Lincoln National Corp (LNC) 2004 Q1 法說會逐字稿

Please stand by Lincoln Financial Group conference call. [Operator instructions] At this time I would like to turn the conference over to the Vice President of Investor Relations and Stategic Communications, Miss Priscilla Brown. Miss Brown, please go ahead now.

Thank you operator. Good morning and welcome to Lincoln's first quarter earnings call. You heard the safe harbor cautions while you were in que so I won't repeat them. We appreciate your participation today and we invite you to visit Lincoln' website, lfg.com, where we have posted slides as a reference for today's call and where our statistical supplement and other pertinent information can be found. An updated equity market guidance spreadsheet will be posted both on the website and in an AK later in the quarter. A full reconciliation of income from operations to net income is provided in our press release and on the lfg.com website. Now I'd like to turn the call over to Jon Boscia, Lincoln's Chairman and CEO and Rich Vaughn, Lincoln's Chief Financial Officer. Their brief comments will be followed by a q&a period. John.

Thanks, Priscilla and thanks to all of you for joining us this morning. The first three months of 2004 marked another quarter of strong execution at Lincoln as sales and net flows continued at record levels. We benefitted from strong domestic equity markets in the quarter, despite the drop in March. The realignment we initiated last year continue to meet operational and financial objectives. We continued our focus on what I called the three pillars of longterm success in this industry. Product, distribution and brand.

Our ongoing committment to operational excellence is producing a more integrated and efficient approach to product manufacturing and service. Let me share with you now some of the highlights from the quarter. Sales in the first quarter continue to break through records that were set in the second half of 2003. We posted record retail deposits of $4.9 billion in the first quarter, a 22% increase over the fourth quarter and 70% higher then the year ago quarter.

Not surprisingly, we saw strong growth in variable annuities and mutual funds as investors continue to recognize the value of good investment performance and product features. As a result of strong sales and good persistancy, net flows across all domestic businesses reached a record level of $3.5 billion in the fourth -- in the first quarter, a 41% increase over the fourth quarter and more than a 300% increase over the prior year quarter. As we saw in recent quarters, the growth in deposits and net flows is coming from both retail and institutional business, which we attribute to growing distribution strength and the strong performance of our product portfolio.

Let me turn to the business segments, starting with retirements. In our retirement segment, the first quarter set yet another record for total variable annuity deposits surpassing the first -- the fourth quarters' record by 21%. Total variable annuity deposits of almost $1.9 billion were up 76% over the first quarter of last year and individual variable annuity sales of 1.3 billion increased almost 131% over the prior year quarter. We saw strong growth in both Choice Plus and American Legacy Variable Annuities due primarily to increased wholesaler coverage and productivity improvement in the planner and wirehouse channels combined with product competitiveness.

For example, the success of our guaranteed minimum withdrawl benefit, principal security, continued in the first quarter with 45% of new contracts electing the rider on products where it was available. Utilization or the withdrawl feature, was within pricing assumptions with 21% of the block taking some level of withdrawls, based on account values, and 9.5% utilizing the maximum withdrawl rate. Overall annuity net flows increased 33% to 712 million from the fourth quarter and seven fold over the year ago period, with most of the flows coming from the variable side. Fixed annuities remained slightly positive as interest rates declined yet again over the course of the quarter and we elected not to pursue business with inadequate margins.

However, rates picked up during April, with a yield on the 10 year treasury improving over 70 basis points from their first quarter low. While spread compression continues to be a concern, gradually increasing rates over the past several weeks should have a positive longterm impact on our fixed business. Remember, while rising interest rates were negative for insurance companies when interest rates were already high, in today's low rate environment, increasing rates are a real positive in the long term, due to the positive impact on spreads. The sell off that occurs in insurance docs when the fed hints of increasing rates, shows that the market has not adapted to todays low rates. Now let's turn to life.

