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Protective Life Corporation (NYSE:PL)

Q3 2012 Earnings Call

November 7, 2012 10:00 AM ET

Executives

Eva Robertson - Vice President, Investor Relations

John Johns - Chairman, President and Chief Executive Officer

Richard Bielen - Vice Chairman and Chief Financial Officer

Carl Thigpen - Executive Vice President and Chief Investment Officer

Carolyn Johnson - Executive Vice President and Chief Operating Officer

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

Analysts

Sean Dargan - Macquarie

Chris Giovanni - Goldman Sachs

Joanne Smith - Scotia Capital

Jimmy Bhullar - JPMorgan

Mark Finkelstein - Evercore Partners

John Nadel - Sterne, Agee

Eric Berg - RBC Capital Markets

Tom Gallagher - Credit Suisse

Steven Schwartz - Raymond James Associates

Dan Berman - UBS

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2012 Protective Life Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to, Ms. Eva Robertson, Vice President, Investor Relations.

Eva Robertson

Good morning, everyone. Welcome to Protective Life Corporation's third quarter earnings call. Our call today is hosted by John Johns, our Chairman, President and CEO; as well as Rich Bielen, our Vice Chairman and CFO. And here in the room with us, we also have Carl Thigpen, our Executive Vice President and Chief Investment Officer; Carolyn Johnson, our Executive Vice President and Chief Operating 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 that information, we are using a slide presentation today with our discussion. The slide deck is being webcast from a link in the Investor Relations section of our website at protective.com and the file is available for download at that location.

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 or subsequent 10-Q for more information about these factors that may affect our 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 on our website.

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

John Johns

Thank you, Eva, and thanks everyone for joining our call this morning. Before we jump into discussion of the quarters, we would like to express our best wishes and concerns to all our friends up in the Northeast, who are now continuing to suffer some of the consequences of the superstorm Sandy, and the storm is heading up that way now, but please note that we're thinking about you and we hope everybody is getting to just fine.

We're pleased to report what we view as a very solid quarter in the third quarter. To look under the hood, the income seems to be running very well. At Protective right now, our fundamentals all seem very strong. On a year-to-date basis, our operating earnings are up 15% over last year. As you know, we track our sales and we'll do that against our internal financial plans. We're consistently running ahead of plan for the year.

Some of the highlights for the quarter are Life sales starting to pick up, as we expected they would. You will recall that we were sort of an early adopter and moved our pricing around in reaction to lower interest rates, a bit earlier than a lot of other companies in the industry, but that's all starting to play out now. And as expected, we had a nice quarter for Life sales and we think that will continue through the fourth quarter. The sales were up 21% sequentially and 12% on a year-over-year basis.

Annuity business continues to be very robust and strong. We have nice positive flows in the segment. Our account values are now at record levels, up 4% sequentially, 15% year-over-year. Our Acquisition block performed extremely well in the quarter, with the two recent acquisitions are performing just right on our plans maybe a bit ahead here in the yonder.

Stable Value continues to perform very well. We're experiencing very nice spreads there and actually seeing a bit of sales activity. Again, we're picking up a little bit of sales in the Stable Value line. One very pleasant surprise in the quarter was we had extremely strong investment income in the quarter. We don't think it will be quite robust in the fourth quarter, but we enjoyed it this quarter. And again, our investment income is holding quite well and very much in line with our expectations, notwithstanding the low interest rate environment.

And lastly, we're very excited about our capital position. Our capital generation is very, very strong, and Rich will talk about that in more detail, Rich Bielen, our CFO, but it's really a bright spot for us right now. As a consequence, we have continued our share repurchase program, we continue to pay a nice dividend, and again our expectation is it will be able to continue to do that out in the future.

So again, the whole focus around here is only plan. We expect to have a good strong close for the quarter, and I'll come back and say a bit more about that at the end of our presentation.

I'll now turn it over to our Vice Chairman and Chief Financial Officer, Rich Bielen.

Richard Bielen

Thank you, Johnny, and good morning everyone. Operating earnings were $0.76 for the quarter. Net earnings were $0.73. We've identified three items that we thought were somewhat unusual versus our plan this quarter.

The first is we saw $0.11 of extraordinary investment income, approximately half of that related to calling of the hybrid securities. We also had some prepayment fees and some participating income that came through. The majority of that investment income is reflected in the corporate and other segment.

We also, as you may recall issued some new notes during the third quarter and called some older subordinated securities as a result of those calls. We rolled of $0.03 of deferred issuance cost, and then we also during the quarter had unfavorable unlocking of approximately $0.20 primarily in the Annuity line, and I'll speak to that as I go through Annuity earnings.

On year-to-date basis, we've returned 51% of our earnings to shareholders through both share repurchase and dividends. As we look at the quarter, operating earnings of $0.76 compared to $0.74 a year ago, we did have $0.03 of investment loses during the quarter in comparison to $0.22 of investment gains in the prior quarter, prior year. And then net income for the quarter was $0.73 versus $0.96 a year ago.

