Lincoln National Corp (LNC) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter earnings conference call for Lincoln Financial Group, all lines are in a listen-only mode. Later we will announce the opportunity for questions and instructions will be given at that time. Should you need assistance during the call, please press star 0 and someone will help you.

This call is being recorded, and will be available for replay beginning today through Tuesday, February 18, 2003. The replay can be accessed by dialing 1-888-203-1112. Again, that is 888-203-1112 and entering the access code of 563521. That is 563521. At this time, I would like to turn the conference over to the Vice President of Investor Relations of Lincoln Financial Group, Priscilla Brown. Go ahead now, please.

Thank you. Good morning and welcome to Lincoln's Q4 earnings call for investors and analysts. You have heard the Safety Harbor cautions in queue so I will not repeat them. We appreciate your participation today and later this week, I invite you to visit Lincoln's recently revised website LFG.com where an updated equity market guidance spread sheet, recent press releases, a statical summary and other pertinent information will be posted.

Also, in March, our website will contain the company's 10-Q filed with the S.E.C. and mailed to investors. You will note that we are packaging the financial disclosures and President's letter in this year's 10-K and eliminating the photography and segment overview that made up the annual report in past years. We remain committed to providing clear and timely communications to shareholders. LFG.com will be our preferred vehicle for dissemination of such information as opposed to hard copy materials. Now, I would like to turn the call over to Jon Boscia, Lincoln's Chairman, CEO, and Richard Vaughan, Lincoln's Chief Financial Officer. Their comments will be followed by a question-and-answer session. John?

Thank you, Priscilla. Good morning and thanks to all of you for joining us. Despite troubled capital markets, our fundamentals remain strong in the fourth quarter. Each of our domestic retail businesses have positive cash flows in the fourth quarter and for the year. Enterprise wide retail deposits were strong with record domestic deposits of $3.4 billion in the fourth quarter.

Let's talk about both components of this organic growth, driving new sales and retaining existing assets in each of our segments. I will start with the life insurance segments. Lincoln Life continues to be a source of steady, positive cash flows as a result of strong sales and good persistency. The breadth and balance of our life insurance portfolio protected us from the negative impact on variable universal life sales from poor equity markets. In fact, fourth quarter retail first-year premiums were a record $223 million, up over 19% from last year's fourth quarter, driven by strong sales in our fixed UL products, which were up 82% for the quarter.

For full-year 2002, retail life sales were also a record, achieving $692 million, up 20% again driven by sales of our fixed universal life products. In addition to the strong sales results, we are pleased with the continued favorable persistency experienced for the full year of 2002, which we attribute to needs-based selling and extensive conservation efforts.

As a testament to the progress on the sales and persistency fronts, life insurance face amount in force increased to $253.9 billion, up 8% from a year ago, and account values grew to 12.1 billion, up 6.2% versus a year ago, despite everything that is going on with the market. With more than 85% of life account values in fixed products, this business has been largely immune to the effects of the market and the strong sales results of fixed UL bode well for maintaining this immunity.

Let's now move on to the retirement segment, where we continue to maintain momentum in net flows and business retention. Total net flows were a positive 74 million for the Q4, and 453 million for 2002, an increase of 348 million over 2001. Net flows were positive for the sixth consecutive quarter. Total segment deposits were 1.4 billion for the quarter and 6.4 billion for 2002, a new annual record.

Lincoln's growth in new deposits, up 6% for the year, exceeded that of the industry average. It is defined as sales that were not the result of transfers from other Lincoln products. We believe that 1035 exchanges present risk, and we don't offer the same inducements as some companies. Our total flow sales which is defined as all deposits including 1035 exchanges experienced a decline versus a small gain for the industry.

On a relative basis, it appears that our peers, who offered crediting rate specials, excessive commission levels, and living benefits saw the greatest sales gains in the fourth quarter. While our extremely strong capital position does offer us some flexibility in looking at living benefits, Lincoln does not currently offer a variable annuity with living benefits, as we have not yet found the acceptable balance of risk, pricing, and consumer-friendly features to warrant our participation in this arena. We will continue to vigorously examine and explore all opportunities as we carefully balance growth with prudent and careful risk management in our product development process.

Lincoln also has a stringent control policy on internal transfers. In fact, we have reduced our level of internal transfers on our core annuity products by over 65% from last year's levels. While we know that limiting internal 1035 transfer activity into our products causes us to lose some sales, this policy is designed to maintain long-term profitability for the company that avoids having the client go back under a surrender charge, and it keeps our producers focused on organic growth rather than replacing business. But the rankings don't tell that part of the story.

Digging a little deeper, we maintain sales momentum in Lincoln's newer generation of products. Those that were introduced in the last few years, and are continuously being refreshed. For example, even in this challenging environment, Choice Plus, our multi manager individual variable annuity grew deposits in the Q4 and for the year as compared to the same periods in 2001. Full-year deposits were higher by an impressive 40% over last year's deposits.