Life sales for the quarter were down relative to the fourth quarter of last year, however, this isn't unusual as the first quarter sales are typically the lowest in the year. In fact, this years' first quarter was our highest on record, which is encouraging given the appeal of the equity market and the competitive environment. Variable life sales remain flat for yet another quarter, but we believe that a recovery in sales will likely lag behind a recovery in the equity market by six to twelve months. Retail first year premiums were $196 million, a decrease of 20% from a record fourth quarter and an increase of 15% over the prior year quarter.

Our life sales in general practical have held up well over the last several quarters despite the competitive market for traditional universal life. Turning to Investment Management, Delaware posted another incredibly strong quarter for both sales and net flows. First quarter sales, including institutional deposits, reached a record $5.1 billion, a 39% increase over the fourth quarter and over two times the level of sales recorded in the first quarter of last year. Retail products which include mutual funds, managed accounts and a director of variability annuity accounted for nearly half of the sales and posted a 47% increase over the fourth quarter. All in all, a great sales quarter for Delaware. Net flows also followed suit reaching a record high of $2.6 billion, a 60% increase over the fourth quarter. Despite its record sales and net flows Delaware is continuing to fine-tune its operations as it seeks to take its performance to the next level.

Last month Drew Driscol announced a new CIO of equities [inaudible] to the value equity team. It's clear that the changes to date have resulted in a significant turnaround. This morning's announcement of the management led buyout of our UK based money manager, Delaware Investments Advisors Limited, is another in a series of actions taken to reposition Delaware's operating model and to maximize shareholder value. Having successfully executed on four components of their five-step program, Delaware's focusing on improving operating margins by building upon its strong performance and capitallizing on opportunities to gain efficiencies. I will now turn it over to Rich so he can spend a few minutes on the financial results for the quarter. Rich?

Thanks, John. Yesterday Lincoln reported first quarter net income of 130.5 million, or 72 cents per diluted share, and income from operations of 175.3 million or 97 cents per diluted share. Earnings for the quarter benefitted from the equity markets, more so on an average daily basis versus point-to-point due to the markets cooling off in March. There were also few items in the quarter that affected earnings that I'll briefly touch on. Before I do that let me comment on this quarters adoption of the statement of position 0301 and it's affect on earnings and equity market guidance. As I had mentioned in previous calls and as reported in our 10(K), the SOP provides new guidance on reporting and disclosures for certain long duration insurance contracts and separate accounts. In Lincoln's case the SOP applies to the reserves on annuity guarantees, namely GMDB reserves, costs associated with sales inducements and the reporting of live contracts with secondary guarantees.

On a consolidated basis the adoption of the SOP resulted in a charge to net income of $24.5 million for the cumulative effect of the change in accounting at January 1, 2004, with 21.8 million in retirement and 2.7 million in the life segment. Looking at retirements first quarter income from operations, it was lowered by 3.2 million due to the SOP related benefits and expenses for GMDB reserves net of sales inducement expenses capitalized and net of amortization. With respect to the 21.8 million cumulative effect charge in retirement, our prior guidance on the implementation had focused on the GMDB reserve and not the retrospective implications to DAK. Reserve calculation under the SOP is based on the development of a benefit ratio which reduces some of the volatility inherent in our prior methodology. However, implementing this approach resulted in a more traditional level reserve charge that when included in the projection of estimated gross profits or EGPs, it caused a shift in the stream of EGPs reduction in the DAK unlocking charge. We can cover this in more detail off-line but it's worth noting since the SOPs impact on DAK had not been at the forefront of prior discussions.

The SOP will also effect the information we provide in our market sensitivity spread sheet. Due to the new reserve methodology per GMDB reserves we will no longer incorporate a GMDB component in the spread sheet calculation. While the market will continue to have an effect on the net amount at risk and the benefits paid, the reserve will no longer be as sensitive to the market movements as it has been the case in the past. With that let me turn to the unusual item we had in the quarter. The one unusual item in the quarter was the $10.2 million of after tax after DAK investment income reported in the retirement and life segments. Income was generated from mortgage loans we held on real estate previously owned by Lincoln. As consideration for providing the financing Lincoln negotiated for additional interest contingent upon and triggered by the subsequent sale of the property. The amount received was based on the sale price of the property collateralizing the loan. Retirement Segment reported additional after tax and after DAK income of 6.5 million, and the life segment recorded 3.7 million.