A breakdown of net realized investment gains and losses during the quarter, the net realized gain on our normal portfolio transactions was a positive $0.18 during the quarter. We also had $0.03 of gains related to the Modco that we have on our balance sheet related to the Chase transaction.

We did have $0.07 of impairments during the quarter that was primarily related to the non-agency residential mortgage-backed securities. On a quarterly basis, we update the prepayment expectations and loss severities on those securities. And so the majority was related to that.

I will also point to the supplement. In the supplement you'll know that our residential mortgage-backs, our market value and our book values were approximately equal on those securities. The derivatives related to the VA contracts are a minus $0.13 during the quarter. The majority of that was all related to the timing of credit spreads. Our hedge program related to VA actually performed very, very well and in line with our expectations, and the $0.13 related to the compression of credit spreads.

In addition to that, we had $0.04 of losses related to our commercial mortgage portfolio. The delinquency rate on the commercial mortgage portfolio was one-half of 1% at the end of the third quarter.

Moving on to our reconciliation of share-owners equity. At the end of the quarter, we had a record level of share-owner's equity of $57.70. If you exclude AOCI, we had book value of $36. The unrealized gain on the portfolio at the end of the quarter was approximately $3.1 billion. And I will also point you to the gross unrealized losses of $173 million. That is a post-financial crises low with respect to any unrealized loses on the books.

Moving on now, to the divisions, and starting with Life Marketing. We were reporting $28.7 million of earnings this quarter versus $12.8 million a year ago. Our sales were $31 million, up sequentially from $26 million in the second quarter and up from $28 million a year ago.

Term mortality this quarter was 83% of expected versus 91% a year ago. And then we did have unfavorable perspective unlocking of $5.5 million during the quarter, approximately half of that related to the lower rate environment, the other related to other actuarial assumptions.

Moving on now to the Annuity segment. The Annuity segment reports $9.4 million of earnings versus $20.2 million a year ago. We did have unfavorable perspective unlocking of $24.4 million during the quarter and are outlining for you what are the components of that number.

First, as we look, we identified a number of older vintage VA account values relating back to the early 1990s where the account value is less than the death benefits, so they are in-the-money. As we examine those, we've seen that the lapses on those policies has gone down, and as a result we reduced our lapse assumption and due to the in-the-money benefit, we put up a $10 million death benefit reserve to reflect those lower lapses.

The second item included in here is a $13 million item related to our expectation of future equity returns. We use a 10-year average for equity returns in our methodology. We review that on an annual basis. In looking at an annual basis, we look back three years and then forward seven years. And as you recall, the period of late of '08 and early '09 was a very poor event for the equity markets.

As we now turn the calendar, we have dropped those poor market returns, and as a result we are now projecting lower equity market returns in our future expectations. The result of turning the calendar is a $30 million impact to our unlocking during the quarter. And the other million dollars relates to lower spreads in our fixed annuity business and that was just we had very good spreads during the quarter, but as we project reinvestments we saw a slight decline.

Our account values did increased to $16.8 million versus $14 million a year ago, and we saw our sales increase from $860 million to $930 million during the quarter. During the quarter, we did implement some changes to our VA policies with respect to some features, and we saw an increase in sales in anticipation of those changes. We expect to make additional changes here in the month of December, and our plans are to bring the variable sales to a run rate of approximately $2 billion in calendar year 2013.

Moving on now, to the Acquisition segment, Acquisition earnings of $46.2 million are a record level, and are up from $43.6 million in the second quarter and $44 million in the third quarter of 2011. We did have some favorable perspective unlocking $4.5 million that related to lower lapses in our Chase business, so that we're seeing more better profits in the future.

Moving on now, to the Stable Value Products division, earnings for Stable Value Products is $13.1 million versus $14.2 million a year ago. We did have adjusted spreads of 200 basis points, which is again at a record level. We did see a large maturing contract at the very end of September.

So you can see that our account balance ended the third quarter at $2.3 million, but we have seen a fair amount of sales activity here early in the fourth quarter. And we expect our ending account balances here to be $2.4 billion and we also expect spreads to be in excess of 200 basis points for the fourth quarter.

Now moving to the Asset Protection division, our earnings for the quarter were $4.2 million versus $6.2 million a year ago. Our service contracts sale, which is the core product, improved 12% over the third quarter of 2011 consistent with U.S. auto sales. We did see in the quarter some higher credit in service contract claims.

On the service contract side, the third quarter is typically the peak summer driving season, and we saw in the month of August, an elevated level of claims as a result of that seasonality. And then on the credit side, as you may recall, we settled a lawsuit earlier this year. What we've now seen is that, we've seen an increased amount of claims related to the resolution of that lawsuit that caused us to have a loss in the credit division this quarter of $1 million.

Now highlighting other third quarter items, our estimated RBC at the end of the third quarter exceeds 460%. We successfully refinanced our subordinated debentures. We are ahead of our plan for the first three quarters of 2012. We did in the third quarter reduce our holding company debt by $85 million, and our debt-to-capital ratio is now 29%.

