Lincoln National Corp (LNC) 2001 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Jefferson-Pilot (Company: Jefferson-Pilot Corporation; Ticker: JP; URL: http://www.jpfinancial.com/) financial fourth quarter earnings release conference. At this time, all participants are in listen-only mode. Later, we will conduct question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. David Stonecipher. Mr. Stonecipher, you may begin your conference.

Thank you.

I'm here this morning with Dennis Glass, Ken Mlekush, Terry Stone and John . And we welcome you to our fourth quarter 2001 conference call.

As most of you know, since the last conference call in November we've had some management changes. Dennis Glass is now our Chief Operating Officer. And Terry Stone has become our new CFO in addition to her role as the head of the communications company. Ken Mlekush has been made Vice Chairman of the Board.

I'm going to turn this call over shortly to Dennis first, for an overview of the quarter in his new role. And then he'll be followed by Ken who will review the marketing efforts of individuals products and the life and investment product segments. Terry Stone will then discuss our financial results in some detail, as well as the Jefferson Pilot communication company's results.

And at that point, we'll open the floor to your questions. Please use the Q&A session for broad questions, that will be of interest to most participants on the call. And save your detailed questions for John who will be available to handle those questions later.

As usual, I need to remind you that we may make forward-looking statements in the call about future sales or other matters. And that obviously there are risks and uncertainties that would effect actual results compared to expectations. So we refer you to the risks and uncertainties referenced in the last paragraph of the earnings release, which is also available on the corporate Web site at JPFinancial.com.

And now I'd like to turn it over to Dennis for his overview.

Thank you, David. Before I start, I'd also like to remind you that we use the terms operating earnings and reportable segment results interchangeably. And these refer to earnings before realized investments gains and losses. We use the term net income to refer to earnings ex -- including realized gains or losses.

Operating earnings per share for the fourth quarter increased 11 percent, while net income per share was effected in the quarter by realized investment losses in our bond portfolio.

We recognize bond investment losses of $46 million after tax in the quarter, and realized stock gains of $18 million. So that we reported a net realized loss of $28 million. For the year, realized bond losses were $52 million. And stock gains were $96 million making net realized gains $44 million.

Although the fourth quarter and year bond losses were larger than normal, we are comfortable with the overall credit quality of our portfolio and it's ongoing earning power.

Moving on to our life business, we reported strong life insurance sales in the quarter, and year. Ken will have more to say about these positive marketing results, as well as good progress we're making in our premier partnering initiative.

Fourth quarter operating earnings in our individual product segment recovered after being hurt in the third quarter by life insurance claims arising from the seven -- September 11th event.

In our newly investment product business asset was good, asset growth was good for the quarter and year in our fixed annuity business, reflecting strong sales and lower surrender activity. Annuity investment product segment profits lagged this growth due several items which Terry will highlight.

Benefit partners had another terrific quarter, sales and revenue growth as well as expense and claim management were in line with our expectations for the year.

Sales of our core products group life, disability and dental, increased 13 percent for the quarter, and 25 percent of the year.

It was a difficult environment once again for Jefferson Pilot communication in terms of advertising revenues. Although we do continue to feel good about our competitive position and our specific markets and the ability to show progress with strengthening economy.

Finally, we took advantage of stock market weakness early in the fourth quarter to buy back our stock. We purchased 490,600 shares at an average price of $42.34, bringing our purchases for the year to over 4.4 million shares, at an average of $42.42 a share. A total investment of $188 million. That by the way is our second largest annual buy back program in the past 10 years.

Now let me turn the floor over to Ken, and then Terry to provide more detail on our sales and earnings results. Ken.

Good morning. As Dennis indicated, we are pleased to report a strong life and annuity sales performance for both the fourth quarter and year-to-date 2001. We'd like to start first with individual life results.

Fourth quarter life sales were at 67.1 million. This represents a significant 51.6 percent improvement over last year's fourth quarter. And a new all time quarterly record achievement. On a year-to-date basis we produced 194.4 million, again a record, year. And a 19.5 percent positive variance to last year. If you also include large case sales our year-to-date total is 205.7 million, 25 percent greater than 2000.