We have provided additional disclosures in the statistical supplement regarding the impact on spreads. Now I'll spend a few minutes on the segments and some of the variances in the quarter that should be taken into consideration as you prepare your second quarter estimates. In prior guidance I've highlighted certain items and amounts that we considered to be unusual in terms of magnitude, timing or frequency. The first quarter did not have many unusual items and the impact of the equity markets was relatively small overall. I'll briefly run through some segment numbers to help provide additional perspective on the earnings trend for those who utilize the market sensitivity spread sheet on our website. Excluding the contingent interest the following items netted to about half a million dollars. In retirement, the combination of lower expenses, the impact of the equities markets on DAK and partnership income, contributed about $4 million to the first quarter, out performance, over and above the contingent interest. Looking forward to the second quarter we would anticipate slightly higher expenses starting April 1, due to the across the board salary increases and slightly lower margins that might reduce second quarter earnings buy about $5 million.

The life segment did not see much of an impact from the equity markets with a DAK related charge coming in at about $100 thousand. What we are seeing is nominal revenue and income growth due to several factors including face amount reductions which triggered the DAK unlocking in the first quarter of last year and which are continuing. We are also seeing the average retention on our in force block decrease due to the replacement of older business. That is replacing policies that typically have higher retention levels from a reinsurance perspective with newer business that is reinsured at a much higher level. As many of you are aware, Lincoln reinsures a significant portion of our new business to reduce volatility given our penetration in the high net worth market and, in some cases, to leverage reinsurance pricing. The implication of this pretty straightforward. It takes a higher ratio of new business to old business to affect a net increase in the net amount at risk. Product mix, internal replacements and excess versus target premium are other factors affecting either the revenue line or the bottom line to some extent and it's all occurring in the face of fierce composition.

Our focus has been on taking action that is align the interest of the client, agent and our company, and we expect some of these items to run their course over the next three to four quarters. Going back to the first quarters results for a moment the net of unusual items for the quarter excluding the contingent interest was a net negative of around $2 million. Looking at Investment Management, first quarter income from operations of 12.5 million did not include any significant unusual items and reflected the benefit of increased assets under management as a result of positive net flows and the slightly higher equity markets. As we announced in the press release earnings from Dial for the first quarter were 3.5 million and we expect the transaction to close some time in the third quarter. Distribution losses for the first quarter totaled 13.3 million, a significant improvement over the prior year quarter. Most of the improvement was as a result of revenue growth within ever within both LFA and LFD and realignment savings within LFA. Our previous expectation for the year of a combined loss of around 40 million is likely to be exceeded as we are increasing our investment in wholesaling by a couple million dollars for 2004.

This is an excellent time to add to our wholesaler base. Lincoln U.K.s earning of 6.2 million were less than expected due in part to the equity markets and seasonality on certain revenue and expense item. Results were also affected by an industry-wide delay in the receipt of government paid pension premiums which postponed recognition of fee income. Despite a negative $1.5 million impact from the equity markets in the first quarter, we are still forecasting operating earnings of about $38 million for the year, with sequential improvement in earnings over the next three quarters. We may need to adjust our outlook if markets fail to improve in the short term. To summarize the segment items the total for unusual items in the quarter was around $10.5 million including the 10.2 million of contingent interest in other items. On an earnings per share basis it's about six cents per share. Before I turn it back over to John let me give you a brief update on our stock repurchase program and realignment. During our year end earnings call we announced a target of $100 million in share repurchases for the first half of 2004.

