment Officer and Steve Walker, our Senior Vice President and Chief Accounting Officer.

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

And finally, today's discussion includes forward-looking statements which express expectations of future events and results. Actual events and results may differ materially from these expectations. You can refer to our press release and the risks and uncertainties, as well as Risk Factors section of the company's most recent report on Form 10-K and subsequent 10-Q for more information about factors that may affect future results.

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

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

John Johns

Yes Eva, thank you very much and good morning everyone and welcome to our quarterly conference call. I am very pleased to result a very solid, a good strong quarter, this quarter. Our operating results were within our expectations across each of our operating segments and we continue to perform ahead of our plan not only for the quarter, but for year-to-date.

There were a number of encouraging developments in the quarter that included favorable mortality results, sequentially higher life insurance and asset protection sales, positive fund flows in our annuity segment and continued strong stable value spreads. We’re definitely pleased by the good results not withstanding that the interest rate environment continues to be challenging for us and all insurance companies and in fact lower than we expected when we developed our plans for the year, but we are addressing those issues head on and as you can see, still producing very good results.

As we look to the rest of the year, we continue to be focus on very disciplined execution of our plans. We’re not chasing market share, we’re not chasing anything. We’re very careful in being sure that we get our capital allocated in the right place and acceptable returns and also very prudent financial risk management. We remain very confident in our ability to execute successfully on our plans for the remainder of the year.

I'll now turn it over to our Chief Financial Officer, Rich Bielen. Rich well delve through the numbers in the quarter in more detail.

Rich Bielen

Thank you John and good morning everyone. On slide four, we list out some of the second quarter financial highlights. Operating earnings for the quarter were $0.85 per share. Net earnings for the quarter were $0.91 per share. We saw a favorable mortality results in our life marketing acquisition and annuity lines.

During the quarter, we did call some of our trust preferred securities and we have a deferred issuance cost write-off of $7.2 million. We also had some unfavorable unlocking related to certain securities that have been called that we did not originally expect and I’ll talk about that a little bit more later. We did have a favorable tax rate during the quarter of approximately 29% as a result of the leasing some reserves and on a year-to-date basis we returned back to shareholders 46% of our earnings through either share repurchase or dividends.

Turning to slide five, operating income of $0.85 in the second quarter versus $0.86 a year ago. In the second quarter of last year we did have some note repurchasing which did not occur this quarter. We had net realized investment gains of $0.06 resulting in net income of $0.91 versus $1 a year ago.

Turning to slide six, our net realized investment gains and losses. During the quarter, in our normal portfolio rebalancing activities we realized $0.13 of gains. As you recall, we have a Modco account related to our Chase Insurance Group (inaudible) few years ago that added $0.06 to our net realized gains. We did have impairments of $0.11 during the quarter approximately half of that was related to non-agency residential mortgage back and the balance was related to some small corporate bond decisions.

During the quarter derivatives related to our VA contract was a positive $0.08 that was primarily attributable to a widening of credit spreads during the quarter. Our hedge program continues to perform within our expectations. We do continue to have some derivatives related to the protection against high rate environment that mark-to-market on those contracts was a negative $0.03 during the quarter.

Our commercial mortgage portfolio continues to perform well. Delinquencies were less than 1% but we did take about $0.05 in reserve charges during the quarter on that portfolio. So the final result is net realized investment gains were positive $0.06 during the quarter.

On slide seven, our shareholders equity including AOCI is now a record $51.81; AOCI is $16.47, so our book value without AOCI is now $35.34. The unrealized gain on our investments is now approximately $2.4 billion up from $1.8 billion at the end of 2011.

Turning now to the divisional results on slide eight. In Life Marketing we report $30.3 million equal to the results of a year ago of $30.3 and flat with the first quarter. We saw very good mortality during the quarters. Term mortality was 75% as expected versus 89% a year ago. Our plan is actually to expect it would be approximately 90%. So this was $9.6 million favorable to plan. We also did have some unfavorable unlocking of $10 million and I’ll spend a minute on this.

We had approximately $200 million of bank hybrid securities that we previously expected to be outstanding in our portfolio. Those yields were in the mid 7% range. We have assumed that those are now being called and that our reinvestment rate will cost us approximately 300 basis points. As we look out, we believe there's maybe another $100 million of securities that maybe subject to these regulatory calls that are still on the table.