One of the key drivers behind the success was the introduction of a new fixed UL product portfolio towards the end of the first quarter. Year-to-date fixed UL sales alone increased 35 percent over 2000. And should place us among the 2001 industry sales leaders with this product line.

Two thousand one life sales were 62 percent non variable and 38 percent variable. That represents a shift form prior years where the mix was closer to 50-50. Year-to-date variable UL sales were at 72.9 million. That's 6.6 percent less than last year. And we believe this compares favorably with industry results. In fact, at the nine month stage, we had actually improved our industry market position from 15th to 12th on BUL sales.

Newly introduced term products in the first quarter resulted in over 7500 paid for applications. And term sales were up 24 percent over last year. Although, based on pay down your life's premium term sales represented only four percent of the total company sale.

It's important to note that we were able to achieve these year-to-date sales -- this year-to-date sales growth despite the fact that survivorship sales were down 21 percent driven by the uncertainty and ultimate passage surrounding new tax legislation.

As indicated last quarter, also diving our positive life sales results has been the acceptance in the marketplace of our premiere partnering strategy. We increase the number of premiere partners from our three core channels from 262 to 293. The total from all channels is 314 premiere partners. And these are all in the producer category.

In addition, we had 68 qualify as managers for a grand total of 382 premiere partners.

Secondly, we're bringing value added marketing support through our three target markets with training, marketing packages, and support.

A third indicator of a success of our premiere partnering strategy as indicated earlier has been the new product editions and the approval of those products in key states has served us well.

And finally, the strategy of providing a differentiating service and support platform for the premiere partner level producer has been well-received in the marketplace.

Switching to annuity sales, in a climate where we had 14 credited interest rate changes last year, 12 of which were downward to reflect the fast moving downward interest environment, we were able to achieve a record year in fixed annuity sales during 2001.

Total fourth quarter fixed annuity sales were 378.2 million versus 286.7 in 2000, a 31.9 percent favorable variance. On a year-to-date basis total fixed annuities were slightly under 1.4 billion, 16.7 percent greater than last year's record performance.

The financial institution channel recorded a 56.7 percent improvement over last year. And added meaningful new accounts during 2001.

Another benefit of the premiere partnering strategy is the fact that we continue to get about 60 percent of our fixed annuity sales from our various agency sources who also write life business with us. And the other 40 percent from financial institutions.

New products introduced during 2001 contributed greatly to the record annuity performance. The Pilot gold and premiere edge products, both MBA designs accounted for 42 percent of our year-to-date annuity sales. We are pleased to report that average fixed annuity fund balances for the quarter, were up 13.5 percent over last year, and year-to-date up 8.2 percent.

The fourth quarter fixed annuity surrenders were at 10.4 percent of the total fund balances, a decline from 18.7 percent for the fourth quarter 2000.

On a year-to-date basis surrenders were 12.7 percent of the total fund balances. As compared with 21.2 percent for 2000.

And finally, fund balances with five percent or more percent surrender charges including pay out annuities increased to 43 percent of the total fund balances at year end from 38 percent at the end of last year, all a positive sign.

And finally, our broker dealer, JPSC like others within the industry, our broker dealer faced the challenge of dealing with a difficult environment in 2001. Market performance continues to effect invest -- investing activity. However, sales based on gross dealer concessions are down only 12 percent for the year. We believe this result is much better than the general planning broker dealer market which seems to be in the 20 to 25 percent range.

Fourth quarter sales based on gross dealer concessions were 9.2 percent ahead of the third quarter.

And finally, 561 new registered reps were recruited in 2001. That's 14 percent ahead of the prior year and record results. Overall, however, it was a down sales year within JPSC but in total a relatively good resolve given the market conditions and the industry environment.

We'll now turn to Terry.

Good morning.

I'm going to talk first about some of the financial information behind what's all ready been said. And then I'll give a few remarks on the communications company's quarter and year. Operating earnings grew 11 percent to 82 cents for the fourth quarter of 2001, compared to 74 cents last year.

Year-to-date operating earnings per share were $3.06 in the current year, representing a seven percent increase over the $2.86 that we reported last year. These earnings reflect the year-to-date return on book equity 16 percent.