We completed that in April. We now anticipate share repurchases continuing throughout 2004 at around the same pace, or $50 million per quarter, excluding unusual events. This target is currently supported by the underlying GAAP and statutory performance in our businesses. We will continue to monitor the markets, changes in regulatory capital requirements and the competitive landscape, reserving the right to adjust our repurchase activity accordingly. With respect to realign many, we've updated our estimates. Changes from our previous estimates relate to implementation costs and investments in the business. For 2004 we expect the operating income impact to increase about $2 million after tax from our previous estimate. We are also expect restructuring charges to increase about 5 million after tack. For 2005 our estimate for operating income is unchanged and we expect a decease - decrease in restructuring charges of about 3 million. With that I'll turn it back over to John.

Thanks, Rich. We've been fortunate in recent quarters to be able to share with you exciting news about record sales, record close and even record operating earning per share but the real excitement is the momentum that has been building within the company. The excitement behind our manufacturing and distribution models is attracting top talent across the enterprise and our distribution relationships are expanding within and across channels. The challenges we face whether in the marketplace or in the business we manage requires a bias for action with a long-term perspective and we have and will continue to execute on that basis. With that I would like to turn it back over to Pricilla.

Thanks, John and Rich. We'd like to now open the call up for questions. We would ask you, once again, to please ask one question and then a follow up so that we have an opportunity to get to the many people that we understand are in the queue. Rufus?

Thank you, ma'am. Ladies and gentlemen, our Q&A session will be conducted electronically. [Caller Instructions]. For our first question we go Vanessa Wilson with Deutsche Bank.

Thank you very much. Rich, you gave us a lot of great detail here to help us with our model. I just wanted to have you repeat or explain a little bit more in detail, in the retirement segment we've got a plus four in the quarter from several different things. In addition you'd also said that there was an SOP above the line charge of four, a DAK charge, did I get that right?

Yes, in the SOP implementation various components that resulted in a little over 3 million of additional cost, i.e., primarily reserve building, obviously for GMDB, that's going to be imbedded in the underlying earnings. Therefore, it's not in effect, an unusual item and wasn't part of the 4 million.

Okay. So if we are trying to really think about a normalized rate it's really the 102 minus the 6.5 of the mortgage upside, the mortgage loan upside?

The contingent interest I think is certainly not repeating and in addition there were other items in there that totaled about 4 million positive. So you have a combination both the 6.5 and the four that are unusual in the quarter and the four includes things like the equity market impact on DAK. Timing on expenses, thing like that things like that.

For our next question we go to David Louis with SunTrust Robinson Humphrey.

Thank you and good morning. Can you give us a little update on what you're seeing on the insurance product sales, you've obviously seen a substantial rebound there. It is a change in distribution or is it more of just increased demand out there in the marketplace?

Yeah, I think what we are seeing here, Dave, it is a little bit of both. We have continued to have very strong results, particularly in the wire regional channel with our life insurance products. The product mix itself has continued to really do well with our money guard to benefit linked product out there. So it really is a good combination of strong distribution expansion as well as the breadth of product portfolio.

And Jon, are you seeing any potential regulatory changes that might enhance the tax benefits for the variable annuity funds?

Not in the near term.

Our next question we go to Andrew Kligerman with UBS.

Hi, good morning. My question is on the retirement spread. You had a particularly widespread of 240 basis -- 246 basis points. Could you give us a little color on the yield how sustainable that is and on the crediting rate how sustainable that is? And then I'll just give you my follow-up question now, and that involves Delaware. You sold the UK operation. Should I be thinking about your commitment to Delaware? Is that something that's a permanent part of Lincoln?

Yeah. Let me answer the Delaware question while Rich is getting the information together on the margins. It would not be right to read anything into the Delaware, the commitment to Delaware based upon the sale of Dial. Dial was done for reasons that really enable us to take Delaware as a whole to a whole new level of operating performance within the company. We remain very, very enthusiastic and strongly committed to the Investment Management group.

Great.

Rich.