With respect to the balance of our hybrid securities there was a comment in one of the reports that we have other securities there. Those are primarily are either in industrial or insurance sales or do not have regulatory calls. So we do not expect those securities to be called except under normal conditions which we have projected in the future. So this reflects our best estimate by now of that $200 million of call securities.

On sales, what you can see is our sales sequentially were up from $23 million in the first quarter to $26 million in the second quarter. We continue to see an uptick and upturn in our inventories, so we would expect that we will see continued improvement in sales in the third quarter.

Now moving to annuities; we report $28.6 million versus $17.2 million in the year ago quarter. We did see some favorable mortality in our life continued annuities of approximately $5 million better than our plans and our current spreads on our fixed block are also outperforming our plan. We did have some unfavorable unlocking of $5.6 million during the quarter. The bulk of that was related to the variable annuity business related to the fact that equity markets was down in the second quarter.

On the sales front, our total sales were $829 million versus $915 million a year ago. We had seen some decline in fixed sales due to the lower interest rate environment. Our variable sales were about flat over a year ago. We are continuing to make product changes to the portfolio and would expect that our runway to sales in our variable annuities will be approximately $2 billion by the end of the year.

Our account balances continue to grow and were up approximately 12% from the year ago point from $14.2 billion and ending the second quarter with $15.9 billion. Moving on to acquisitions, acquisition earnings this quarter was $43.6 million versus $39.4 million a year ago. We are now benefiting from the full immigration of both Liberty Life and on United Investors.

On Liberty Life, we completed that transition in the second quarter and on United Investors on July, we merged that company out of existence into Protective life Insurance. So we have now completed those transitions and integrations of both those of box of business. We saw a favorable mortality in the acquisition sector during the quarter and our earnings are above planned for the quarter by about a $1.5 million.

Moving now to stable value products, we report $16 million of earnings versus $19.1 million a year ago. Our spreads during the quarter were 233 basis points. If we adjust out for the $2.4 million of participating income, our adjusted spread is 198 basis points, we continue to expect those spreads will continue throughout the balance of the year. We did have sales of $26.5 million during the quarter, our account balances are roughly $2.7 billion and in the current rate environment we would accept that those will decline over the balance of the year to roughly $2.3 billion from which we continue to expect spreads similar to what we recognized in the second quarter.

Moving on to the asset protection division, we report $6.5 million of earnings versus $5.7 million a year ago. Our sales improved 10% over the second quarter of last year. We are benefiting from the new auto sales environment where we are seeing over $14 million unit run rate. In our core service contract products, we have seen sales of year-over-year approximately 19% from $79 million and $94 million.

Moving on to Corporate & Other, a couple of highlights in Corporate & Other, first is that we did have the deferred issuance cost of $7.2 million of held down Corporate & Other. We have also benefited from the lower tax rate of 29% during the quarter. We would expect the balance of the year that tax rate will be closer to 34%. We saw slightly low investment income in Corporate & Other during the quarter but that was offset by the strong spread in the participating income in the stable value unit and division. Also as we look through the divisional earnings, we recorded $0.85 and we believe that is a very good run rate with respect to the company's underlying earnings. And with that I will hand it back to Johnny for some final second quarter highlights.

John Johns

Thanks Rich. A couple of other things to point out before we open the call up for questions. One is that as we close our statutory books, we do expect to have a very strong statutory quarter. We continue to build our capital redundancy even in the [size] of maintaining a healthy dividend and continuing our reverse program. We expect our RBC ratio at the end of the quarter to be in the range of 435% to 440%. We were also able to successfully extend and upsize our existing credit facility for another five year term.

As Rich indicated our acquisitions are performing very much in line with our plan. We continue to be very active in the acquisitions to the next space. We remain very optimistic and constructive on the M&A activity we except to see continued flow of opportunities in that space and we think our franchise there is stronger and more robust its ever been.

Just in summary, we are having a good year that’s the bottom line; we are outperforming our own plan. We’re doing not withstanding a difficult macro economic environment, particularly interest rates. As I said earlier, we remain quite confident in our ability to continue for the rest of this year to have good performance and execute our plans.