On the employer-sponsored side, our multi manager product called a Lincoln Alliance Program, also continued to gain momentum. Full-year deposits including the fixed portion grew 43% over last year's deposits. This, in a market generally thought to be moribund. Both Choice Plus and Alliance are products that are distributed and wholesaled internally. We believe that this internal wholesaling offers opportunities for maximizing efficiencies and leveraging our product and marketing messages.

Turning to fixed annuities, deposits excluding the fixed portion of variable contracts were $351 million for the quarter, a decrease of 52% from the same period in 2001. We continue to approach this marketplace opportunistically and only offered rates that were consistent with our required spreads. Our sales of fixed and variable products occurred without getting aggressive with DCA rate specials or enhancing crediting rates. With respect to surrenders within our retirement segment, we remain better than pricing at an average of 9.3% in the fourth quarter and 10.5% for the full year.

We feel good about the quality of business we are bringing on to the books. Clearly, what sells a Lincoln product today are things like product excellence, responsive customer service, and the relative performance of our asset managers led by our two largest, Delaware Investments, and Cap Research, and strong distribution alliances.

Turning now to the investment management segment, Delaware's good performance in balanced distribution contributed to positive net flows of $1.1 billion in the fourth quarter. Delaware ended 2002 with positive net flows of $2.9 billion. That's a $3.5 billion improvement from the outflow of 600 million Delaware had in 2001. The breadth of our capabilities can be seen on both the retail and institutional sides.

The retail business had positive net flows of $502 million for the fourth quarter. Managed account flows continue to be strong with year-to-date deposits more than doubling last year's deposits. The institutional business, which had positive net flows of 572 million for the quarter, won 25 new institutional mandates across 12 different asset classes over the quarter.

The most recent mutual fund redemption data provided by Investment Company Institute through November showed that Delaware's mutual fund redemptions continue to be significantly better than industry averages and in fact, the spread versus the industry rate widened even further during the year. That's not surprising considering the outstanding investment results Delaware continues to deliver.

With respect to that investment performance, in 2002, 68% of the 25 largest funds in the Delaware Investments family are in the top half of the LIBOR universe, a truly outstanding performance. Also for the year, 41 of Delaware's 52 retail funds have been labeled a LIBOR leader in at least one category and 17 funds have been selected in multiple categories. We believe that it is important to build performance records that are lasting. For example, on the retail side, our goal is not to design funds that shoot to the top of one-year performance only to land in the bottom of the pack in the next year. So, we are very pleased that 64% of our largest 25 funds are in the top half of the LIBOR universe for the three-year period. That is truly remarkable and reinforces our strategy.

Before I move on, I would like to mention the appointment of Drew Driscoll as the new President and CEO of Delaware Investments which we announced in January. As you are aware, he played valuable role in the last two years in getting Delaware back on track and we are exciting about having him lead Delaware into the future. The Delaware organization is built around five boutique-like disciplines in the asset classes they manage. In each area, we have a strong team of investment and research professionals in place, and there is a strong sense of ownership in each boutique.

Next, I would like to say a few words about distribution results in the fourth quarter, and longer-term. Lincoln Financial Distributors, or LFD is the wholesale distribution arm of Lincoln. LFD completed in 2002 with year-over-year sales gains in all three Lincoln product categories they wholesale. Total sales were up 23%. But let's dig down a little deeper.

The greatest increase occurred in life insurance, with total new premiums up 38%, and retail sales seeing an increase of 32%, which far exceeded the industry, according to the most recently available data. We also are pleased to see we are gaining traction across all of our new distribution alliances. We were the number one nonproprietary life company within Salomon Smith Barney with a 26% market share as measured by first-year premiums. Investment product sales were up 32% reflecting buyer interest and managed accounts. Mutual fund activity while dropping slightly in the Q4, finished the year up 13% compared with only 4% for the industry according to the investment company institute.

LFD's annuity sales were up only 10% with higher variable product sales up 41%, partially offset by declining fixed annuity sales, reflecting both the lowered interest rate environment, coupled with our lack of desire to chase business when it is less profitable. At LFD, we continue to leverage our technologies and deep relationships to drive performance. LFD is winning market share in every manufacturing segment. Going forward, at LFD, our focus is to develop our existing strategic alliances to their greatest potential.

Lincoln financial advisers, or LFA, is our comprehensive financial planning firm. In December, we announced that Bob Dineen became the President and Chief Executive Officer of LFA. He comes to us from Merrill Lynch where he had a long distinguished career on their retail side. Bob is deeply engaged in careful analysis of the sales trends and profitability drivers at LFA.

One early observation he has made is that the profile of most LFA planners is a hybrid between the estate planning focus life insurance professional and the securities focus wirehouse broker. That's because LFA is distinguished by having the combination of one of the most productive affiliated broker dealers and the most sophisticated estate planning process in their respective industries. Thus, we attract very comprehensive fee-based financial planners.

