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Executives

Jim Pirak – Senior Vice President, Marketing and Investor Relations

Thomas M. Marra – President, Chief Executive Officer and Director

Margaret A. Meister – Executive Vice President and Chief Financial Officer

Michael W. Fry – Executive Vice President-Benefits Division

Daniel R. Guilbert – Executive Vice President-Retirement Division

Analysts

Steven D. Schwartz – Raymond James & Associates

Humphrey A. Lee – UBS Securities LLC

Ryan Krueger – Dowling & Partners

John M. Nadel – Sterne, Agee & Leach, Inc.

Christopher A. – Giovanni Goldman Sachs & Co.

Symetra Financial Corporation (SYA) Q3 2012 Earnings Call October 25, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen, welcome to the Third Quarter 2012 Symetra Financial Corporation Earnings Conference Call. My name is Brene, I’ll be your conference operator for today. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I will like to now turn the conference over to your host for today, Jim Pirak, Senior Vice President Marketing and Investor Relations. Please proceed.

Jim Pirak

Thank you. Good morning and welcome to Symetra Financial Corporation’s review of third quarter 2012 results. Before we begin, I would like to call your attention to the Safe Harbor statement on slide two of the presentation materials, which are posted on Symetra's website.

Some of the information discussed on the call, is based upon information, as of today and contains forward-looking statements that involve risk and uncertainty. To the extent, any of the comments on the call are forward-looking statements, they are qualified by the risk factors in Symetra's public filings, including the press release issued yesterday.

During this call we will discuss GAAP and non-GAAP financial measures, reconciliations between the two are available in yesterday's earnings press release and in the presentation materials which are posted on Symetra's website.

On the call today, you will hear from President and CEO, Tom Marra; and Executive Vice President and CFO, Margaret Meister. Michael Fry, from the Benefits Division and Dan Guilbert, from the Retirement Division, would join in the Q&A discussion.

Now I’ll turn it over to Tom.

Thomas M. Marra

Thanks, Jim, and good morning, everyone. In a moment, I’ll ask Margaret to run-through the quarterly results then I’ll come back to give my assessment of each division and how we are responding to the current environment.

As a brief overview, on Slide 3, we have our consolidated financial results for the third quarter. Net income was $55 million, up sharply from $11 million in third quarter of 2011 reflecting net realized investment gains compared with realized losses in the prior period.

Adjusted operating income was $46 million, compared with $47 million in third quarter 2011. Earnings for the quarter reflected solid results across our operating segments. The Benefits loss ratio was 65.5% or just over our long-term target of 63% to 65%.

Our medical stop-loss business is underwritten to achieve results over 12-month period and we continue to expect the full-year loss ratio to fall within the long-term range. Year-to-date the loss ratio stands at 64.2%. The Retirement division posted strong earnings again this quarter driven by solid interest spreads in both deferred annuities and income annuities.

The Symetra team is working hard everyday to maintain our margins through disciplined pricing actions combined with very effective asset liability management and investment strategies. Individual Life reported better results than year ago, reflecting more favorable BOLI claims experience.

Return on equity was 7.6% from the 12 months ended September 30, compared with 7% for the same period last year and operating return on average equity for the 12 months ended September 30 was 9.5% or unchanged from the same period last year.

So I’ll now turn it over to Margaret to run through each of the segments, and then, I’ll return to do a deeper dive. Margaret?

Margaret A. Meister

Thank you, Tom, and good morning. We are reporting another solid quarter with good results across our operating segments generally reflecting the same overall trends we’ve experienced in the first half of the year. Before I touch on the highlights from the segments, I’d like to update you on a few overarching topics.

First, the impact of our Grow & Diversify initiatives to third quarter adjusted operating income was a negative $0.03 per share. Results in the quarter for the benefits deferred annuity and Individual Life segments all including elevated operating expenses related to our build out of new product and distribution capabilities.

Grow & Diversify expenses are generally tracking with our plans for 2012, but the revenues associated with these initiatives have been slower to emerge. In the fourth quarter, we estimate that Grow & Diversify initiatives will be a $0.02 to $0.03 per share drag on adjusted operating income for full impact that is roughly inline with previous guidance of $0.09 per share.