In individual products, operating earnings for the fourth quarter were 79 million which was a seven percent increase over the 73 million of the fourth quarter of 2000. Operating earnings for the quarter increased from the third quarter of 2001, which as you know was adversely effected by the September 11th event.

The increase in average UL policy holder fund balances for the quarter compared to the fourth quarter of 2000 was five percent. The average face amount of insurance for UL type contracts grew there percent from the fourth quarter of 2000.

Both fund balances and phased accelerated their growth in the fourth quarter demonstrating the good momentum that we have in this segment.

Expenses were higher in the fourth quarter of 2000 compared to -- 2001 as compared to 2000. Primarily because we took all of the unlocking in that last quarter of 2000.

Overall , this was a good for individual products when compared to the fourth quarter of 2000.

On a year-to-date basis, individual earnings of 294 million are up three percent over the prior year reflecting both the growth in average UL fund balances and average faced amounts of UL type contracts.

The decline in the market value of the variable universal light separate account assets, due to the weak equity market continue to mask the real growth in that line. Deposits in separate accounts showed healthy increases over withdrawals, but much of the increase was offset by market value declines in assets held in separate accounts for the year.

If we adjusted for the decrease in fair market value of those accounts net of dividends received, year-over-year separate account assets would have increased by 14 percent and total fund balances would have grown by five percent.

Our annuity and investment product segment operating results were essentially flat for the quarter and decreased two percent year-to-date compared to 2000.

Earnings related to the broker-dealer as Ken all ready outlined were off a million for the quarter on an after tax basis and four million for the year. This drop for the broker-dealer is directly related to lower equity and mutual fund sales.

Investments for -- on fixed annuities declined during the year. Approximately two-thirds of the 19 basis point decline for the year and the effects are spread is related to sales of our lower commission products that require a smaller investment spread to meet our return criteria.

The remaining third decline in spread, represents the kind of economic impression that occurs in declining interest rate environments, despite very active management as Ken all ready cited with crediting rates. The significant decrease in surrender rates led to a decline in surrender charge income. And it increased in deck and amortization.

Lower fixed annuities surrenders coupled with increased in fixed annuity sales lead to an increase in average fixed annuity fund balances of 13 percent for the quarter, over the similar quarter last year and eight percent year-to-year. We are very pleased with the increase in fund balances as a platform for growing earnings.

We'll turn for a minute to benefit partners. This segment continues to produce strong results with operating earnings of $12 million for the quarter, and $44 million for the year. Our lost ratio was down two percent to 73 percent in the recent quarter. Year-to-date the loss ratio is 72 percent, an improvement of one percent over 2000.

Effectively flat expenses to both the quarter and year-to-date, evidence continued to expense management in spite of significant increases in sales and benefits.

In summary, this business is performing well, and the business fundamentals are solid.

The corporate and other reportable segments which are net of dividends on capital securities were $5 million for the quarter compared to $1 million in the 2000 quarter. Significant changes in 2000 include a drop in interest expense due to a combination of lower market rates on our adjustable rate instruments and repayment of debt.

This segment also benefited in the quarter from the effective strategies we implemented to reduced federal income taxes on investment earnings, the resolution of tax issues for which we had previously established reserves.

The results of this segment will vary from quarter-to-quarter based upon a number of factors such as strategic initiative, corporate allocations and tax items.

Realized gains and losses net of income taxes are also reported in the corporate and other segments. Recent events including bankruptcies and the continues weak economy caused us to take some losses in the bond portfolio that exceeded the gains in the stock portfolio. These losses include both actual sales and write downs of bonds.

In the fourth quarter, we recognized losses of 46 million after tax in the bond portfolio. They were partly offset by gains from sales of equities netting to a loss of 28 million for the quarter.

I'm going to spend a couple of minutes now on communications. It was a challenging quarter for our company and for the industries in which we operate. For the quarter our net income was 9.9 million down 27 percent. Broadcast cash flow for the quarter totals 20.6 million which is down 24 percent.

Total revenues were down about nine percent, as our sports and radio properties suffered from the weak advertising environment. However, this was offset somewhat by a slight increase in our TV revenues. We're very pleased by out TV results.