And then subsequent to the third quarter, we closed our Golden Gate Five securitization. That involved our AXXX business that was originated from 2005 through 2010. We believe that that will improve our RBC ratio at yearend by approximately 30 RBC to 40 RBC points.

I'll also like to point out a couple of other things with respect to our capital management and the business. As we forecast this year, we are expecting that we will be able to report record earnings for the year. I think as we've gone through the divisions, we've had growth in all of our organic business segments with respect to our sales this quarter.

Over the last six quarters, we've consistently repurchased shares at approximately $25 million a quarter. In the last three years, we've increased our dividend each and every year, and during this year we've reduced our debt-to-capital from 31% to 29%. So as we look at our business, we are investing in our organic business, we're prepared for acquisitions, and that we are also managing our capital appropriately as an entire organization.

And with that, I will turn it back to Johnny for some final comments.

John Johns

Thanks Rich, and my comments are brief. Again, it was a good quarter. We're very focused on execution in the fourth quarter. Our expectation will be another solid quarter. Our goal is to finish the year this year with a record level of operating earnings, and if we are successful with our plans for the fourth quarter, we will certainly achieve that.

Again, as Rich indicated, we feel very good about our capital generation. That's especially well ahead of our expectations and just growing stronger during the year. And finally, I'll say that we are looking forward to our Annual Investor's Conference. It will be on December 4, in New York, at Intercontinental Barclay. There is information about it in our press release or you can call, Eva Robertson, for more information, if you would like.

And I'll say again, our plan there is to do what we've done over the last two or three years, just to kind of give you a high level overview of the business, I will talk a little bit about our investment portfolio. Although, as you can gather from our report this morning does not have much to really talk about there at the present time.

And lastly, we will give you a detailed financial plan for 2013. We will give you what our financial projection models show. We might be able to do in 2014 and 2015, in terms of growth in earnings and capital and that sort of thing. And we'll also update you on our outlook in terms of the impact of the interest rate environment on our company.

And our expectation is that report will be that not much has changed really since last year. We've now sort of incorporated the current interest rate environment, and our product pricing, all of our assumptions and so on, and we will show you a little bit in more detail, where we are in terms of how we're matched up with respect to cash flows out and into the future.

So with that, we will conclude our presentation, and we'll open this call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sean Dargan from Macquarie.

Sean Dargan - Macquarie

I have a question about the mechanics of the unlock in the variable annuity book. So if the negative market experience from 2008 has rolled-off, why are we taking a perspective unlock in your view of future equity market performance?

Richard Bielen

Based on that 10-year averaging, we would have expected going forward in equity markets with averaging low-double digits, including that core market period of 2008 and 2009. Now, that that has rolled off, we're now projecting that equity markets will be modestly below 8% during the next seven years. So as a result, we're reducing our expected fee income on the business over the next seven years and that resulted in the $13 million unlock.

Sean Dargan - Macquarie

Given, I guess what's an implied outlook for lower expected future profitability in that product line, why are you already at plan year-to-date and maybe why shouldn't the plan call for lower sales next year?

Richard Bielen

Let me answer the second question, I'm not sure exactly of first question. But with respect to the second question is our original plan for 2012 was to have approximately $2 billion of variable annuity sales. We believe that's a good core run rate for us. As you know, many competitors have been changing features on their product. We have simultaneously been changing them, and we feel very comfortable with that kind of control growth level for the product.

With respect to the earnings in the line, we have seen during the year that equity markets perform better, but this unlocking was only done on an annual basis. So we did see in the third quarter, better our fee income from VA. We actually saw a lower death benefits than expected in the quarter. So we've reflected, we've seen in the quarterly numbers, the better equity market performance, this related to our future assumption only on equity market returns.

Operator

Your next question comes from the line of Chris Giovanni.

Chris Giovanni - Goldman Sachs

I guess the first question is around Life sales, and I think many have gotten comfortable with certainly the life sales shrinking, taking that incremental capital and buying back stock. So I guess with Life sales now, picking up here, can you talk a little bit about kind of the targeted sales pace here within Life Marketing? And then does that have any implications on kind of the run rate of capital generation and capital deployment you've been doing?

Richard Bielen

Chris, we actually on a year-to-date basis are below our original plan for Life sales this year. We expected $137 million of sales. We're going to come in a little shy of that for 2012. We have factored in sales for next year, which we will outline at the Investor Conference. But I don't see our organic plans impacting any of our capital management on a going-forward basis with the level we expect.

Chris Giovanni - Goldman Sachs

And the sales mix will continue to be what we've seen recently in terms of the focus on UL?

Richard Bielen

That is correct.

Chris Giovanni - Goldman Sachs

And then, just switching over to VA average I think. The product feature changes you made in August, I think you took the WB rider rate up 20 bips or so, you took the withdrawal rate down a 100, and you alluded to some changes in December as well. What are those additional kind of feature changes you expect to make?