During the Q4, LFA planners found themselves doing what a lot of their competitors in the securities business were holding the hands of their clients as the market uncertainty continued. The result was that for the first time in four years, LFA did not achieve strong sales in the Q4. This may surprise you, but this is exactly what should have happened. When clients are shell-shocked, they don't need or want products shoved at them. Now, I will turn it over to Rich so he can spend a few minutes on the major changes in earnings.

Thank you, Jon. Lincoln reported net income of $63.2 million, and income from operations of 112.2 million, or 63 cents per diluted share. A full reconciliation of income to operations to net income was provided you in a press release today and on the LFG.com website. I won't spend time on the numbers that have already been provided in print, except to review the future implications of prospective DAC unlocking.

On January 30 of this year, we announced a prospective unlocking reflecting changes in assumptions underlying deferred acquisition costs, and the present value of in-force assets as well as GMDB reserves. These changes reduced earnings by 34.5 million, after-tax, for the fourth quarter. The most significant assumption change was to reset our reversion to the mean long-term growth assumption back to 9%. The effect of these changes should be lower amortization expense in future quarters and improving earnings by about $5 million in 2003.

Lincoln's retirement segment was most effected by equity market changes. In the Q4 operating earnings, excluding the prospective unlocking, were increased 5.9 million by the equity markets rise with about half of that coming from higher fee income and the other half from movement in DAC and GMDB balances. At December 31, our retirement DAC assets, excluding FAS 115 were 1.1 billion and represented 2 .45% of annuity account values. This ratio of DAC asset to account values remains one of the lowest in the industry.

You might recall from previous quarters, conference calls, that there is no method prescribed under GAAP for guaranteed minimum death benefit reserving. Some companies recognize the costs of GMDBs on a pay-as-you-go basis. We use a more conservative method that recognizes that there is an amount at risk that will result in future payments, and that over time the market growth will reduce the payment stream. Our approach is expected to cover future payment activities.

Our GMDB GAAP reserves are $85 million on a net amount at risk of 4.6 billion at December 31, 2002. The statutory required reserve was 144 million at year end, down from 163 million at the end of the third quarter. Our ratio of GAAP-to-stat reserves increased to 59% in December, from 42% in September, a result of resetting the reversion to the mean.

At September 30, our risk-based capital discipline had us at a 96 percentile level of confidence that the reserves and capital would be adequate to cover future developments. At December 31st on an internal basis we have assigned capital of 340 million to cover future downside risk for our GMDB exposure. With the increases to both reserves and assigned capital in the fourth quarter, we approached a 98th percentile level of confidence in adequacy of covering future developments.

At year end, 52% of Lincoln's variable annuity account balances had the most conservative type of GMDB called the return of premium. As you are aware, there are two other primary types of GMDBs in the industry. A high water mark type representing 25% of our account balances, and the more aggressive guaranteed return features, including those that ratcheted up each year.

Our 5% step-up product accounts for only 7/10ths of 1% of our variable account values and currently represents only $40 million of the net amount at risk. The remaining, roughly 23% of account values, has no GMDB guarantees. During the fourth quarter, we announced the suspension of sales of product with the 5% step-up benefit.

Moving now to distribution. I was disappointed in the fourth quarter, and full-year losses of 10.4 million and 61.5 million respectively. We didn't get the fourth quarter cyclical pickup in sales we have seen in recent years in LFA. Looking forward, we would expect improvement and expect losses totaling about $45 million for the full year of 2003 in distribution.

Another component of the corporate and other section is financing. For the fourth quarter, this expense was 13.5 million. We expect it to be somewhere in the 12 to $15 million range per quarter in 2003. Also, in the corporate section is the deferred gain from our sales to the reinsurance segment in 2001. Following the settlement of disputes with Swiss RE we were better able to access information needed to estimate the deferred gain based on developments to date.

In the fourth quarter, we had true ups in the true gain resulting from the settlement as well as adjustment for reserve changes. The accumulative adjustment of the deferred gain amortization reduced the quarter's results to 4.5 million, and the full year to 48.9 million. Going forward, we expect the amortization of the deferred gain to produce about $48 million in annual after-tax earnings. This amount will decline very slowly in future years.

I would like to briefly mention Lincoln's enterprise wide stringent controls and expense management. In our life segment, general and administrative expenses were down 2% for the year. In addition, we recently announced a realignment of operations in Lincoln Life that will reduce annual operating and administrative expenses by 15 to $20 million.

Retirement segments, general and administrative expenses were flat with the year-ago period. This was in spite of higher transaction and call center volumes in this business climate and increased expenses for conversion. Delaware kept the pressure on with regard to expense management and lowered head count by 2.5% and expenses by 7% in 2002, excluding the effect of goodwill amortization in 2001.