We've made considerable progress in rebuilding our Charlotte TV station in spite of one of the worst add recessions ever and the loss of significant political advertising during the fourth quarter of last year. We were able to report essentially flat PD broadcast cash flow for the quarter.

Our sports results for the quarter were weak due to the difficult advertising climate during much of the last spring and summer selling season which is the prime selling season for our football products.

Our radio results were also disappointing. Competitors in several markets have slashed rates seeking increased share and putting downward pressure on ad rates.

Total expenses for the quarter increased 3.5 percent, due to the rebuilding of sales forces in two markets and cost associated with the edition last fall of a new format and an additional format in one of our radio markets, the Denver market.

For the year our revenues were down six-and-a-half percent. Broadcast cash flow was down 17-and-a-half percent. And net income was down 18.6 percent.

As you probably recall, the economic downturn for advertising started in the third quarter of 2000. That was about three-quarters before the rest of the economy began to feel the downturn. Throughout this time I have repeatedly stressed to our managers, our goal to increase share of market revenues and to control expenses. And I'm pleased with how we've done on those measures.

For the year, we maintained or increased revenue share, at each of our TV locations and at three of our five radio locations. Operating expenses were flat for the year. And total expenses which include sales related cost, grew by only 1.6 percent during the year in which we were able to rebuild sales forces in two markets, and start up the new format in Denver.

So in closing on communications, this kind of difficult advertising environment highlights the importance of operating in good markets, having strong positions and a strong management team in each market.

We're very fortunate we have the franchises that we do in our markets. And we operate in some of the best markets in the country.

So I feel we're well-positioned to take advantage of the economic recovery. And we're very optimistic about prospects as a turn occurs in the advertising growth.

Thank you, Terry.

I think in summary as you have heard, all in all we are very pleased with the results of our fourth quarter given the economic difficulties of the past year.

And we remain very optimistic about the initiatives that we're pursuing particularly in the core business and our premiere partnering strategy which is undergoing at this point in time a look back as to how well we have executed in the year. With the assistance of McKinsey we will be fine tuning that as we go into 2002 to improve the results even further.

We're confident about the underlying strengths of Jefferson Pilot including our asset quality as a competitive advantage as we move forward. So now we would like, however, to take your questions. , if you may now we'll take questions.

Thank you, Mr. Stonecipher. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

Our first question comes from David Lewis of Sun Trust. Your question please.

Good morning. Congratulations on a great quarter and a good year.

Thank you.

A couple of questions. In trying to dig into the annuity segment I know the fund balances were up 13-and-a-half percent in the quarter, up eight-and-a-half percent. And if you pull out the broker dealer pressures, it looks like in the quarter, the earnings would have been up five percent, for the year up three percent.

Do you think that in 2002 if we have a flat interest rate to possibly rising interest environment we will see something that reflects more of the average fund balance?

Obviously that's -- that is our intention. The broker-dealer as you know as a depressing factor in this quarter, and in this year. Our recovery in the securities markets overall will help on that factor. And as we talked in this kind of declining interest rate environment, although you're very active, you can have some economic compression in your interest spread.

So you know we assume over time that growth of earnings will relate closely to growth in fund balances.

And Terry, if I heard you correctly you said about a third of the spread compression came due to the declining interest rate environment?

Well yes. A third, I would call economics were a depression. Whereas the rest really was built into the product pricing on these lower spread products with lower commissions that had been very successful for us.

And on a net bottom line, the lower margin -- the lower spread products generate the same kind of return on equity, correct.

Correct, exactly.

OK. Next question on the benefit partner side, obviously it's been a great year for you and ever since you completed that acquisition. What's the outlook for 2002? It's going to be difficult to continue the same kind of improvements on the loss ratio and the expense ratio I would guess. Should we assume something more in the flat area? Or do you think you can even hold it down at the current levels for 2002 versus '01?

Are you talking in terms results or in terms of loss ratios?

Loss ratio and expense ratio.

I think we're operating with the kind of loss and expense ratios that we view as appropriate for the business. And have no reason to assume deterioration.

So do you think you could see further improvement on the expense ratio side?