In our Other segment pretax operating income was down $8.3 million from third quarter 2011, primarily driven by higher amortization on our larger tax credit investment portfolio. Our effective income tax rate was very low this quarter. Each quarter we drew up to the estimated annual effective tax rate, and this quarter reflects the impact of higher levels of tax credit investments in relation to our expected income levels.

In the fourth quarter and for the full year, we expect an overall effective income tax rate in the low to mid 20, which is lower than in recent years as a result of that increased tax credit investment. Following our annual review and update of actuarial assumptions, which include a holding reinvestment rate near current levels for the first couple of years in the model, we recorded unlocking charges totaling $3.9 million pretax relating to debt and deferred sales inducement balances affecting the Individual Life and Deferred Annuity segments.

Prepayment fee income in the third quarter totaled $4.2 million pretax, including $2.5 million in deferred annuities with the balance split between income annuities and individual life. We can see this in the base versus actual interest spread numbers in our financial supplement. We expect this prepayment activity to have minimal impact on go forward investment income.

Moving now to the Benefits segment on slide 4, Benefits operating revenue was up year-over-year driven by a strong stop-loss sales. Pretax adjusted operating income was down from the prior as a result of a higher loss ratio and higher operating expenses. The Benefits loss ratio was 65.5% in the third quarter, up from 63.6% in the year-ago quarter, due to a higher number of large dollar claim.

On slide 5, we illustrate the quarterly volatility and the Benefits loss ratio. Over time, we expect the loss ratios to be within the target range of 63% to 65% and we expect that for the full year 2012.

Moving to slide 6, the Deferred Annuity segment reported higher operating revenue and pretax adjusted operating income was down modestly from the same period last year as a result of lower interest spreads and higher operating expenses. I am pleased that the base interest spread held at a strong 1.78% in the third quarter.

Turning to income annuities on slide 7, operating revenue was about flat with third quarter 2011 and pretax adjusted operating income was up primarily due to improved mortality. Mortality was slightly favorable in the third quarter 2012 at $2 million in net gains which was up $3.4 million from last year’s mortality loss. That was substantially down from the gains seen in the first half of 2012. We expect mortality gains and losses to fluctuate from quarter-to-quarter and to be near neutral to earnings over the long-term.

On Slide 8, the Individual Life segment contributed higher operating revenue and $1 million higher pretax operating income than in the same period last year. Improved earnings were driven by lower BOLI claims, which boosted the BOLI return on assets. This was offset in part by unlocking.

Turning to our investment portfolio on Slide 9, our $27 billion portfolio continues to be primarily investment-grade fixed maturity bond. Pretax impairments in the third quarter increased to $13.3 million from $4.9 million in the third quarter 2011, mostly due to a couple of large write-downs including one bond that we’ve designated intent to sell.

In the third quarter, our commercial mortgages grew to 10.7% of our total invested assets. We have capacity to grow the commercial mortgage portfolio further and we continue to see attractive opportunities in this asset class. We funded new loans in the quarter at about 340 basis points spread to comparable to U.S. treasury.

Moving to Slide 10, we updated the low interest-rate environment analysis we presented before to improve through 2015. The asset and liability cash flows for our annuity lines remain very tightly matched and the overall results are the same as earlier except that the estimated annual reinvestment exposure for BOLI has increased by $50 million to $400 million on average per year. This is a conservative estimate and we believe that we will be able to manage that number down.

Of course our expected levels of reinvestment are subject to change if there are adverse changes in monetary or fiscal policy or significant increases in the level of corporate refinancing activities.

On Slide 11, we illustrate how our effective matching of asset and liability of cash flow has produced stability in our annuities interest spreads over the past nine quarters.

And with that, I’ll turn it back to Tom.

Thomas M. Marra

Okay. Thank you, Margaret. Turning to Slide 12, we’ll review where we stand in each of the Grow & Diversify initiatives. This table shows the sales targets that we set for our new products at the beginning of 2012. In the second column, we have our current outlook for progress against these goals. And now there are pockets of success, I’m generally not satisfied with our topline growth.

In particular, two of our key initiatives have not yielded the results we expected, one being the sales of our no-living benefits True VA through fee-based financial advisors, and secondly, our sales of our Classic UL in the BGA channel.