During our third quarter earnings call, we noted management's commitment to a very strong capital position. Lincoln's strong risk-based capital at 340% of company action level at the end of the third quarter both safeguards our ratings and positions the company for growth. We think Lincoln's strong capital position and stable ratings are a competitive advantage as much of the industry was downgraded in 2002 and forced to rethink their strategies.

Therefore, we did not repurchase shares during the fourth quarter. We expect to resume share repurchase activity as market conditions improve. If we had expense options in 2002, it would have reduced earnings an average of about $9 million per quarter after-tax. Our revised long-term incentive plan for 2003, which contains a mixture of options, stocks, and cash, which will be awarded based on performance, is expected to result in about the same amount of expense as would have been reported in 2002 if options had been expensed. As we had previously announced, we will be expensing options starting with the first quarter of 2003 reporting and expect to reach state results for prior years for ease of comparison.

Looking forward, our Lincoln UK operation is expected to produce earnings just over $40 million, providing the UK equity markets provide a return of about 9%, and we don't have any major surprises from regulators. The $40 million expected is 10% higher than reported in 2002. And with that, I will turn it back over to Jon.

Thanks, Rich. I would like to sum up by saying that 2002 was another extremely challenging year for the financial services industry with one flat quarter, two very negative quarters and finally a fourth quarter with the S&P 500 up about 8%. For the full year, the S&P fell 23.4%. This is the third consecutive year of negative returns for the S&P 500, something this country hasn't seen since the 1939-1941 period.

In addition, several companies in the S&P 500 declared bankruptcy impacting the capital and equity markets, and extremely low interest rates caused spread compression. As Rich noted, Lincoln's earnings are certainly affected by the markets, and as bear markets continue, the impact is more severe. If you applied the market sensitivity guidance in our 10-Q last quarter for use of market volatility spread sheet provided on our website, your calculations would show an estimated impact generally in line with the positive $10 million that we experienced in the fourth quarter.

While we cannot control where the market goes, we are managing many things within our business that drive value. I said this before, and want to reemphasize our guiding philosophy through this downturn. We are sharply focused on things like producing positive net cash flows by growing sales and reducing surrenders and redemptions, enforcing rigorous expense controls, maintaining our strong capital position, maintaining high asset quality in our investment portfolios. Managing crediting rates to maintain acceptable spreads, developing and distributing state-of-the-art products consistent with our stringent profitability and risk management disciplines and we are investing in Lincoln's war for talent.

In these uncertain times, financial discipline as it relates to product profitability, or risk factors, is critical. Utilizing sound risk practices will lead to long-term quality in both our earnings and product offerings. In addition to managing these important business fundamentals, we endeavor to provide investors with as much visibility into earnings drivers as possible.

Our practices include diligent and dynamic resetting of the deferred acquisition cost assumptions, accompanied by industry leading disclosures, setting up GAAP reserves for guaranteed minimum death benefits, long before being required to do so as well as offering guidance on earnings and close and run-off businesses and providing guidance on the equity market's impact to earnings. Lincoln continued its long standing commitment to industry leading corporate governance practices resulting in a seamless adoption of Sarbannes Oslo legislation.

In the last year, we hosted an unprecedented number of investor meetings focused primarily on accounting practices, including our second series of educational meetings on DAC, GMDB, and other accounting nuances. With that backdrop I would like to now turn it back to Priscilla.

Thank you Jon and Rich. It has been suggested by listeners that I framed the first question for you two today. Numerous calls this morning and last week wanted Lincoln's perspective on the legislative issues that have been proposed on Capitol Hill.

They want to know what we feel the impact of bush's tax proposal and economic stimulus package is likely to be to the both industry and also to Lincoln. They are also asking what the industry stance has been, how actively we have been involved in discussions, what we think just in general about the passage. Jon, would you take a moment to address these questions?

Sure. I think like everybody in the industry, we are all closely watching the events unfold on Capitol Hill, studying the details as they come out. We are also very active participants of the company, myself as an individual, in the industry through our ACLI's efforts.

In spite of all of that, trying to predict the outcome at this point in time really isn't possible. It is a little like saying who is going to win the baseball game when you are still in the first inning.

Now, some general comments, thoughts, observations. Anything that promotes consumer savings for the long-term is a good thing. So, we support the administration's efforts along these lines, because the simple fact is Americans, you know, just don't save enough money. People are living longer, and they are going to need more money as they move into retirement.

However, I don't think that the legislator is likely to pass all of the aspects. One of the ones that looks to be particularly vulnerable to defeat is the lifetime savings account, what is being referred to in the press as the LSA. Now, that may seem strange, because it could be the easiest one to pass, but the reason it doesn't seem like it's likely to get the support that it needs is because this particular part of the provision is geared towards the majority of Americans, middle income people. Saving $7500 is a lot of money, and there is legislator concern that if they put that money into this LSA, they may actually withdraw or not deposit money into their retirement plans, like their 401(k) plan or their money purchase plan whatever optional vehicles they may have out there.