Richard Bielen

Chris, we've not announced all of those to the distribution, but we have had some filings out there. So people are aware that they expect some changes to come. But at this point, we haven't finalized all of those announcements to distribution in customer, so you'll have to wait on that.

Chris Giovanni - Goldman Sachs

And then lastly, just on the lapse rate change for the early 90 vintage VA. Can you talk about what the assumptions were, maybe what you changed them to? And then that book, how big is the percentage of in-force? And then lastly just kind of how do those lapse assumptions compares to the newer vintage VA with living benefit products.

Richard Bielen

Chris, we had lapse assumptions that were probably in the high single-digits, and on those in-the-money policies, we know our policyholders have recognized that there is value in those benefits. So we drop them to almost zero, but I don't have that exact number in front of us.

We also, in this process went through all of our assumptions including on our current product and made changes with respect to any in-the-moneyness and utilization. And that's all been based through these current numbers. And for the most in-the-money policies, Chris, that we reflect the $10 million death benefit, we've assumed a zero lapse on those at this point.

Chris Giovanni - Goldman Sachs

And then lastly, if I can just speak, what's the difference in lapse assumption between a policy that is in-the-money and out of the-money?

Richard Bielen

I don't have that available in front of us at this point. I do think that number moves through time, age and the level of in-the-moneyness.

John Johns

What we try to do is update all of our assumptions based on our own experience and also information provided to us by consultants that have broader knowledge of the industry the, persistency and utilization and that' sort of thing. But we're trying to keep very current with those assumptions. So we don't get behind the curve, if you will and we've done that and that's what reflected in this quarter, in our unlocking analysis.

Operator

And your next question comes from the line of Joanne Smith from Scotia Capital.

Joanne Smith - Scotia Capital

I might have missed this because I had to step out for a second, but did you talk about where the policies associated with the VA and the reserve increase for that 90s percentage. Did you talk about where they are relative to the overall bulk of business in terms of size? Second question is just related to the service contract claim. I'm just wondering, if you could talk a little bit about what you saw subsequent to August when they spiked and if we can safely assume that this was just an average deviation that should not be repeated.

Richard Bielen

With respect to the first question, there are older vintage policies, when sales were relatively low. So I am confident there are less than 10% of reserves, but I don't have that specific number in front of us.

With respect to Joanne, your question on service contract claims. We did see a reduction in the level of claims in the month of September. We also saw in the month of October, and they're probably, slightly higher than what we've traditionally seen. They're back in, what I would say, is a more normalized level. And our plan did not reflect seasonality. We just assumed a flat movement through time on claims.

Joanne Smith - Scotia Capital

And just one last question, that was on the other assumption changes with respect to the Life Marketing book, can you just give us a little bit more detail on that, was that LIFO, was it interest rates, what was that related to?

Richard Bielen

It's primarily related to the VUL and with the same equity averaging that occurred in the VA. We have the same assumption build into our VUL.

Operator

And your next question from the line of Jimmy Bhullar from JPMorgan.

Jimmy Bhullar - JPMorgan

I had a question first on your sales in the Asset Protection business. They've been slowing recently, especially for the GAP products. I just wanted to see what your expectation is for that? And then on margins in Asset Protection, you discussed the service contract claims, but you also I think had higher claims in the credit insurance business this quarter or generate the modest loss, what's your expectations for that? And then finally, on the deal environment, if you can just talk about what you're seeing out there and if there is something suitable when do you consider maybe suspending or reducing your buybacks to do a deal?

Richard Bielen

Jimmy, I will take the two on the Asset Protection division on the GAP side, we did see some increase competition there. And as a result, we got some of that business move away from us, and that is why you've seen a decline in those sales during the quarter from a year ago.

With respect to the credit insurance claims, I had mentioned in my comments that that relates to a lawsuit that we settled earlier in this year. The response way, we have seen as we settled that lawsuit with higher than our original expectation. So as we trued up the actual results from the settlement of that lawsuit, we have $1 million loss during the quarter. The balance of our claims in credit insurance, have been consistent with what we've seen in other parts of the business historically.

And then on the acquisitions, I will now let Johnny in.

John Johns

Jimmy, this is an active year, in terms of us being in bedrooms and looking at deals, I'm sure you're very familiar with a lot of activity that's out there. We are certainly primed and ready to do another substantial acquisition. If you put together the RBC numbers that Rich reported earlier in the call, you can back in that we have a lot of firepower right now to do acquisitions.

I'll also tell you that the way we're thinking now about acquisitions is that, we don't see kind of an either or choice between acquisitions and share repurchase at the level at which we're currently repurchasing. In fact, we think we have ample capital to do a transaction larger than the either one of the two we just did, continue our share repurchase at the current level, continue to invest in our retail businesses without any pullback there to extend to opportunities there, and even to reduce debt a little bit. So I mean we've got a lot of energy here to deploy.

Operator

And your question is from the line of Mark Finkelstein from Evercore Partners.