That said, next I will review our steps or what we are doing to drive improvement in the fourth quarter and beyond. Regarding the emergence of our Group Life and DI business, our build-out is essentially complete and we are well positioned to deliver differentiated service to middle-market corporate clients.

We set our sales target to $25 million for Group Life and DI and sales today suggests that we will not meet this goal. At this point, I expect we will achieve around $15 million. Not bad for a startup and we will enter 2013 on a wave of strong momentum. This is critically important as this business is so concentrated around the January 1 renewal season.

Looking ahead, we will continue to build in on our momentum and accelerate our sales growth in Group Life and DI, while maintaining our underwriting discipline. I’m feeling good about this initiative. Though we misjudged the expected sales growth path, the Group Life and DI build-out has clearly been successful and the team we have assembled is very strong. We will provide an update on our fourth quarter call, but I can say with confidence the expanding group life and DI, will prove to be a successful addition to our portfolio.

In the retirement division, while year-to-date sales of fixed indexed annuities are quite on track to achieve sort of 50 million sales target, we are up to a very good start for the fourth quarter, so we do expect to meet the $250 million goal for 2012. In deferred and fixed deferred annuities, we are working closely with our bank distribution partners where our relationships are as strong as ever.

The bank sales across the industry are suffering in this rate environment, we do expect a level of fixed annuity sales to continue as banks customers look for safe places to earn guaranteed yields. So a niche market is really a matter of remaining consistent in our presence and maintaining our longstanding distribution relationships.

We’ve had real good success in sales of fixed index annuities and I really believe this will become an anchor product for us. We are focusing on extending the growth trajectory for our edge flow product by getting it launched on the sales platforms of more bank and brokerage dealer partners. We added two important things in the third quarter and we have more in the works.

While our sales team has worked to educate the best advisers on the merits of True Va, our VA product is not gaining traction in the market and we do not expect to see a meaningful pick up in the fourth quarter. As we have said, we knew four wealth that we were not talking an easy route here. We purposely have added – we have avoided VA guaranteed living benefit risks. We continue to believe there are VA opportunities without taking these risks and we will continue to pursue these opportunities.

We built the VA platform for the long-term and we needed to establish our overall VA capability. Looking ahead, we’re now working on a commission-based VA, again no-living benefits, and as we predicted the gradual de-risking in the overall VA market is now affording this kind of opportunity.

In the Individual Life division, sales continue to be off the mark from initial productions and we do not expect to make the full-year to $25 million sales target. Our wholesalers are working hard to driver Classic UL through BGA partners, but we have not seen meaningful sales results yet.

We’ve changed our product structure as I’ll get to in a moment, but the sales impact won’t materialize until 2013. And we will not generate meaningful single-premium life sales given the dramatic adjustment we had to make to the product in light of the low interest rates.

Next steps for Individual Life, we remain committed to Classic UL and we expect it to be our main area of retail focus for 2013. Classic UL offers superior cash accumulation as well as a Lapse Protection Benefit rider. However, we overestimated the markets willingness to embrace a higher premium, higher cash value product line. We now realize this, and importantly, we dial down both the premium and cash value and just reintroduced Classic UL along these lines and early indications suggests that we are back on track now.

So in conclusion, while the third quarter was especially rough for life and annuity sales, I firmly believe that these new efforts will produce positive results right now in the fourth quarter. So I will tell you today that I expect third quarter 2012 to mark the low point for Individual Life and Retirement sales. This is an important turning point for our team and I really do feel we turn the corner.

Finally, before we take your questions, let me anticipate a topic that is likely to come up, and that’s with regard to capital management. Our three state in priorities remain in this order; first, organic growth; second, acquisitions that are aligned with our Grow & Diversify strategies; and third returning capital to shareholders.

As we develop our operating plans for 2013, we will again evaluate our capital management priorities including our debt capacity. We will share our work for 2013, including an update on capital management on our fourth quarter earnings call, which is in February 2013.

So again to conclude, our financials results for the third quarter were solid, we are pressing hard to deliver improved sales numbers in the fourth quarter. We are acting under a tremendous sense of urgency to execute against the best opportunities of the market. We are maintaining our price and discipline while keeping our core business going strong, and working to accelerate sales of the new products.