On the retirement savings account, or the RSA, one of the concerns that we hear coming out of the Hill is that the passage of RSA may actually end up being a dis-incentive for small employers to set up a retirement plan, which is a goal that the government has had for a long time. If people can do it on their own, why should I do something for them is some of the comments and the thoughts that the legislators are hearing.

As I also look at combining both the LSA and the RSA, it really is pretty apparent that they are each geared and directed towards a different customer than the one that we are targeting. As an example, you know, we hear numbers talked about that the average annuity deposit in the industry or with lots of companies is a little bit over 50,000. But if we drill down into our four core products, just taking the current month, January, we are certainly this was something that people were aware of. Our four products averaged anywhere from 61,000 to over $130,000 in average deposits. And remember, there is no cap as to what people can put into it, and many of our clients don't just make that initial deposit and walk away, they come back year after year and put more money into it.

One of the other things that, you know, really influences our thinking about this is that individual annuities offer some very attractive features that either the RSA or the LSA can't do, and that is they provide a death benefit. Imagine if these plans had been in place, you know, three years ago, and we had three years of negative market returns, and people died, what would have happened to their account value. We know what happened with annuities. The other thing is they can't provide guaranteed lifetime income in the way that an annuity can.

Now, there is one part of the President's economic proposal that I am concerned about, and that's the dividend exclusion. It doesn't apply right now to individual nonqualified annuities. We are aggressively bringing that to the attention of the legislators, and to the administration. If elimination of double taxation is good, it should apply across the board. People that plan for their retirement through purchasing of annuities ought not to be penalized by legislation that is there.

But I think perhaps one of the best overall aspects of what is going on now is the breadth of Lincoln's product line, positions us extremely well, regardless of whatever legislation comes out. We have the products and the distribution access to take advantage of it and that distribution access is really coming to the forefront now because people are confused with all of this and they are turning to planners, and they are turning to planners like we sell through. So it is too early to call, but overall, it is not a dire consequence or the end of the insurance industry.

Okay. Thank you, Jon. We are going to open the lines up for questions now. I received one other comment this morning that I think we should try this time, and that is so that more of you you have an opportunity to get your questions in, I am going to ask that you limit the question to the question and one follow-up rather than multiple follow-ups to an original question. Rufus, you can open the lines now.

Thank you, Miss Brown. Our question-and-answer session will be conducted electronically. If you would like to ask a question, please firmly press the star key, followed by the digit 1 on your touch-tone telephone. We will come to you in the order you signal. If you find that your question has been asked and answered before you could ask it and you would like to remove yourself from the roster, press the pound key.

Also if you are on a speaker phone, please make sure that your mute button is disengaged so your signal can reach our equipment. If you would like to ask a question, press the star key followed by the digit one. We go to Jason Zucker with Banc of America Securities.

Great, thank you. A lot of one timers in the quarter. What I was hoping you could do is could you tell us what you thought your normal recurring earnings were for the quarter? And I guess maybe the follow-up to that would be is there 2003 earnings per share guidance that you are willing to share with us today as well?

Thanks, Jason. This is Rich. There were a number of items that affected -- that would cause the reported earnings not to be reflective of an underlying run rate. I will go through a few of those with you and be glad to share, you know, all the detail with any of you that are interested.

The big items obviously were the reversion to DAC unlocking that opened up retirement and life. That $34.5 million obviously is not part of the run rate, and that would be obviously an add-back to the earnings that were reported to get you to a run rate.

Looking at partnership kind of returns in the retirement area, we had results that were about $4.9 million below what we would have expected in a regular quarter, i.e., a normal return of about a 5% after-tax on the investment and partnerships would have given us about $5 million more in this quarter than was actually reported. And then from a negative perspective, i.e. the quarter had a positive about 3.1 million from DAC and GMDB reserve adjustments that you would want to back out.

So, if you took those items into consideration for just the retirement segment it would make you from $36.5 million in earnings to 68.6. Do the same kind of thing in life, you have got the $4.2 million in life that had the reverse to the main that was a negative in their earnings. If you normalize the partnerships and spread compression as well as the negative mortality you get another 6.5 million. So you take them from about 63-8 to 74-5.

In Delaware, the only really unusual thing I would say in that quarter, in this last quarter there was the reversal of the accrual for compensation with -- we had the -- hadn't disclosed in the third quarter queue, that obviously is in the quarter and is not something that would repeat on a regular basis. That takes you from 10-3 to 6-1 in the UK which reported 15.9 million had in that about 1.5 million of positive DAC and PVIF. They also had 4.1 million positive from a tax benefit from truing up prior years as they reached settlement with the government in the UK.