On the spreads, if I look on the statistical supplement that we have on our website we are showing 246 basis points of spread in the first quarter. If you focus on the footnotes that we've put there, we've indicated that of that about seven basis points has been contributed by prepays and another 27 basis points by the contingent interests. So would you take those items out to come down to something like 212. That's I think a better indication of where things are from a spread perspective. With interest rates at the levels that they are at today as money continues to mature and money comes in the portfolio we would expect to see some tightening continue in that over some period of time yet in the future unless we have a substantial increase in interest rates, from where they are today.

We go next to Eric Berg with Lehman Brothers.

Yeah, I was hoping that I could try get additional perspective on the outlook for revenues in the life business. I realize that you're selling a lot more but it seems like the mix continues to be dominated by term and by money guard and I gather that the latter is more of a high cash value, lower face amount product than some of your other products. So, my question is, how are efforts going to sell the really big face amount, high cost of insurance, high revenue products that are really your target? And when can we start seeing revenue growth, you know, relatedly when can we start to see revenue growth out of the life position? Thank you.

Okay, Eric, thanks for the question. Todd, can we turn that over to you?

Yes, let me speak -- this is Todd Stevenson CFO, Life and Annuities. As Eric, you've indicated, we've seen in the last year or so more growth from a premium perspective coming out of our money guard and term products. In fact even though our total retail sales growth for 2003 over 2002 is up 15%, since that 15% includes term and money guard, when you adjust those out, our core, if you will, permanent products, the sales growth was only 2%. So that's obviously having an impact negatively on our ability to grow revenue through mortality assessments in 2004. I think the good news there, though, is as we look at the first quarter of 2004, we are beginning to see a different profile of our earnings growth.

In fact. For the first quarter our retail sales, excluding term and money guard, were up 13%. So while term and money guard is still growing nicely as business lines we're starting to see the impact of renewed growth in universal life and hopefully, as the equity markets have turned, begin to see further improvements for our variable products. So the key to obviously growing revenue is growing those sales levels and through those sales levels of those permanent products, growing our net amount at risk on which the revenue base is derived.

Thank you. Thank you, Todd.

I should note, too , and follow up to Todd's question there that John Gotta who normally would be with us taking questions regarding some of the questions that you might have, is and has been off ill for a couple of days now. So, and a part of that is he he has no voice and it would be hard for him to sign over the phone. So that's why you'll hear from Todd and others questions normally that John may have taken.

Next question Colin Devine with Smith Barney.

Good morning. Looking at the anew [inaudible], I was wondering if you could give us perhaps some color on where those sales are coming? Are we seeing a lot of new money coming into VAs? Is it more of your 1035 percentages changed and also if you can give us some feel of perhaps the split between qualified and nonqualified, if there's been any change there?

Wes Thompson, why don't we ask you to comment on the sales in general, and if you need assistance on some of the split we could asked Todd Stevenson for that as well.

I'll comment on the overall sales drivers and then I would turn it over to Todd for the splits. The drivers for us really are just to reiterate John's point, I think the effectiveness of our expansion of our wholesaling force in general and the quality of that force. We are seeing significant growth in our key accounts so it's where we have focused our resources also. And those relationships have been deepening and broadening at the same time in terms of products. Certainly our business model has really been helping us also, Colin, with respect to the team approach that we are taking in many of the firms that we are working with.

And that is having an effect not just on our variable annuity product lines but across the board in our investment products and in our life product sales. And then the last, I think driver, significant driver would -- is really our product performance with the improvement in our product last year in the VA space we continue to see through the first quarter obviously great growth. And that's really the same I think and that is indicative I should say of the other products that we are selling through LFD. Todd.