So with that I am going to turn it back to you. We welcome your questions. So now we’ll open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Christopher Giovanni with Goldman Sachs. Please proceed.

Christopher Giovanni - Goldman Sachs

First question I guess for Rich. In terms of the tenders that you still expect, the $100 million, are the yields on those similar to the $200 million that mid-seven range?

Rich Bielen

Yes they are Chris.

Christopher Giovanni - Goldman Sachs

Okay, and then where are in the VA adjustments that you guys are making to the product? Can you walk through what some of those changes are?

Rich Bielen

The primary adjustments that we’re making, we have a portfolio of products, in one case, we're raising the cost of the GMWB rider from a 100 to 120 basis points and then in the second case, at the overages we have the consumer has the ability to withdraw at a 6% rate based on the notional amount we are dropping that to 5% I know that those changes are going into effect on August 20.

Christopher Giovanni - Goldman Sachs

Okay. And then John you made comment the rates are sort of sort lower than where you guys planned for and Investor Day last year, can you just talk may be sensitivity wise how we should be thinking about potential adjustments that could have then to either your income statement or your balance sheet as you guys look further out.

John Johns

Yeah I will prefer that back to Rich.

Rich Bielen

Chris, the cash flow in (inaudible) and also we have done continues to be very consistent, we think we are well matched for the next three years to four years as we presented to you back at the investor conference. We will go through a rigorous back unlocking here in the third quarter but we think we are reflecting the current rate environment in our earnings as we see it emerge.

John Johns

Chris you recall to that with respect to the interest rate component of that calculations, we tend to do that more in real time, so as we've seen interest rates strip down we made our best effort to reflect that in our results and you will also recall that from the investor conference last year that we did have considerable, wherein remaining under some of our portfolios with respect to credit rate and that’s still is true we still have some run [rate] there to adjust to the lower credit environment new credit rate adjustments.

Operator

Thank you for your question. Your next question comes from the line of Sean Dargan with Macquarie. Please proceed.

Sean Dargan - Macquarie

Thank you. I was wondering if you had any update as to your outlook for acquisitions in the back half of the year?

John Johns

Yeah, thanks, as I indicated we continue to be very active in this space. We think we are among the first calls when the process is established because of the track record we have in acquisitions and again given all this going on in this turbulent environment we are in and lots of changes in the way people are addressing business model issues, we are very bullish on acquisition opportunities as we look forward. And we are optimistic too because our balance sheet is just getting stronger and stronger.

Sean Dargan - Macquarie

And I was wondering if you could comment on the competitive environment in UL, your sales have picked up from the trial from last quarter, is that a function of the market meeting you on comprising new business?

John Johns

Yeah, that's a good, you know I mentioned earlier that we try to respond to the macro economic environment in terms of our assumptions and I think we may have lagged a bit in terms of adjusting UL pricing to the lower rate environment and now we do see competitors starting to follow in that respect and I think that's certainly a factor, one factor at least in sequential improvements we are seeing with respect to our life sales.

Operator

Your next question comes from the line of Mark Finkelstein with Evercore Partners.

Mark Finkelstein - Evercore Partners

I guess just on the hybrid call, if you've seen the $100 million gets called it looks like that's about a $0.07 incremental impact, a quick math. I guess I am trying to think about generally in the context of the $0.15 to $0.20 that you had given previously on interest rate impact. Should we add that to the $0.15 to $0.20, do we think because even somewhat lower rate environment that the overall impact is more. It sounded like we're pretty comfortable with what you said. How should we think about kind of the $0.15 to $0.20?

John Johns

Mark, I am not sure of the numbers you mentioned. So we will go back to the impact of the second quarter. We estimated approximately $240 million were actually going to be called and modeled for the balance of this year with an average rate of 7.5% losing about 300 basis points and that equated to roughly a $10 million adjustment.

Now if you add another 100 million with a similar assumption I think you can just raise the difference. The balance of what we’re doing is consistent with our prior estimates in terms of how we're looking at spread management and earnings impact going forward.

Mark Finkelstein - Evercore Partners

Okay, but just to clarify, you had given kind of an interest rate impact. I think it was $0.15 to $0.20 on 2013 going by memory. So I am just making sure that this is incremental to that prior expectation.