If I look at the corporate piece, there is a number of things going on in there, but, you know, if I look at what was reported for distribution, about 10.4 million, that to me is pretty close to what I would expect to be a normal quarter, an average quarter, in effect, going forward. We obviously have good quarters and bad quarters depending on what happens from a distribution perspective. But as far as the outlook for the full year at this point, $10.5 million, something like that, per quarter, feels about right based on what we know today and assuming that we don't get hurt terribly by the legislation that is pending, and if that slows down sales it could be a little bit worse.

Financing was pretty much sort of what I expect as a normal quarter, the 13.5 million as I indicated in my comments, 12 to $15 million is something sort of normal. The deferred gain amortization, which for this quarter, was reported at 4.5 million because of the catch-up amounts that are in there, that is well below what we would expect on a regular basis. I indicated we would end up with about $48 million for an annual amount, so something in the neighborhood of $12 million per quarter. So that kind of, if you take all those things into consideration, that gets you down to something in the neighbor of about $147 million for the underlying amount.

You have to keep in mind as you think about 2003, we are going to be expensing stock options, and as I indicated we would expect that to be $9 million a quarter, so that would take you down to something in the $138 million range and there is a lot in there, obviously, but that is sort of where we take it.

So, without stock option expensing, you are in the neighborhood of around 82 cents to 83 cents, and then considering stock options, somewhere in the 77 cents net neighborhood. Does that help you?

Terrific. That's great. Thank you.

We go next to Nancy Binacchi with McDonald Investments.

Good morning. Could you talk a little more about your outlook for variable annuity and fixed annuity sales? I know numbers were weak based on your decision not to provide some of the enhancements. Could you give us a sense of what you plan to do here as we look into '03 and the expectations for both products?

Lorry, can we ask you to comment on Nancy's question?

Sure. In terms of the fixed annuity sales, I think we have been very careful over the last couple of quarters, these are really low interest rate environments. We have spent time in terms of ratcheting down our renewal crediting rates to maintain our spreads. We anticipate in terms of working with Delaware, that we will be very opportunistic about what kind of fixed business we want to put on the books.

So you may see a little bit of volatility in the sales. When we feel the time is right to put liabilities on the books, we will do so. In terms of the variable annuity business, we continue to see people looking for training and education and performance to get back into this product line. We are very, very well-positioned on the performance story with our cap guardian subaccounts in most of our products, Multifund, Choice Plus and American Legacy. And I think you can see what is going on in the mutual fund world that shows how we can capitalize on that.

We are also, as jon indicated, looking at living benefits. That marketplace is becoming more rational. We decided not to plan that business for the first two or three generations. We continue to see if we can find a way to play in that business. So we are stressing quality versus quantity. We did that in the Q4, and we will continue do that in the future.

Could you give us an an anticipation where you see spreads shaking out for the year on fixed annuity sales?

I didn't hear the question.

The question is regarding spreads, what is your thoughts in terms of spreads for the year?

Well, we think we can maintain our spreads. And, you know, again if you look at our sales in the fourth quarter, we didn't chase business, and we didn't reduce spreads just to put liabilities on the books.

Our next question we go to Steven Schwartz with Raymond James.

Congratulations. One quick question. Are you guys going to file an 8k with the written guidance vis-a-vis the market this time around?

Yes, we will update the -- and as well as the LSG.com spread sheet, those will both be updated.

Steven, that will be out sometime either the very end of this week or beginning of next week.

Okay. And then on to a real question. With regard to follow-up to Priscilla's question/statement. I was interested if somebody has looked at the top-heavy requirements with regards to the new employee retirement savings accounts, and if that were to pass, would that negatively affect [Colee]deferred comp sales, if anybody looked at that? I was wondering if you looked at possibly restructuring your variable annuity c-share product in order to make that attractive in an LSA marketplace?

Let me take the first part of that, Steven, as far as the interplay between top-heavy plans and what may be going on in the [Colee] marketplace. The top-heavy aspect of the plans, I don't think would displace all of the ways of deferred comp is used in corporate America now. [Colee and Bolee] itself are under a whole separate examination process by the regulatory and legislative branches or aspects of government. And all of it will connect, but there are moving pieces in each of the individual segments that I think really preclude us from having an idea as to how it may shake out.

When all is said and done, my personal assumption is that for the highest compensated people in corporations, the change to qualified plans will not be enough to satisfy all of the ways that they use deferred comp in other means now. So it will still exist, maybe in a different form, but I think there will still be plenty of opportunities. Lorry, do you want to answer the other question, the other part of Steven's question?

Sure. On c-shares. I think the c-share issue is not a retirement issue it is an industry issue. I would expect during 2003 you will see c-shares replaced by a good chunk of the industry. We are continually looking at how we should be pricing that particular product.

For our next question, we go to Robert Lexeeble with Regan Macellany

Good morning. I am looking for a little bit more clarity in LFA and LFD trends, listening to Jon's opening remarks I got the impression we should be applauding management for taking a sort of more cautious outlook towards sales in the current environment in these businesses, and Rich's comments were that you were sort of disappointed you didn't get the normal fourth quarter cyclical bounce, then you went on to say 10 million a quarter perhaps indicating that there isn't a cyclical bounce in the fourth quarter to look for perspectively.