David, this is Dennis. I think what we're saying is that we're comfortable with the aggregate loss ratios that we have this year. We think over time, when it comes to the technology platform that we have, we'll continue to see improvement in our expense ratio. We'll have to manage our loss ratios very carefully. But I think that we don't see next year any significant drift in these two ratios.

David, let me add one further thought. This completes the second year of the acquisition. And as you know from the past, most of our expense synergies and earnings recovery from an acquisition does occur in the first 18 months to 24 months.

So now we're looking more at a go forward situation. The business is growing very well. And we're very pleased with the growth rate exhibited by benefit partners. And so I think that is what I would look to in terms of the future expectation levels.

One final question, given that we've, you know industry wide, seen a shift to fixed life insurance sales for the variable products given the equity markets. Would you anticipate that that could put some pressure on your ROE as you look into '02 versus the 16 percent in '01?

Ask that question again, David.

The question is you know fixed products tend to have a lower ROE in general than the variable products. So the question is would you anticipate that you would see some pressure on your ROE in 2002 versus the 16 percent you reported for 2001?

No, I think we've been pretty consistent in this return on equity. And I think we're expecting that we're going to continue at these levels.

Great. Thanks very much.

Thank you. Our next question comes from Michell Giordano of J P Morgan. Your question please.

Good morning. I have a couple of questions.

First, I was wondering if you can address the 27 percent decline, sequential decline in fixed annuity sales. And tell us what your look for spreads is in the fixed annuity business.

And then secondly, could you tell us what your appetite is for acquisitions? What you've seen in terms of pricing? And how much excess capital you have for either acquisitions or future share repurchases.

On the first part of your question, Michell, this is Ken, if you'll go back and historically look at the pattern of our fixed annuity sales for whatever reason, third quarter has always been our best quarter. And fourth quarter has always had a decline.

So if you look at the quarter results relative to the fourth quarter of a year ago as we mentioned, it was up 31.9 percent. So on a sequential basis, the fourth quarter has traditionally been than the third quarter.

I guess on the spread question, we've had really a lot of success with these lower spread, lower commission products. We expect that to continue. If that continues the reported spread would decline but the returns would remain appropriate.

Dennis, would you comment on the acquisition ,excess capital?

We still have about six to $800 million in excess capital. And we generate about $200 million a year in free cash flow. So we're optimistic that we can continue to generate that and have sufficient excess capital for further acquisitions.

And can you just talk about the acquisition environment in terms of pricing and things you might have been looking at?

You know the pipeline continues to provide opportunities. They're fewer each year because there are properties that have been sold over the last several years. There's a little more on the pipeline because of the demutualization.

We characterize it as a very competitive market for acquisitions. Pricing varies from transaction to transaction depending on the strategic importance of the property that's on the market.

So we continue to be very active in looking for acquisitions. And I hope that in time we'll be able to do another one.

Thank you.

Thank you. Our next question comes form David Pincus of K R Capital Advisors. Your question please.

Yes, congratulations on the results. Could you talk about the changes you're looking at in the premiere partnering program? I mean what's been going well there and what has not? Maybe where -- areas where you could improve? Thank you.

David, it's premature for us to really give you anything definitive. I think we feel in general, and we're in the midst of some surveys with our field partners to flesh this out, but the feedback is very good from the field. And most all quarters in terms of our realignment around the premiere partnering strategy.

But we wanted to take a short time here, probably a month or two in the first quarter, to really examine the aspects and then to tweak it and fine tune it as we go forward, and that's what I was referencing earlier.

I'm sure by the time we get to the end of the first quarter, we'll have some things that we can share with you that come from that study. But in general, we're very pleased as you can tell from the sales momentum that Ken's referenced which has been building over the last three quarters, that we're on the right track. And that fine tuning is all that we really envision through this review.

I guess I was wondering if you're thinking about expanding it to more producers or on the other hand perhaps becoming more selective?

Well in terms of expanding -- the goal is to increase the number of premiere partners substantially form where we've been in the past. And Ken has shared those numbers. And we've exhibited a level of growth all ready. So that's just part of the core program to expand it as you call it.

OK. Thank you very much.

Thank you. Our next question comes from Andrew Kligerman of Bear Stearns. Your question, please.