John Johns

No, I think the number that you're referring to I think everything we put out at the investor conference reflected where rates where at the time than in, they were probably a little higher than they are today but not materially higher than today.

Mark Finkelstein - Evercore Partners

On the acquisition segment, I guess I got the $1.5 million roughly of favorable mortality. How much more is any of expenses do you have from the two acquisitions that should still be coming into the numbers through the balance of the year?

John Johns

Mark with the completion of both of those deals I think that second quarter reflects our ongoing expense run rate because we were able to complete that those deals are little bit earlier than we originally projected. So United Investors is all in the numbers and Liberty we really finished that up in May. So that's effectively all in the numbers at this point. I don’t see a lot more for here.

Operator

Your next question comes from the Jamminder Bhullar with JPMorgan.

Jamminder Bhullar - JPMorgan

I just had a question first on the acquisition environment. You mentioned that you are still interested, but just wondering what size of a deal could you execute on without needing additional capital and then would you consider stopping share buybacks if an attractive deal came around and then the other question is just on your tax rate. It was 28.8% in the second quarter what's your outlook for the second half of the year for the tax rate.

Rich Bielen

With respect to our capacity to do additional deals, I think we said in the past that we are working toward the capacity to do -- to be able to do 8 transactions about the size of the two roughly in the range of the two transactions we have just done and it is reflected in the growing strength we have in our balance sheet and our financial flexibility. It has no real precise number we can give you on that, but I think we can compliment we say and I will say that we obviously believe we could we could do a very substantial transaction today and that capacity will only grow over time even as we continue to expect it -- we expect it to grow over time even as we continue with our share repurchase programs.

So we don't view those two things as being in some kind of conflict one or the other. At least for the moment we think we can continue to build capital and return capital back to shareholders as we are. I will take your question about do we need to stop the repurchase program, if we found the right deal. I will put it the other way and say, we are not going to do deal if we think of better opportunities is to repurchase our shares over the long haul all things considered.

So we are always going to make that trade off in our own minds. If we had the right deal, if the right returns, the right risk profile, yeah we would sustain share repurchase, if necessary to do that. But on the other hand we are not going to do a deal unless we think it’s a better use of capital than anything else we have to do with the capital.

So that's a philosophy of being disciplined and careful and thoughtful of what we do with that shareholder money.

John Johns

And Jimmy with respect to the tax rate question we would expect in the second half of the year a more normalized tax rate is roughly 34%.

Operator

Your next question comes from the line of Ed Spehar of Bank of America-Merrill Lynch.

Ed Spehar - Bank of America-Merrill Lynch

Just a follow-up John in your last answer. Can you tell us what the -- if you look at your capacity to do a deal and let's say not change your capital distribution of shareholders, can we think about the difference between an RBC at 4.35 to 4.40 down all the way to 3.50 or is that too much.

John Johns

As I think going to 3.50 would probably be too low in the current environment. I think temporarily we can dip below 400 with the expectation that these deals we build capital very quickly.

Rich Bielen

Yeah, that’s a key point. Remember this money comes – find back at us very quickly. So that gives us a little more flexibility. We believe with our rating agencies and other constituencies to have a little flexibility on RBC, but premise on having the lower capital in the right deal, where the money does come back and we recover and rebuild in a short period of time.

Ed Spehar - Bank of America-Merrill Lynch

But just looking at so, I mean would it be fair to say kind of substantial deal today of at least a few hundred million dollars?

John Johns

Yes, yes.

Ed Spehar - Bank of America-Merrill Lynch

Okay, and then a question on new money yields. I think you said in the past the DAC charges that you had been taking or you took last quarter, I think it was $0.04 was to reset your new money yield assumption related to your enforced book down to current levels and did you do that again this quarter?

John Johns

We made some slight adjustments on our reinvestment rate where previously we had some of the portfolio, reinvestment assumptions at 4.5. We lowered that down to 4 in the quarter during this process.

Ed Spehar - Bank of America-Merrill Lynch

So was it, I mean have you decided now that with rates this low, that it doesn’t make sense to sort of assume every quarter that you're going to invest at this level across the board for the rest of the life of the book?

John Johns

Can you repeat that, Ed?