Mark Finkelstein - Evercore Partners

Maybe one follow-up on the M&A environment. I guess, obviously, you had the high profile deal, Hartford and one or two others, but there's also been based on my own understanding a whole bunch of stuff out there that maybe not as high profile. And I guess I'm curious about is, from what you see today is a level of activity less equal, maybe a little bit more like, how would you gauge the level of stuff that you're looking at now versus there, four months ago, even putting the Hartford deal to the side?

John Johns

Clearly, this summer was a very busy period. Things are not as active now as they were then. But, Mark, it's a little bit like seeing the weather today is it cooler, warmer, you'd expect. I mean it's a little hard question to answer, because it's hard to establish what the baseline is around to which you would make that comparison.

But we are seeing lots of stuff right now. And we're busy, we're looking at things. We've got some couple of active competitor channel agreements out there, right now. Well, I think about acquisitions and I think we're in a very enviable position here. It's like baseball with no call strikes. You just keep watching pitches, until you find the one that you like and you swing hard at it, and that's where we are.

Mark Finkelstein - Evercore Partners

One thing I noticed in the supplement, as you started obviously putting in in-force numbers, I think you started putting it in this quarter. And obviously, you've seen the growth and UL offset by declines in the traditional business, but the overall in-force numbers are trending down 3% year-over-year, whatever the number is. I guess I'm curious about, what is kind of the outlook on the in-force? And obviously the sales number is lower, but I'm also curious about lapse activity maybe in some of the 10-year term block written in the early 2000. How should we think about the in-force numbers going forward?

Richard Bielen

Our sales have come down from the mid 2000s, and so the higher in-force reflects that. As you know, historically, we've seen lapses roughly on average in the 6% range on our business, and that's both our organic business and the acquisitions business. At our current level of sales, we are now fully replacing that. But we think that will smooth-out from a profitability point of view, which is where we think the most important factor is.

We continue to project our earnings in those business and probably in our plan. So the base amount of the business by itself doesn't really worry us, it's really about how we manage the earnings going forward.

John Johns

Again, Mark, we'll show this to you and a lot of detail at the Investor's Conference. We'll model-out next year's really in Life Marketing our earnings. But in terms of kind of just directionally where we think that's going to go, I think you'll see a dip in what we report in that segment, because we have a little bit of experience associated with Golden Gate Five to absorb and also we're taking a lot of reserves out of that by virtue of freeing up of a XXX reserves to that securitization transaction. But then if you look out over the next couple of years and the kind of sale as well as we'll project, we start to see some growth in earnings in the Life Marketing segment.

Richard Bielen

It was up, because of that.

Mark Finkelstein - Evercore Partners

Just one quick final question, I know you've done the work on it. Anything on AG 38 and capital position at yearend in terms of the kind of the retrospective treatment of the compromised position of the NAC and everybody came up?

John Johns

Mark, we're pretty much done with modeling out the impact of the new AG 38 on our in-force block, and we do not expect that would up any more reserves as a result of being compliant with those new rules.

Operator

And your next question is from the line of John Nadel from Sterne, Agee.

John Nadel - Sterne, Agee

Couple of quick questions for you, Rich, maybe in particular thinking about the higher net investment income in the corporate segments or primarily anyway in the corporate segment, as you're looking out, how much of that can we sort of expect is going to be ongoing versus the $0.11 that you're identifying. Is all of that $0.11 essentially, we should expect that to come off?

Richard Bielen

John, if you recall our plan for the year, we expect extraordinary income of $15 million on an annual basis. So with $3 million to $4 million a quarter, this quarter that $0.11 was very high because of the called securities. At this point, we haven't identified any activity that would provide that extraordinary income in the fourth quarter, but I think that tone of $15 million annually, and maybe a little lumpy is very consistent. And we've actually exceeded that on a year-to-date basis.

John Nadel - Sterne, Agee

And then just, I guess, similarly thinking about the stable value segment and your commentary not only about this quarter, core adjusted spread of 200 basis points, but your expectation that 4Q is going to remain at or above that level, I guess, the spreads have remained much higher than expected for a lot longer than expected. How do we think about that spread going forward? I mean what's normal there?

Richard Bielen

We will at the investor conference show you the model and the plan for the next three years, but we are benefiting from losing higher rate contracts and we're little long in there. So that's the reason this has stayed up much longer than we would have otherwise expected.

John Nadel - Sterne, Agee

And then the last one is just this Rich, it's maybe a little bit more macro, but new money yields, I guess I'd be interested or curious in where you're investing today, new cash flows versus, let's say, even three or four months ago, the end of 2Q new cash flows because it certainly appears like they've fallen off a cliff. I wonder if that's sort of what you're seeing and how that might influence some pricing decisions moving forward?

Carl Thigpen

As far as new investment yields, in all our product pricing is reflecting the lower yield, as new money has come in we are able to invest based on the portfolio to get our adequate spreads. As far as our overall portfolio, our duration is well north of seven years. We're fully matched within just a few months, and so we don't have a lot of cash flows that are coming in that we're having to, scramble to put money out.

John Nadel - Sterne, Agee

So I guess the way to think about is pricing on new sales is fairly dynamic?