Good morning. A couple of questions. First, in the individual life area, could you -- it wasn't clear to me exactly what portion of sales are represented by premiere partners, could you specify that?

And David, you had mentioned you wanted to see substantial growth in premiere partners, what would that mean, 10 to 20 percent growth in producers?

On the annuity front, following up on Michell's question, it looks like fixed annuity sales have been sequentially declining since the third quarter of last year. Could you talk about -- I'm sorry of 2000. Could you talk about where you expect that trend to go should it continue to sequentially decline?

And finally in benefit partners, sales have been phenomenal there. Do you think you can keep up with that 20 plus percent sales growth clip? And why?

On the first part, Andrew, this is Ken. Again, we gave you the numbers relative to the number of people who qualify as premiere partners.

Right.

So in terms of the percentage of the total sales produced by those individuals, I think it's right at 70 percent. I don't have that number right in front of me.

OK.

I can get you that number. Excuse me, closer to 50 percent. I'm sorry.

Oh, OK.

OK.

And then recruiting growth on that?

The recruiting growth in terms of number of recruits we -- we had a growth in recruits as far as the ABGA and the GA channels of around the low 20 percentile. And we have as I indicated before a 14 percent increase in our number of people who continue to register within the broker-dealer.

Another number that might be of interest to you is 148 of the 314 producers who are premiere partners were new partners for this year.

OK.

After on the -- on the question about sales, on our sequential analysis you'll see that fixed annuity premiums have not declined sequentially. Investment product sales which is what drives broker dealers gross dealer concession have gone down.

I see.

So but back to the point, I think we showed Ken, didn't you say year-over-year fixed annuity growth was up 10 percent?

Right.

OK.

What we see next year of course will be a function of the competitive market for fixed annuities in general. And as compared to other alternative investments, we continue to be optimistic that we've got a good platform.

OK. So the investment products is then reflective of the weakness in your broker dealer. That's why earnings are off?

That's correct.

OK. Got it.

Thank you. Our next question comes from Arthur Winston of Balis Capital. Your question please.

Great, great quarter. Great results. I just want to understand this and see if I've looked at it appropriately. In the course of 2001, you bought back stock, paid the dividend, paid the commissions on a growing book of business and actually paid down the debt at the same time. Is that right?

Walk me through that again, please?

We did do all of those things.

Yeah.

Yeah.

In other words, you paid the dividend, bought back stock, you grew the business and paid more commissions and simultaneously the debt was lower at the end of the year, if I'm interpreting this right.

That's correct.

OK. Thank you very much.

Thank you. Our next question comes from Sabra Purtill of ABN AMRO. Your question please.

Good morning. Just two questions real quick. One I guess is for Ken, and I was just wondering what sort of measurement statistics you had in terms of productivity of the premiere partnership agents particular over the course of the year?

Obviously part of the sales growth is driven by having more producers. But I'm just curious about the production per producer as well.

And then the second question and this may be a little you know ticky tacky but I was just curious it looked like the investment income numbers were higher in the individual life and the annuity businesses in lower and corporate. And I was just wondering if that was reflecting any reallocation of capital to those segments?

First of all in the answer to your first question, the average production per premiere partner did improve during the course of last year. And it's in the mid 200 range, 200,000 of paid and loss premium.

OK.

And just with respect, there hasn't been a change in the methodology for allocation of capital with respect to the two lines of business. So there is no methodological change in the numbers.

OK. So the reduction investment income at the corporate level in the fourth quarter relative to the third quarter was due to just a lower interest rate environment?

Well there's some of that. But I think we discussed the fact that in the third quarter, there were lots of one timers in the investment income line that really you know made that a high number, a very high number during that quarter. On a sequential basis the comparison is you know significant.

OK. So the fourth quarter would be a better normalized number.

It would.

OK. Thank you.

Thank you. Our next question comes from Ed Spehar of Merrill Lynch (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/). Your question please.

Thank you. Good morning. I was wondering if you could talk a little bit more about the spread compression issue. And specifically when we're talking about economic spread compression, how much of that relates to the new business that you wrote last year, versus just an overall tightening of spreads on the in force?