So thank you, and with that Brene, please open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Steven Schwartz with Raymond James. Please proceed.

Steven D. Schwartz – Raymond James & Associates

Hey good morning everybody. I’ve got – I think it’s three if I may, first on stop-loss and the group sales that were so strong in that area. I am wondering what the competitive environment looks like and whether PPACA is driving that by any chance?

Michael W. Fry

Good morning, Steve, and this is Michael Fry. Thank you for your question. We are continuing to see a pretty rational market with regard to our stop-loss business. We are pleased to have such a good year. One of the things that I believe are driving such a good production year for us is the strength of the organization and the tenure of my sales people. We are seeing a lot of the benefit brokers out there kind of narrowing the field with kind of a flight to quality, and I am proud that Symetra is picked as one of those players. And I think we’ve been a factor for that focus in the market place.

Our position on ACA is still neutral to slightly positive. We think we’re continuing to see some great new business opportunities and I think it’s very stable for us at this point.

Steven D. Schwartz – Raymond James & Associates

Okay, thank you Michael. I’ll just leave it for one more. Tom, maybe you can help me here. Did the Classic UL – did that always have a no lapse rider?

Thomas M. Marra

No.

Steven D. Schwartz – Raymond James & Associates

Okay.

Thomas M. Marra

First time out, it was all cash accumulation, which I think is a good place for marketers. There are certainly uses for that product, but as we got further into it, we realized that premium still is important. Competitors premiums are going up, so as you might expect, but as we may see adjustments, in July we came out with a product with premium, it still has pretty high cash. And we’ve done with this reintroduction is, it’s kind of dial both down and we think as a result, the first thing they look at is premium, and we are now in synch. In early – it just came out there last week, but we’re able to illustrate pretty quickly and activities up, so it probably won’t show a lot in the fourth quarter, but clearly in ’13 we expect sales to dramatically improved.

Steven D. Schwartz – Raymond James & Associates

Does the – adding the low lapse rider as you have, do you run into AG 38 issues?

Thomas M. Marra

Yes, its AG 38 governed. And that’s all taken into fact with the pricing.

Steven D. Schwartz – Raymond James & Associates

Okay.

Thomas M. Marra

It’s not – obviously, it's not as severe as something that's going to have no cash value because the cash value itself provides a little bit of a starting buffer, but it is AG 38 governed.

Steven D. Schwartz – Raymond James & Associates

Okay. Thank you, guys.

Operator

Your next question comes from the line of Humphrey Lee, with UBS. Please proceed.

Humphrey A. Lee – UBS Securities LLC

Good morning, everybody.

Thomas M. Marra

Good morning.

Margaret A. Meister

Good morning.

Humphrey A. Lee – UBS Securities LLC

Just a question on the affordable housing credit investments, so what is size of the asset cost right now and how much would it continue to dampen the other segments in the investment income, which is negative for the quarter? And then you mentioned for 2012, the tax rate would be low-to-mid 20s, but how should we think about it kind of going forward?

Margaret A. Meister

Hi, Humphrey. This is Margaret. Thanks for the question. That portfolio is actually somewhat small, it's just about $100 million overall. We will continue to look for opportunities to add to the affordable housing credit portfolio. Because when you really look at it, it still offers an attractive return. It does impact the investment income line in our other, but it is the driver of why we are seeing, what we're seeing with the effect of tax rate in the company.

So going out into 2013, this is our best year for the amount of affordable housing, things based on the portfolio we have in place. So I expect that next year, we will see slight uptick, but we'll still be in the 20s, let's just say more close to the mid-20s in 2013. But again, we will be looking for opportunities as they percent themselves.

Humphrey A. Lee – UBS Securities LLC

Okay, got it. And then in terms of income annuities, the net investment income fell sequentially and then also the base yield also declined other than what I expected. Any color on the drop because it doesn’t seem like prepayment had any impact on the quarter-over-quarter comparison? And then also how much did the above income from funding service activities got the earnings for the quarter?

Margaret A. Meister

I’ll comment on the investment income. I mean it did drop up sequentially. We’ve had between the periods different levels of some prepayments type of items. This quarter income annuities had very little of that and so that’s one of the reasons why you would see the investment income down in that particular segment compared to like second quarter and first quarter, as well as just the overall book is going down modestly. So you’re seeing a little bit of shrinkage tracking along with that.