John Johns

Absolutely. We priced against our pricing metrics, but we have a model portfolio that we think we can really invest the money and what we're pricing into the products is based on new money yields against that pricing metrics. And so as far Carl indicated, we don't have a lot of mismatch on reinvestment. So that's why we fell fairly safe about the way interest rates are impacting us right now.

Operator

Our next question is from the line of Eric Berg from RBC Capital Markets.

Eric Berg - RBC Capital Markets

Two questions, first, it distracts me as inconsistent to add to that companies including Protective that are expressing such confidence in their strength of their risk management are pulling back as sharply as they are from the variable Annuity business. How do I reconcile that? If your feeling is good as you are about your ability to manage the business, why are you going to cut yourselves in a half next year?

John Johns

I think we feel very good about our ability to manage the risks associated with our current level of variable annuity in-force business, but one of the ways we think about risk management, we are a very balanced company. We want a company that has got a balance between equity-market volatility and interest-rate volatility and mortality volatility. We just don't want to load the boat too much in any one product line. We're trying to keep a very nice balanced profile with respect to how exogenous macro economic forces impact us.

And I'll also say that while in terms of the economic risk of that product, we think we've got our arms around that pretty nicely. There is still of certain amount of earnings volatility associated on a GAAP basis with that product. You see some of that in this quarter. And we think in terms of maximizing shareholder value, we just don't want too much of that. We think that investors on this call would place a higher evaluation on a company that has a nice spread of risk and a balance of risk and not too much volatility on reported numbers coming out of any one product line.

Eric Berg - RBC Capital Markets

My second and therefore final question relates to your Life Marketing business. I suddenly understand the point you raised just a moment ago that there are several items running through the P&L, whether it's reserve-related charges or manage related to your securitization, but my question is how should we keep score, what is the best measure at this point, given your product transition?

What is the best measure to keep score about the progress of the business? Is it the account values that you think we should be focusing on? Is it the in-force and if so which type of in-force, Traditional or Universal Life. What's the best measure of your progress?

Richard Bielen

I think you need to go back to the plan that we lay out at our investor conference. We've been very detailed about the earnings. We've laid out assumptions with respect to sales, mortality, interest rates in terms of our product pricing. And I really believe it's about earnings, it's not about the level of in-force or market share or level of sales. It is about how do the earnings get generated from the division and the products we sell.

Eric Berg - RBC Capital Markets

I here your answer, but isn't it the case, Rich, that overtime, I mean, if you're running a mortality business increasingly, trying to move away from under-priced guaranteed product, such as No-Lapse Guarantee product. I would think that the in-force you're including it here presumably, because you think it matters.

And I would think that that looking at the in-force and whether it's growing with time especially in the traditional area, is reflective of your strategy and reflective of your progress, because maybe not in one quarter, maybe not in two, but overtime that in-force has got to grow. I think if you going to run a traditional business in order to generate higher and higher earnings. Do you not agree?

Richard Bielen

I think the way to answer that, Eric, is that every product that is sold has the same level of profitability. So just looking at in force is not a true measure of the underlying earnings in the capital deployment. And I'll go back to some of the comments I made, we've really focused on deploying capital and improving returns. And that's why I said, the real measure, I believe, is how did the earnings emerged from the business we ride, not the level of in-force that we have.

John Johns

And not only has every product have its own level of profitability, it's on margin, if you will. But the pattern, that the profit emerge its pattern can vary between products. There was a point in time where some of our products designs created a lot of variability and now that's not the case. Our products now deliver smoother, more consistent levels of profit overtime, but that's another thing.

We have some in force blocks that are very profitable that are burning of. We have some that aren't very profitable. So it's just really hard to use that as a metric to reliably predict what's going to happen in the future. I will say when we show you our plan for next year, and our projections two years after that, that will be based on a very detailed, almost policy-by-policy calculation that we run through our systems.

So it's our best estimate. And what if sales were $50 million more, what if sales were sales were $50 million less, so we think zero end on the quarter, that we think is the earnings flow is going to come from the sales that we assumed in those models.

Operator

And your next question comes from the line of Tom Gallagher from Credit Suisse.

Tom Gallagher - Credit Suisse

Just wanted to come back to Life Marketing as well Rich, just I guess more of a technical question. When I look at the P&L, and I followed everything you said on the Annuity side in terms of the DAC adjustments and the prospective assumptions going forward.

On the Life side, though Life Marketing, in particular, I notice the benefit and some of the expenses went up a bunch. You had negative DAC amortization. And I saw you called that a little bit in terms of the one-timers and in the press release, but can you just talk about the puts and takes, what was sort of swinging things around there?

Steven Walker

I just wanted to explain that a little bit, as we said the net number was around $5.5 million benefit and settlement line was really impacted more by the update of our new money rate yield assumptions that we put into our models. And that affected the SOP reserve. So we saw an up tick in the benefit expense.