Could you give us more color on whether we should just look at these operations as, you know, important elements of your distribution system, or are there either expense or revenue enhancements to drive '03 improvement versus '02?

Let me comment, Bob, first on the reconciliation of the two, and Rich can talk about the financial aspect of it. We have to separate when, in answering your question, Lincoln Financial Advisers from Lincoln Financial Distributors. Lincoln Financial Distributors does not see the same type or did not see the same type of downturn in fourth quarter sales, because it is a wholesaling operation selling through lots of retailing shops. The individual underlying retailers may or may not have had a downturn in fourth quarter sales, but because of the breadth and the expansion of distribution from LFD's perspective, if one of the sales were down, they were able to make it up by expanding into another wirehouse.

So, it is a different situation than what we have in Lincoln financial advisers. I do believe that long-term, making sure that our advisers in LFA are there to answer the questions, have an empathetic ear and be perceived by their client as caring about their personal situation, rather than just using that as an opportunity to sell something more, will accrue to the relationship strength between the LFA planner and their client. It hurts us in the quarter where that occurs. But I think overall, when you have stronger client relationships, you have a more profitable long-term client relationship. But it is different than LFD. Rich, if you want to comment in particular about --

Yes, just getting into some of the nitty-gritty of the numbers, if you go back to the third quarter, for instance, in the LFD earnings, you look at distribution in total, we had about $62 million for the year of a loss. Included in there is $6 million after-tax that was in effect prior-year costs that were written off in the third quarter.

So if you wanted to look -- underlying run rate, you have to start with looking at the details. So that would take you down to something like 56 million. We have been on a trend. If you look at the underlying LFD results, they had about a 20% improvement this year, once you take that $6 million out. So, we are heading in the right direction, and we expect those trends to continue.

LFA, on the other hand, is reported about $27 million for the full year and my expectation is there is some slight improvement next year, continued improvement in sales in both organizations, more efficiency and effectiveness being picked up primarily in LFD, in the wholesaling side. But as you can see, it is not a huge amount of improvement when you look at some of the underlying factors. And then there is always some noise issues, and there is a few million dollars of noise issues still in the LFA numbers we wouldn't expect to see repeated in future years as well.

My model's number is never right on these two lines, but -- and they seem to bounce along at an unpredictable fashion before the fact. But if you are going to be wrong on your guidance, is it going to be on too little revenues or too high expenses?

It typically is on the revenue side. Sometimes one of the more difficult parts we have to factor in is depending on what is hot, in the given markets, the allowables, the transfer pricing in effect, can really change. So they might end up with sales up, but the allowables on those sales are lower therefore less revenue being transferred to the distributor which then impacts the bottom line. So the variable in there is the product mix and the allowables related to that. It is very difficult to predict, Bob.

We go next to David Lewis with Sun Trust Robinson Humphries.

Good morning. Can you give me an idea if you looked at kind of the cheat sheet you have up there, if you have done any calculations, assume that your market growth assumptions now 2.25% per quarter, and the market is down six points, it remains flat for the rest of the quarter, wouldn't that negatively impact first quarter earnings by say 5 to 6 sense per share off of that 77-cent number?

I haven't taken in effect the spread sheet and put those numbers in it so I can't really comment on those specific criteria. We will be updating the spread sheet, and it obviously does change slightly quarter-to-quarter as you in effect have a different base that you are starting from. But if you put the numbers in the spread sheet, it shouldn't be very far off at this point in time, even using the old spread sheet.

All right. And then also, just where is the excess capital position now? I know you indicated 340 RBC, you still have roughly, I don't know, 300 million kind of excess capital if you even --.

The 340 was, as I indicated, September 30th measure. We have yet to finish up the statutory accounting and et cetera that would give us the ability to give you that number as of year end, and so I also want to hold off on giving you anything as to where we are in excess capital. Things in the fourth quarter pretty much went as we would expect. Not much has changed but we don't have the final number to get the comfort level to give a new number out.

We go to Barrett Byrd with Lehman Brothers.

Thanks very much and good morning to everyone. What is the, either to Lorry or Jon or whoever wants to answer, what is the nature, what were the nature of the promotions, specifically as you can be in the fixed and variable business that you found distasteful? And relatedly, what specific types of living benefits, as again as completely and as specifically as you can be, have you just decided not to offer?

Eric, this is Lorry. In terms of the living benefits, we have stayed away from all of the guaranteed minimum income benefits, the GMIBs. We have not liked the risk profile and most of the companies that came out with the versions first and second versions have pulled those from the marketplace for the same reasons that we didn't want to get in the business. So we will not play with that particular business.