Yes, this is Todd again. Traditionally we've seen and expect about 35 to 40% of our total annuity deposits to come to us in the form of 1035 exchanges. We continue to operate in that band across both our legacy and choice plus products, importantly as we look at our 1035 rate, if you will, on our contracts electing GMWB it's either at or below that 1035 historical trend. So we take that as good news in that the type of product and our prepared in product in particular that's in the marketplace is succeeding in attracting more new money to the variable annuity business than traditionally has been the case. And in terms of the split between qualified and nonqualified for those electing GMWB we haven't seen any discernible change there either. I don't have the exact statistics in front of me but the mix of business going into IRAs, for example, is, remains consistent as well.

We go next to Nigel Dally with Morgan Stanley.

Great. Thank you. Good morning. I just wanted to go back to this management by out of Dial. If I remember correctly I thought you were quite optimistic on the outlook for these operation so I was hoping you could spent more time on the strategic rational for the sale and also just hoping get some details on how this group contributed to sales both in the first quarter of 2004 and in 2003?

Sure. Nigel on the strategic aspect of it, I'd start with a reminder of what we have referred to for a couple of years now as the five-step process in the turnaround of the Delaware organization. And step one was the right people, step two, the right processes, step three, improved investment performance, step four was improved cash flows, and step five was improved EBITDA margin. We're fairly solid I think now in really demonstrating good progress in steps one through four. People all the way up through cash flows. Step five is now where Jude and his management team are really concentrating, which is how do we improve the EBITDA margins inside of Delaware? In the case of Dial itself, as you can see from the results or from the press release that we put out, Dial is not a significant contributor to the profitability of Delaware as a whole.

The way that the structure of Dial from its very outset was put together really does not permit a lot of their revenue from AUM to actually flow to the ownership structure. So what we saw was that this was an excellent opportunity for us to effectively monetize and achieve the benefits that Dial has had produced in one fell swoop while yet from a product in a retail side of the business where we're seeing a lot of traction on Dial continue to maintain them as a sub advisory type of a relationship. So it allows us, we believe, to have the best of both world's, to still have them as a sub advising manager and yet to have a very significant gain come to the Lincoln shareholders through the management by out.

Jude, you want to cover some of the flows?

On the flow side for the first quarter the net impact from Dial was 61% and for '03, 43%.

What that boils down to is their flows on a deposit basis they contributed about $1.2 billion of deposits and about $1 billion of our 2.6 net flows.

Next question we go to Ed Spehar with Merrill Lynch.

Thank you. Good morning. My first question is going back to, Rich, some of the comments you were making on the life business, if you factor in what's going on here in terms of face amount reduction and the average retention of the in force decreasing, is it possible that life earnings are just going to be at this kind of level for awhile? Or maybe, you know, maybe stated another way, what kind of sales growth do you have to see to translate into earnings growth given these other factors? And a follow up is, I was wondering if you could go into a little bit of detail of why it seems like your interpretation of the SOP is maybe a little different than some others in how it impacts the universal life business? Thanks.

My expectation at this point is we will see three or four quarters where sales, where the sales will not be in effect contributing to earnings growth, or in effect other aspects of the business will be muting the impact of the strong sales that we've got and then we should see the earnings pick up start moving up again. Internal replacements, the face amount reductions. When we did the DAK unlocking a year ago we estimated that the face amount reductions would impact us for about seven quarters. And we've had in effect we've been for, we are about halfway through that process so we've got another three or four quarter that face amount reductions have an impact on the growth in our EGPs in effect, the revenue side. Internal replacements is another aspect of the business. We've written a lot of internal replacements where in effect the COIs on the newly written policy in effect are lower and at the same time they didn't have to go through underwriting and therefore the reinsurance rates remained at the same level that they were on the old policy.

That also should tail off over the next three or four quarters because we are now a requiring starting in the beginning of '04, reunder righting which will result in lowery insurance cost commensurate with the lower COI.s. There's a couple thing there that I think are contributing and should run off over the next three quarters or so but I do think we are going to see relatively level earnings over the next three or so quarters because of those items. And then we should resume the growth that would you expect with the sales.