There was an offset, however to that due to us updating our crediting rate assumptions that we expect in the future on the UL policies and that had an impact of writing of DAC and recalls the credit that you see coming through the DAC amortization. So the net of those to is the net of the $5.5 million, roughly and that's how it flowed through our income statement.

John Johns

I think that's probably logical. I think we've adjusted our current view of new money rates, slower interest rates, same time we changed our view as to what we need to do with respect to crediting rate management. So the two, kind of worked together and should offset each other.

Tom Gallagher - Credit Suisse

So the NII impact hits the reserve. The crediting rate liability side hits the DAC?

John Johns

That's correct.

Tom Gallagher - Credit Suisse

A competitor of yours also head a fairly large positive offset through DAC when they updated mortality assumptions, because they been having, I guess, positive mortality relative to assume. And if I look back, you guys I think have actually outperformed. And if I sort of tracked it over several years on mortality, did you guys do any update on mortality and was there any impact this quarter?

Richard Bielen

We always look at our mortality assumptions as part of all of our assumptions, but we did not have any material change to mortality. We have had extremely good current mortality results, and of course, that is about 60 products and the assumptions on that are locked in.

Tom Gallagher - Credit Suisse

And then, Rich, just a question on your overall capital position, so just from following what you were saying, 460 RBC going to probably close, sort of, 500 at yearend, at least with the RBC lift from the Golden Gate Five deal, and you have debt-to-capital now of 29. How should we be thinking about excess capital now at a 500 RBC, but with somewhat high financial leverage?

Should we be thinking about excess in the same way that you've always looked at it, because obviously, you have some much larger cap peers who have 500 or so RBCs that are no longer thinking, that 500 implies much excess. So I guess, the question maybe if we just talk high level about how you're thinking about that?

Richard Bielen

Well, Tom, I think our standard that we believe rating agencies would be comfortable with continues to be our 400% type RBC level on a normalized basis. I think some of those larger players you're referring to have other elements that are influencing their decisions around capital.

And one of the reasons, I wanted to point out that we've been taking a very balanced approach to capital management with respect to dividends, share repurchase, and debt reduction all at the same time. And I think that we'd like to see opportunities on the acquisition front to deploy some of this. If we don't see that, we're continuing to run a very balanced approach as to how we might deploy that excess capital.

Richard Bielen

Just to reiterate, what I've said, a minute or two ago, that we think we're in a position now, we will be next year to do a very large acquisition, continue share repurchase, possibly reduce debt further, keep the dividend growing. So we'd like to be sitting where we are on capital.

Tom Gallagher - Credit Suisse

And so there is really no change guys to the 400% RBC, and anything or but above that this year as excess?

John Johns

Just be careful, I mean, we want to be very careful how we define excess. I don't think we could take or we should take RBC down to 400% for the one-time massive share repurchase, for example. That wouldn't be consistent with our thinking about how to deploy capital. I think we have more flexibility, when it comes to using that capital to buy an earning asset. Something is going to generate stat earnings in the future in the way we do them, quickly generate stat earnings in the future, so had to be careful, how you define excess capital.

Tom Gallagher - Credit Suisse

And then, guys, just one final one from me, and I realize this is not an easy question to answer, but at least from my perspective, it looks pretty clear that the biggest firms in the industry are going to have to hold more capital, potentially a lot more than they've held historically. And probably a lot more than 400% RBC, based on the way non-bank SIFI rules are going, is there a knock-on effect for you, if that comes to pass, does that going to mean that you all and others below them would also need to start raising the bar in terms of capital levels?

John Johns

It is a hard one to answer, and we are very closely monitoring the developments under Dodd Frank and sort of this evolution of enhanced capital standards for systemically important financial institutions, as well as insurance companies that have a thrift or bank within their holding company structure.

Based on the current, we understand the advance current view of what is a SIFI. We did not think we fall into that category. And we do not have a bank or thrift in our structure. So I think near-term our expectation is that we were not going to be subject to enhance federal over side of our cap structure or other aspects of our business.

But who knows where that will go in the future. It's impossible really to predict the trajectory of that. Again, as you know the feds view right now, is that they are obligated under Dodd Frank, essentially the Basel III methodology and capital standards to insurance companies who follow them one of those two, certainly the SIFI category, and probably in the bank or thrift category as well.

That does create lot of problems, because the two businesses models are so different between banks and insurance companies. As you know liabilities are different, everything is different. So that's problematic. But something we're monitoring carefully, but for at least position in the near-term, foreseeable future we're helpful that we won't fall within that.

Operator

And your next question is from the line of Steven Schwartz from Raymond James Associates.

Steven Schwartz - Raymond James Associates

Thumbs up for including the life insurance in force, that was very, very helpful, I appreciate that. A question on mortality, I got a bunch of follow-ups I guess. I have in my notes, Rich, a point on the 8E is equal to about $640,000 of earnings, is that still correct?

Richard Bielen

That's probably about right, with respect to the term mortality.