We have looked at guaranteed minimum accumulation benefits and we are looking at guaranteed minimum withdrawal benefits, and as those continue to change and become more realistic, there may be a place for us at some point in the future. But we have just been unwilling to take some of the risks, and we shared what some of those forecasts modeling charts look like when we had our DAC conferences a couple years ago. The tales on those were very ugly.

In terms of fixed business and commission specials, and those kinds of things, on the fixed business, we have not bought business where we have really increased commissions or had interest rates that were significantly above the market. And again I think if you look at our fourth quarter sales, you can tell that we had a pretty significant decline on a year-over-year basis. We will continue to do that and to be opportunistic, and again we are in a position where we have some old portfolio business. We have multi-year business, and we have some bank bills. So, we have different channels that we can provide product with different compensation structures.

On the variable business, we have really not played a long-term high commission kind of game that some of our competitors have. We haven't put out increased bonus kinds of products, so we have, you know, we have done a little bit of that, but very insignificant as opposed to a number of the competitors in the marketplace. And you know we have been gaining market share or been holding steady without doing those things so we have not felt the need to do that. And I would suspect that that is going to continue going forward.

Thank you.

For our next question we go to Andrew Klingerman with Bear Stearns.

Good morning. Question on your $33 million realized investment plus, could you give us some color on the gross losses, maybe, you know, specifically what types of securities and maybe even specifics, and then secondly, Rich, you had mentioned that your buy-back would not restart until, quote, market conditions improved. What did you mean by that?

All right, let me answer the he second question first, and what we are looking for obviously is the risk profile and the nervousness, I believe, of the rating agencies to both come together. That is sort of the conditions we are looking for.

Right now with the equity markets having been poor for three years, every company that has sold variable annuity business has a certain amount of at-risk. Some companies are reserving for those risks, others aren't. You have seen the rating agencies in effect, put the whole industry in a downward negative trend. Many companies outlooks are negative, etc., and we don't want to be one of those.

So, we are being very cautious right now. Maybe overly cautious, but we believe it is the prudent thing to do considering what the markets have done, and obviously we felt pretty good about fourth quarter coming back up, we got a little bit of hope in the first quarter of this year and lost that. The markets are the big driver here, both credit and equity. Those are a big deal.

That kind of leads into the first part of your question which what was the gross losses in effect for the quarter? And we had write-downs that we took during the quarter on a gross basis of $88.6 million, and in addition to that, we had about $58 million of losses on securities that were sold and then we obviously had some realized gains, and that was about $78 million.

So that is sort of the gross, that's pre-DAC, pretax, everything, those are your gross numbers. And could you give us flavor on the losses?

Yes, to be -- the cause of the losses, in the fourth quarter, we have been actively managing our, you know, portfolio quality here, we have been steadfast in maintaining our A average rating of the portfolio. Through active management and given the markets we have incurred, losses and realized some gains as well, but amongst the larger losses for the fourth quarter, were airlines, utilities, and some equity mutual funds.

For our next question we go to Colin Devine with Salomon Smith Barney.

Yeah, could we talk a little more in terms of specifics on the variable annuity business and what products you may have in the pipe? Looking at some of your competitors on the withdrawal benefit, Hartford had great success with theirs, Met was successful with its income benefit this past quarter, although at the same time Agon had the industry's leading product pulled out of it. Maybe you can give us specifics in terms of what you have coming down the pipe specifically?

In terms of what we have coming down the pipe, if you look at how we will grow our variable annuity business, one of the most exciting things we have going on is the fact that we are in our relationship with American Funds that we are transferring the wholesaling of that product over to LFD. American Funds has made that announcement to their distributors. That will allow us to take control of that business, and greatly increase our wholesaling capacity if we choose to do so, that's number one.

Number 2, I think I have indicated we are looking at all of these kinds of benefits that are in the marketplace, and as they become more rational, we would hope to find one that will work for us.

Lastly, we are spending, as we talked about for the last couple of years, a lot of time on our income for life. We have a test market program underway with Edward Jones, and we will -- we are starting to see the results of that. We are seeing that product starting to gather a lot of traction in the marketplace. So, you know, in terms of, you know, do we see any new kinds of B shares or C shares or other share classes, wedon't see that.

Okay. As a follow-up, I gather Hartford has done the same thing with Putnam in terms of taking over the distribution, and how are you going to manage the potential channel conflict now that you are running the distribution for both your own product and American Funds?

Well, look at Hartford, they have four -- three separate products in the marketplace, and they really don't have that much channel conflict. The American Funds product is really a single-manager product that is sold by people that predominantly sell American Funds product, and our Multi Manager product is sold by people who like to sell Multi Manager projects. So I don't see channel conflict in any significant form.

Ladies and gentlemen, this does conclude the fourth quarter 2002 earnings conference call for the Lincoln Financial Group. Again, the replay may be accessed beginning today through Tuesday, February 18, 2003. To do so, please dial 1-888-203-1112 and enter the access code of 563521. Your participation in today's conference call is greatly appreciated. You may disconnect at this time.