As far as the funding services….

Daniel R. Guilbert

Good morning Humphrey, this is Dan Guilbert. The funding services impact versus 2011 for this quarter was about $4 million in terms of relative decline.

Humphrey A. Lee – UBS Securities LLC

All right. And what is the main reason for that decline?

Daniel R. Guilbert

Yeah, there is several issues, when you look at the structure settlements blocks there is a whole lot of maturing in the blocks as we move forward over time just less overall activity. So it’s I think like any factor mortality or otherwise you are going to see some quarter-over-quarter volatility as the block will start, but in general I would say just as the block gets older and stabilized, as you might see some patterns of decline there.

Humphrey A. Lee – UBS Securities LLC

Okay. Got it. Thanks.

Operator

Your next question comes from the line of Ryan Krueger with Dowling. Please proceed.

Ryan Krueger – Dowling & Partners

Hi, good morning.

Margaret A. Meister

Good morning.

Thomas M. Marra

Good morning.

Ryan Krueger – Dowling & Partners

I had a follow up on just the investment income in the other segment. It had been running in kind of a $5 million to $6 million range for a while and then the last few quarter, it’s been $2.5 million and negative $0.8 million. I know the tax advantage investments have had an impact. How should we be thinking about the run rate in that line going forward?

Margaret A. Meister

Well, the negative point is definitely low because we did have in this particular quarter with these accordable housing credits. We have to review your amortization schedule before we had an up tick in the amount of amortization in the third quarter. So a more normalized number would be more or like what you saw in the second quarter. But you can like – just like we experienced in this quarter, it could bounce around just based on what we’re seeing in those amortization schedule.

Ryan Krueger – Dowling & Partners

Okay. And then how do you feel about cash flow testing heading into the fourth quarter and given the low industry environment.

Margaret A. Meister

Sure, well as you know, we took a little bit of medicine on reflecting our view of the world of interest rates last year, just because we did have a belief that we were going to be in an environment where low interest rates would be around. We are very early on in that analysis, so I don’t have definitive statement. But I do believe that we took a very substantial stuff last year. Also our opinion would be, if you look at where the rates were during the third quarter, which were record lows on absolute levels for a treasury as well frankly with corporate levels. That would be more than a moderately conservative level of interest rates.

Ryan Krueger – Dowling & Partners

Okay, and lastly on debt capacity, I know you want to give some more color next quarter, but it is pretty low, it is about 16.5% of what your competitors are in the – it would be low 20% type range.

Thomas M. Marra

Yeah.

Ryan Krueger – Dowling & Partners

Do you have any thoughts on how much capacity you might have?

Thomas M. Marra

Well let me just sort of say, I’ll talk overall that as we get into capital management, that is a, the deck capacity is an area that certainly can be looked up because of this low as you point out. And just overall we will evaluate everything as we do both as a management team, but also with the board. And while we stay – obviously we are conservative here as I think you would want us to be, but we need to keep evaluating it and we will along with our board in terms of the amount of capacity we have, Margaret maybe you can give some color on that.

Margaret A. Meister

Well, sure, I mean, we realized that we are running substantially below what you see a lot of companies are running. And – we’re early in our internal discussions, but I don’t think that we would necessarily say we’re going to step up to equal those levels but clearly there is room for that. I mean, our starting point is what is our cost of debt versus what’s available on the market place and what can we do to improve that particular aspect and then would we put on a little bit more leverage.

Ryan Krueger – Dowling & Partners

Thank you.

Thomas M. Marra

Thanks Ryan.

Operator

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

John M. Nadel – Sterne, Agee & Leach, Inc.

Hey, good morning everybody. A quick question on stop-loss, just on medical stop-loss, I am wondering if you can give us a sense for both how pricing has been trending over the last few quarters and equally how lapse rates have trended the last couple of quarters. I was a bit surprised that the year-over-year premium growth wasn’t a little bit better.

Michael W. Fry

Good morning John, this is Michael. Thanks for your questions.

John M. Nadel – Sterne, Agee & Leach, Inc.

No mention.