Steven Schwartz - Raymond James Associates

And then, this was not clear to me, there was a reference to negative mortality or at least a change from a year ago in this peer book, $8 million or something, was that absolute number for this year, was that a change? And if it was a change then what was the absolute number for this year?

Richard Bielen

Steve, I'm sorry, I forgot to include that in my prepared remarks. The mortality for those peers was actually a negative $2.8 million during the third quarter of this year. So the number mentioned in the press release is the change from a year ago. But on an absolute level, it was negative $2.8 million. And then, as one other follow-up to an earlier question about the in-the-money account values that we had the unlocking, the account values that impacted were $458 million on that question that we had earlier.

Steven Schwartz - Raymond James Associates

And then just a couple of more, how would you rate mortality in the acquisition book this quarter?

Richard Bielen

It was slightly better than planned on acquisition mortality. It was about $2 million better than planned.

Steven Schwartz - Raymond James Associates

And then one more the can, I honestly don't remember the details of your legal settlement earlier this year, and when we say credit, you're referring to GAP product, is that correct.

Richard Bielen

No. There is a credit insurance product that provides both death benefits and disability benefits. And what we seen is we've just seen an increase in the number of customers who actually file claims as we settle that lawsuit from a number of years ago.

Steven Schwartz - Raymond James Associates

I don't think you mentioned this, but the press release mentions higher loss ratios in the GAP product line. Now, if I remember correctly, this was the product that basically ensures that that the next that were to happen as soon as you roll off the dealer lot, that you could pay the loan back?

Richard Bielen

We had extraordinarily good performance on that a year ago. Because used-car prices were very high and new auto sales hadn't come through. We're seeing a slight deterioration, well in excess of pricing, but we are seeing deterioration from those levels of a year ago.

Operator

And your next question is from the line of Dan Berman from UBS.

Dan Berman - UBS

I just had a couple of quick follow-up questions on variable Annuities, with VA sales up by I think 13% quarter-over-quarter, in your remarks, I believe you mentioned some accelerated sales ahead of the product changes in August. Any sense of how much of this elevated VA sales were due to the firesale.

And then just secondly, are the upcoming December product changes you mentioned more of a reaction to the high current sales level and competitors pulling back, or is it more due to continued pressure on product returns given the difficult rate macro environment?

Carolyn Johnson

The sales have gone down since the August increased sales as a result of the changes there. And the changes we're making in December are really related to, if those changes we've seen in the marketplace does not have anything to do with reacting to pricing returns in the product, that has to do with us wanting to maintain this level of sales that Johnny spoke about earlier.

Dan Berman - UBS

Just curious is there any sense you can provide on kind of what you're current returns are on new VA sales and kind of how much of an incremental are re-boost and kind of December and maybe the August product changes well with that?

John Johns

We normally don't provide pricing information. We consider that competitively sensitive and proprietary, but I will say that if you accept the methodologies that are standard out there in the industry for pricing VA products, the returns are very robust right now in the product lines, the projected returns.

Operator

And your next question is from the line of Chris Giovanni from Goldman Sachs.

Chris Giovanni - Goldman Sachs

Just a follow-up Johnny, in terms of M&A, I mean you've been talking pretty optimistically about getting a larger size deal done. Can you just talk about the types of deals you're looking at, and have they changed from the past couple of deals you've been doing?

John Johns

Chris, we look at what's out there. And some of the deals are kind of consistent what we've seen in the past and some aren't. But our sweet spot is like seasoned policies that are fairly straightforward and simple. We really prefer mortality reserves. We will do annuities and some spread businesses, but our real sweet spot is to take a very complicated messy block of small life insurance policies and convert it over to our systems and services very well, and enhance the profitability of it. And as we had changed that would be, what we would still be keeping our eye on it and prefer to do, given an option to do so.

Chris Giovanni - Goldman Sachs

And then lastly, just with the variable annuity business now, representing I guess kind of low-double digits as a percentage of the earnings as a company. And John, you talked about kind of a balance of VA business, mortality business, spread business. Do you have a target for what comfort level in terms of the overall operations you guys are targeting the VA business for or are you just really managing to sales levels?

John Johns

We're actually reviewing that, as we speak. We think we're almost sort of the lower end of what we consider our prudent competitors, our rational competitors. But we really don't have a real definitive line in the sand on that right now. But that something we'll continue to think about. We do think this $2 billion of sales level next year was sort of in the right zone in our quarter.

Chris Giovanni - Goldman Sachs

And if it gets bigger, I mean is that going to force you to hold a higher RBC position, because I think that really is one of the primary drivers of what made it appears are pointing to from rating agency demands?

John Johns

I don't think so, not in the zone we're in now. I'm sorry to say, but I don't think so, we missed our expectation. I think, Chris, does that answer your questions?

Chris Giovanni - Goldman Sachs

That is.

John Johns

Thank you very much. I think we're well over the hour now. So we do appreciate everyone's interest in our company and joining us today. And if there are any details within the topics we've discussed, then we're always glad to provide more information through a supplemental conversation. So thanks a lot everyone. We appreciate. See you in New York at our Investor Conference.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.

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