Well I think that we have a record of doing a very good job at managing the profitability of the in force. And we put a great deal of care and attention to that. So I think that you'll find that in our view, the difficulty on economic spread compression this year was related to the necessity for keeping up with the very quickly falling interest environment that we expressed -- experienced throughout most of the year.

So management of the in force is a very high priority here, and I think we do a pretty good job of it based on all of this historical information.

I guess the reason that I'm asking the question is that if I look at the -- if it's all related to the new business, and I look at the sales -- or the bulk of it is related to new business versus in force. And you look at the sales and you say take the average of what you did in '01 what you did in '02 it's like about a billion three of new business.

And you know 13 basis points, or I guess you can a third of the compression is related to the economic factors.

Right.

You know a third of the 19 basis points, right is six basis points.

Right.

But six basis points on a billion -- on a total book of seven billion is you know $21 million. Which would be the equivalent of like you know a pretty significant number of I guess in terms of spread on new business.

It's more like three million I think.

OK. Sorry. Faulty calculator.

In other words, that number is probably a lower effect on the year, than the broker-dealer decline. But you know it's one that we pay attention to.

So I mean does it look like -- I guess it looks like that. If it is three million then that looks like the spread compression is like 25 basis points on new business versus what you might have had last year.

Ed, the old book is rolling off each year as well and being reinvested. So you have the same dynamic occurring, there I believe.

Yeah, and I think let me try to answer your question from a higher level, the overall book of business is earning north of 12 percent on an ROE basis. And the new business that we're putting out depending on the year is a little south of that or at that level.

So I think overall the business is being managed to appropriate ROE's. And you always have the pressure on new sales of the competition. But we manage the book to our ROE's and I think over time, I should say -- I think, we will manage our ROE's to the appropriate level for this kind of business.

And sorry, just one final. Is there any sign of lessening competition in the fixed business?

I wish that were the case, but the answer to that is no.

How about any business, Ed?

Yeah, right. Thank you.

Thank you.

Thank you. Our next question comes from Al Capra of Putman Lovel, your question please.

Good morning. Most of my questions have been answered. I did have one last. Within the benefits partner segment, given your loss ratio, were there any fluctuations by a line of business, that is life, disability or dental that you can elaborate on?

Yeah, the numbers were pretty good across the board. There was some pressure at a point on the short term disability business. But there was repricing to respond to that. But generally the -- the results in each of the lines has been good.

And any meaningful changes in the competitive environment, fourth quarter versus the third?

It remains very competitive. But we continue to believe that the model that we have is unique. And we're hopeful to be able to compete not just on price, but on the overall value that we've provided these customers.

OK. That's helpful. Thank you.

Thank you. Our next question comes from Venessa Willson of Deutsche Bank. Your question please.

Thank you. Terry, you have mentioned there was a tax resolution in the quarter. Could you give us the dollar amount?

We don't break -- this is Dennis. I'm more familiar with that. The resolution was on some of our med situations. It's very difficult to break out what piece of that is reflected in the changing tact reserve because there's a lot of moving parts.

Would it have been more than two cents a share, Dennis?

I'd have to go back and check that. I don't think so.

OK. So when we look at the tax rate this quarter which seems about two to 300 basis points lower than what it's been historically, should we use that as a normalized tax rate going forward? Or is that temporarily depressed?

My guess is it's temporarily depressed.

OK. And on the investment yield in the quarter, you seem to have very favorable investment experience with investment income in the life segment growing ahead of reserves as had cited, as well as in the annuity business. Is there anything in the investment portfolio that you could cite in terms of what's driving the yield up in a period where a lot of companies are seeing yields going down?

I think the progression is good. There are as always some anomalies. There's some yield adjustments on mortgage back securities which was a favorable for the quarter, and some other pieces like that. But in general, we've just had pretty good solid yield performance.

So would you say this is a peak deal? And that you'll see declining from here?

Peak deals in the terms of the absolute bond portfolio?

In sort of where the portfolio is in the fourth quarter as we're thinking about trending forward into 2002.

No. I think that the bond yield is a function of new investments. And you'll see a declining bond yield as we put more business on at a net yield that's lower than the existing portfolio yield. How that plays out in profitability is a function of how well we manage particularly our spread businesses.

OK. Thank you, Dennis. Thanks, Terry.