Michael W. Fry

With regard to the pricing on this business, it’s really important that we achieve leveraged medical trends on our renewals and we been able to do that and meet our target through the year. So I feel really good about that, which will portends to tedding our profit targets going forward.

With regard to the lapse rate, actually our lapse rate has been slightly lower than what we predicted. Now that’s, offset a little bit by the block of business that we purchased last year in July from the AUL block of business. The lapse rate on that block actually was higher than what we had predicated, but again just like our own business, we manage the business to bottom line profits. So we are only going to keep business if we can get the price we need and so we did retain a little bit less than what we expected, but that business is still outperforming the deal model that we’re going to put together to support the price.

John M. Nadel – Sterne, Agee & Leach, Inc.

Can you just remind us what the original assumption was on retention and maybe give us an order of magnitude how much below that if you are?

Thomas M. Marra

Yeah, we expect it to retain about two-thirds of that block. We knew we were going to take some pricing action on that. And on an inception to-date basis, we’ve got about half of it.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay. All right. Thank you.

Thomas M. Marra

Again, John, I will tell you that it is performing loss ratio wise better than what we expected.

John M. Nadel – Sterne, Agee & Leach, Inc.

Does the fact that you’ve retained a little bit less, put maybe a little bit more pressure on the expense ratio though?

Thomas M. Marra

Not really, we actually were able to achieve the savings actually a little bit better than what we had expected on the deal that John.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay.

Thomas M. Marra

I mean, that’s included in the Grow & Diversify numbers that Margaret shared as well.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay. Great. And then Tom, I am really please to hear, it sounds like you maybe foreshadowing a little bit perhaps a potential change in the approach or at least the view point towards capital management, particularly given a tougher growth environment. Am I reading that right?

Thomas M. Marra

Well, we’re lucky. We’re going to look at it and we had expected reduce more organically and we have. So I am going to present that to the Board, I think our organic results are going to be better next year, I’m quite confident about that. But will it – how much capital will that use, we’re going to lay it all out and we’re going to take a fresh look at it.

John M. Nadel – Sterne, Agee & Leach, Inc.

Okay, all right. I am happy to hear that. And then, would you – would it mix, I am trying to work through this and maybe this is something we can discuss offline. Would it make sense to be an issue or debt, given your capital levels today as opposed to just being a buyer of your stock?

Margaret A. Meister

Certainly that’s part of the analysis as well, because obviously where that is today is quite attractive as an issue.

John M. Nadel – Sterne, Agee & Leach, Inc.

I guess that’s fair. Okay, all right. Okay, thank you very much.

Thomas M. Marra

Thanks John.

Operator

(Operator Instructions) Your next question comes from the line of Chris Giovanni, Goldman Sachs. Please proceed.

Christopher A. – Giovanni Goldman Sachs & Co.

Thanks good morning. Tom, when you provided the guidance last year, you gave a roadmap for sort of the long-term impact of the Grow & Diversify strategy, and I believe you estimated we’ll continue to see a drag on earnings in 2013. So curious just given how much sales are falling short of your expectations, are you considering pulling back on some of that spend until you see these products actually gain some momentum. And then is the expectation still that these initiatives from an earnings standpoint will be recovered by I think you said mid-2015?

Thomas M. Marra

Yeah. Okay, so it is a really good question, well, kind of all jump in on that. We will – we have that, we look at it frequently, we need to update it. My take is the overall spend will be tapered a little bit certainly, as we look at the group operation which is going to be a success, already showing signs of success, but lower than we had thought, but if we can just ramp expenses down a little bit, which means just a slower bill, I think will be in good shape there.

On the annuities, we think VAs are an important product, indexed annuities pretty much already shown success there, and will reshape that one. And then on the Life Line, I really feel like what we just did is with the reprising hits the market. I don’t think we’ll have to do a lot of it. If term does expand the product and maybe a little work we’ve done, we are doing in middle market like term and simplified issue programs that makes sense in that market. But I feel like we’ve invested the big dollars there. So we will refresh it all, I think what look for Dan to do is, just talk a little bit about how we’re viewing VAs because I think what we might do is kind of shift the emphasis from the fee-based over to this commission product that is building.