Ed Spehar - Bank of America-Merrill Lynch

Yes, I guess I was under the impression last quarter that the DAC charge that you took was to reflect in your view reinvesting at current new money rates for the remaining life of your book of business.

John Johns

Right.

Ed Spehar - Bank of America-Merrill Lynch

And did you do that again this quarter or you did something different this quarter?

John Johns

We updated the assumptions for reinvestment down from 4.5 to 4.25 on a portion of our portfolios.

Ed Spehar - Bank of America-Merrill Lynch

Okay. So we didn’t go all the way to the current new money rate this quarter like we did last quarter?

John Johns

Right, markets are moving so we made an adjustment and we will continue to review it again next quarter and the quarter afterwards, but we didn’t just jump as a result of the substantially lower rate this quarter.

Ed Spehar - Bank of America-Merrill Lynch

Can you give us any sense of what the magnitude of that would have been if you had done that?

John Johns

The change of 25 basis points wasn’t very big as part of the $10 million. It was probably a 1 million or 2 million in (inaudible) most of the portfolios do have some flexibility around credited rates. The one portfolio where we are more sensitive is in (inaudible) but that represents less than 10% of the company’s reserves and so it’s not a major item as we build through our DAC process.

Ed Spehar - Bank of America-Merrill Lynch

Okay. So is it fair to say that if you would have done what you did last quarter across the board here just based on the low level that we were at for the 10 year, at the end of the quarter that it would have been less than the $10 million DAC unlock that we saw?

John Johns

That’s a good guesstimate. I did not calculate that number but that’s reasonable.

Ed Spehar - Bank of America-Merrill Lynch

Okay. And then one last question on the annuity side, the competition in the fixed annuity business, I know you talk a lot more about the VA business down, but in the fixed annuities are you seeing competitors lowering new money crediting rates to keep up with what’s going on in the new money yield environment?

Rich Bielen

I think it is a general rule; we are as always at outlier at any one point in time, but I think the industry on fixed annuities has been pretty disciplined about bringing down the credit leasing line with the rate environment.

John Johns

This is John; the product is just not all that attracted to consumers given the low interest rating environment; I think that’s just much factor as a competitive environment.

Operator

And the next question comes from the line of Steve Schwartz with Raymond James & Associates. Please proceed.

Steve Schwartz - Raymond James & Associates

Rich a couple of accounting questions if I may; what’s the $0.85% run rate that you quoted; did that include the participating income or not?

Rich Bielen

Well, the $0.85, we have always assumed we would have $2 million to $3 million of extraordinary investment income each quarter; as you may notice we do not have any note repurchase gains and so this quarter we saw $2.4 million of participating income in the stable value divisions, were consistent in our plan.

Steve Schwartz - Raymond James & Associates

I thought we were looking at nothing given that everything have been earned through the note repurchase for the year, but just so I know it doesn’t run that way or another. And then on the unlocking, if I can ask couple of questions on both of those did those adjustments run solely through the debt amortization lines or do they affect other lines as well?

John Johns

In the Life Marketing segment, the majority of that went through the benefit line, because it was an adjustment to the [SLP] reserve in the annuity segment that would have gone through the – back on the amortization line.

Steve Schwartz - Raymond James & Associates

And then just as another thought here; joining PBR next week in the NAIC meetings what's your thought there, what might come out of that?

John Johns

We continue to be actively involved through the ACOI and the discussions around PBR. We think that we've made a lot of progress in our discussions with, you know NAIC leadership. We think with the NAIC leadership has really done a great job of listening and responding to industry’s concerns. So I am very hopeful and optimistic that next week the NAIC will approve.

I know, you know, the standard valuation law and also a new manual will be the cornerstone of PBR, but it will take a couple of years to get the necessary state legislative approvals to get basically a new standard valuation law approved in the state and I think it takes over 40 states that have to enact a new law before PBR really kicks in. So our expectation is there's probably a couple of years out before it really starts to make up meaningful difference in the way that we reserve for guaranteed products.

Operator

(Operator Instructions) Your next question comes from the line of Dan Berman with UBS. Please proceed.