, we have time for perhaps one or two more questions.

Thank you, sir. Our next question comes from Eric Berg of Lehman Brothers (Company: Lehman Brothers Holdings Inc.; Ticker: LEH ; URL: http://www.lehman.com/). Your question please.

Yes, thanks very much. I too have a question about this -- this growth in the fixed annuity business. A clear pattern is emerging here, not only yourselves but The Hartford Financial Services (Company: The Hartford Financial Services Group Inc.; Ticker: HIG; URL: http://www.thehartford.com/) Nationwide and Lincoln National (Company: Lincoln National Corporation; Ticker: LNC; URL: http://www.lfg.com/) have all reported healthy increases year-over-year and fixed annuities. Maybe you could take us through sort of the economics of the insurance company. You know obviously it would have to be a short discussion.

But in sort of short hand form, what is it about your economics, business conditions, you know conditions in the fixed income market that you face? Versus those faced by commercial banks that is producing this type of what seems to be industry wide surge in fixed annuity sales.

Yeah, Eric, we've always in past quarters, I think we've been pretty clear that the level of annuity sales is very closely tied to competitive alternative investment yields on the fixed side mostly. And those would be certificates of deposit.

I don't have the statistics in front of me, but I believe CD's are probably one year CD which seems to be the benchmark is down in the two to three percent range. And annuities in general are being credited at 490 on a base rate in that range. That spread is historically you know a very wide amount. So I think that's what is helping fixed annuity sales.

A little bit less of an impact, but clearly an impact is that variable annuities and variable investment products in general haven't performed very well. And so there's a little flight out of equity type products and fixed type products.

Now in terms of -- but in terms of what's supporting that higher crediting rate than that offered on bank CD's, is it -- is the conventional wisdom that your investment policy is different from that which is done with the proceeds of CD's, is that conventional wisdom right?

Eric, I think it's more that annuity investors in general invest further out on the yield curve than banks do because of the surrender charge protection in the product. And so it's a play between -- it's a play on the yield curve in some respect, again from a competitive perspective.

Thank you.

Thank you. Our last question is a follow up question from David Lewis, your question please.

Thanks. Just to be clear, Dennis, you talked about the company now having six to $800 million of excess capital. And you generate 200 million of free cash flow a year. You did spend the bulk of that 188 million on repurchases last year.

Yes.

And maybe the numbers you gave us a year ago were just overly conservative. But if I recall that the year ago comment was it was closer to two to 400 million excess capital. Has anything changed? Or was that just maybe an overly conservative assumption at that point?

I think it was probably conservative at the time, David. We -- when we quote this number, often times we have a cushion in it. And this second number that I've just mentioned is our current thinking.

OK. So make sure nothing changed. Last final, thing, interest expense for 2002, you did bring down the debt at year end. Obviously interest rates continuing to help.

Can you give us what maybe the aggregate rate is or any guidance on what you think the interest expense might this year if you hold the debt level steady?

That gets us into the arena of predicting market interest rate movements. And I suspect your firms are as good as that -- at that as we are.

But what is the aggregate right, right now so we can trend off of that?

OK. Do we have that handy? Yeah, just a second we'll have that.

All right. Maybe in the meantime, Ken could make some -- somebody could make some comments on the life insurance sales. Obviously, since the September 11th, the industry has seen fixed sales continue to rise. And I assume that's benefiting yourselves. Do you think that will continue to be very favorable throughout 2002?

Well again, you're asking us to predict, David. But obviously our fourth quarter speaks for itself. We had a very strong fourth quarter. As to how much of that is related to September 11th , I really don't think anyone knows the right answer to that.

I read a recent article that indicated very little of it had to do with that .

Some agents have told me -- tell me their producers are saying the same thing. That following September 11th that it is easier to get in front of people than it would have been last summer.

Yeah, I think that's accurate.

Just to conclude the session with the answer to your question, in the fourth quarter our average cost was 3.9 percent. And for the year it was 4.96 percent.

Great. Thanks very much.

OK.

Thank you. Thank all of you for joining us today.

Ladies and gentlemen, thank you for participation in today's conference. This concludes the program. You may now disconnect. Good day.