Daniel R. Guilbert

Good morning, Chris, this is Dan Guilbert. As Tom mentioned, I would say that our initial start of the fee based VA is slower than we’d like. We’ve gotten some good feedback, but there is to challenge to work in the fee based advisor market and get traction there. So we’re continuing to work hard there, but beyond that we have seen a lot success on our fixed index product, and so as Tom mentioned, we are likely to hit our $250 million target in that product alone. So that kind of momentum as we move into 2013, we really think that that factor really takes off and we will continue to look other products that they are on that same genre for 2013 as well. So it might be a reshaping of expenses and sort of a little change of the emphasis. And so we’re looking forward to 2013 from that perspective.

Christopher A. – Giovanni Goldman Sachs & Co.

Okay, and then, I guess you guys wouldn’t be the first that have tried different things in kind of the VA landscape. And seeing things a bit slow off the bat, so I guess if things kind of stay that way and you don’t gain traction, would you guys be more or likely just exit the VA space or do you think you’d kind of push the envelope a bit more and move into maybe a lesser rich living benefit feature?

Thomas M. Marra

Yeah, at this point, we’re still not going to plan an offer in living benefits. If we look at that market, as you know, it’s evolving very quickly, those players coming in, as well as leaving almost everyday. And so we’re not interested in that part of the market right now. However as I mentioned when you look at 2013, we actually think there is an opportunity to play in the registered annuity market, and we’re actually looking at building in our product for mid-2013, that will be a little close to the home in terms of our distribution really leveraging our bank and brokerage dealer partnerships. So we think you can actually compete in that space without living benefit, it will be a combination of what we’re already launched. It will be an extension to some extent what we had success and with our fixed index product and we think we have a good shot success in 2013.

Daniel R. Guilbert

This is a good assessment, and the only other thing I would add, this is to Chris, so I think it seems to me like the index annuities are going to go much more mainstream within more of an independent agent market and now we’ve been one of the catalyst to bring it to banks. But I think they’re going main stream. So you’re going to see the – I believe that has gone into the financial planner market which we’re doing now.

But as that will grown and then if those get back, it will get into the more of the wirehouse regional market. So I feel like just – that product is a real winner already, but I can see it, I can see – and it’s clearly an anchor product for us, but I can see it becoming our main stream product for the industry. Because VA is our – today they’re just not, they just don’t offer the value they used to and I think indexed annuities are starting to compete head-to-head value wise and are much more straightforward.

So I just – I see opportunity in VA, but I really think the indexed annuity will help. And then of course, we’re anchored by a real strong fixed annuity platform. So anything that’s old weren’t the way we grown them up, but I think they are going to turn out exactly in good shape and as markets respond more I think we need the versatility including our VA platform to be able respond.

Christopher A. – Giovanni Goldman Sachs & Co.

Okay. And then maybe just one quick follow-up for you or Margaret on capital, obviously, I appreciate the discussion around the leverage opportunity and all. And I think when we look at kind of the RBC ratio, it looks certainly elevated relative to your business model, but I think you’ve alluded to in the past maybe that being the wrong metric and maybe we should be thinking about more of the S&P model for evaluating excess capital. So just, by your estimate, how much kind of on balance sheet excess capital do you guys currently have and then how much incremental debt capacity would you be comfortable issuing?

Margaret A. Meister

Well, you are right. We do have a very healthy RBC ratio and it is the factor that we’re most keyed in on keep on, of course, is ratings and what the capital requirement are for the various ratings in particular S&P. As we’re working through S&P and understanding what their ratings analysis factors are, we are trying to get a hone in on in understanding of what the level of free capital we have in the company. We are very early on in assessing where we are and what we are willing to do from the leverage perspectives, so I’m not going to give any absolute figure there.

Thomas M. Marra

Okay.

Christopher A. – Giovanni Goldman Sachs & Co.

All right. Thank you.

Thomas M. Marra

Okay. I think that’s it for questions. We thank you very much. We will be back with you in February 13, we will go through our plans, give a lot more color on our business opportunities and how are attacking the markets and I’ll guarantee by the time we get together next there will be more change in this industry. So we need to stay flexible too there. And we’ll also give us our earnings guidance for ’13 at that point as well as, as we mentioned our assessment of capital management and the priorities thereof. So again thank you. Hope your earnings season is going well, and we will be back to you in February. Thanks.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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