Dan Berman - UBS

I wanted to get your thoughts on how long the current stable value spreads are sustainable? I think you said earlier that spreads remain on current levels for the rest of the year? And Investor Day last November I think you estimated about 165 at spread longer-term. So I just wanted to get a sense is that still your longer-term view. And if so kind of when you know, post 2012 do you expect these spreads start to decline and kind of how long until they reach that normalize level?

Rich Bielen

Dan, I would tell you that we would project this level of spreads at least into 2013. I don’t want to go beyond that just because we don’t know what tails will look like over the rate environment is but as we project our run-off in anything resembling the current rate environment; we should be able to maintain this spreads for a number of quarters.

Dan Berman - UBS

Okay, great. And also it looks like asset protection earnings came in somewhere around a $1 million or so below the $7.5 million quarterly run rate that just kind of implied by your 2012 plan. I just wanted to see if you give any color on the segments results, kind of what the (inaudible) for earnings going forward?

Rich Bielen

You know, overall earnings there are really tracking now. We have started some new initiatives there and are doing some upgrades to our call centers. And those expenses are holding down the earnings from the plan we laid out back in December but the impact of that is roughly a $1 million. So we haven't really talked about it?

Operator

Thank you for your question. Your next question comes from the line of Sean Dargan of Macquarie. Please proceed.

Sean Dargan - Macquarie

Thank you. I just had a follow-up. Given what the New York department has said about captives, I was wondering, if you had any discussions with rating agencies and how they view captives and if there is any possibility you might have to unwarranted captive?

John Johns

No, we really had no conversations with anyone with respect to our captive which would be basically used for traditional securitization purposes, very conventional use of captives and they have generally have used a non-recourse format for our captive structure, so we are, no conversations around then.

Operator

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

Christopher Giovanni - Goldman Sachs

Thanks just a follow-up in terms of interest rates you guys mentioned sort of the tied asset liability matching still having some room for lower crediting rates, but curious may be if Carl can comment on opportunities within the investment portfolio expanding certain asset classes or what other opportunities you have whether additional non-guaranteed element features or other opportunities you have to kind of go after existing in force business as we look out in the future?

Carl Thigpen

Yeah Chris as far as investment opportunities, the issuance market and the corporate bond were always been very robust. There has been a quite a few companies coming that don’t issue very often that’s been good opportunities there, there has been a great flow for us to participate and stay very diversified and not having any concentration issues. We are seeing some good opportunities in the commercial mortgage arena the market seems to be opening up there some as well as we are seeing a few more opportunities on the participation mortgage front. So where the great environment is not great, we are seeing ample opportunities with the money and good quality assets.

Christopher Giovanni - Goldman Sachs

Are you looking at all alternative asset classes or expanding in equity portfolio or anything along those lines or is that just not in your risk appetite.

Rich Bielen

We are not. Those are very capital intensive and we've found that it's better to put that money into acquisition to buying back the stock when you look at the capital related to those instruments.

Carl Thigpen

Chris and some of the topic maybe a little conservatism here on what we've been talking about with respect to the (inaudible) securities that are being called unexpectedly. The sense that you know that creates more room within our disciplines, risk management disciplines for reinvestment back into the financial sector and the yields on that paper is really higher than and the quarter is kind of rate we've been talking about.

That would be assuming we will be going back in the corporate world pretty much and so I think we have an opportunity to actually do a little better you know the demand about virtue of the calls that we didn't expect to have.

John Johns

And Chris with respect to your final comment on non-guaranteed elements, I mean we continue to review our crediting flexibility. We target specific spreads by each of our portfolios but we are just continuing to reflect those numbers in our normal course. There's nothing unusual there.

Christopher Giovanni - Goldman Sachs

And then anything kind of on the horizon in terms of the non-recourse notes, anything lumpy coming up as you guys look at things over the course of the next few months.

John Johns

Chris, those are opportunistic and it has been quite for the last six months.

Operator

Ladies and gentlemen we thank you for your questions. I would now like to turn the call over to Johnny Johns for closing remarks. Please proceed, sir.

John Johns

Again just once again thank you everyone for participating in the call today and continuing to follow company’s progress and I will say one more time that we think it was a very good quarter and we are quite optimistic as we look to the rest of the year. So thank you very much.

Operator

Ladies and gentlemen we thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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