On the SOP, let me turn that over to Todd Stevenson to talk a little bit about that the SOP. There's a lot of complexities involved with this SOP and quite a bit of flexibility and interpretation, I believe. Todd?

Yes, Ed, you're absolutely correct and you, as well, Rich, in terms of the, applying the SOP to universal life type contracts is clearly been something that the industry and the accounting profession is really trying to come to grips with and, because of a lot of ambiguity there and a lot of potential for different interpretations there clearly is the environment now where companies will look at and minor assumptions could drive significant differences in the amount of any required reserve under the SOP. I would also indicate that as an industry largely through the efforts of the ACLI, we continue to seek for clarification from FASB and other accounting bodies as to more specific guidance for the industry going forward.

More specifically to Lincoln and our review of our life products globally, we did spend a lot of time and a lot of effort looking at our products, in particular we, in looking at our money guard product, that's our length long term care universal life product, did determine that it was appropriate to increase slightly our reserve levels that we're carrying under the, under that particular product area. In terms of looking at the particular dynamics for the more traditional universal life policies those with the no lapse guarantees did a comprehensive economic analysis of different scenarios under which there was a possibility of a payment or a incurred impact under that guarantee and, based upon our modeling and our analysis, just do not see a material or measurable, even, amount of reserve that would be required under the SOP.

We, we've looked at a lot of the complexities surrounding the measurement of mortality losses following mortality gains and again there where we're looking at and able to model with appropriate mortality assumptions, model with assumptions as to ongoing levels of COI.s, or cost of insurance, and other potential toggles with the universal life contract, which is inherently flexible in nature. The end result for Lincoln, given our product profile, just do not see and do not have any other measurable SOP impact for our life products.

Next question, Mario Mendonca with CIBC.

One of the reasons that the take up rate on the GMWB, you referred to nine-point, and that was up a little bit from the 7% we talked about last quarter, presumably that take up rate is an important assumption in your hedging of that product. Could you share with us how that 9.5% compares to the assumptions used in determining how to hedge this product?

Mario, this is Rich. One of the aspects of the business, a lot of quotes have been out there as to how much is taking maximum rate. Probably as important or more important a take rate is how much of the business is actually taking automatic withdrawals. And I believe we are sitting at around 21% of the business taking automatic withdrawals, withdrawals at some level effectively with the GMWB. Nine and a half percent taking the maximum 7%. That compares very favorably to what we priced for in our product and is currently running considerably below what we priced for. So we feel pretty good about that. Todd, do you have anything else to add?

I would add that as we hedge for the risk and build our hedging infrastructure and system for this risk, we would be utilizing an assumption for hedging probably closer to the price for utilization or election of AWS than what we are actually seeing to date. So we have our hedging program some ability to come any additional increase in utilization that might occur in a down equity market environment, for example.

Were you essentially saying that the hedge assumption would be similar to the pricing assumption which is probably significantly higher than what we are actually seeing?

It would be close. I wouldn't exactly characterize it as being right on top of but it would be closer to.

We go nest to Joan Zief with Goldman Sachs.

Good morning, thank you. I guess my question relates around some -- the -- these, these extra expense. First of all, were you give color to your comment about investing more in distribution, in what particular sense are you going to be adding more wholesalers, adding more agents? In what respect would those costs be going up? And then also wanted to ask you about your compliance with Sarbanes-Oxley? Can you give us an idea of how much that has cost you and if you are done?

On the added distribution your assumption is right, we are adding wholesalers and I believe we have good opportunity to add wholesalers at this point in time and do it in an effective manner with a pretty quick pay back. We're going to be investmenting at this point a little over $3 million pretax, a couple million dollars after tax additional over what we'd originally planned for 2004 because we do have some good opportunities with, we've got a good product and opportunities in distribution channels we believe that would be more effectively exploited with additional wholesalers. That's why we are doing it. We think it's the right thing to do right now. Relative to Sarbanes-Oxley, yes, it is costing us.

It's costing us and will cost us more in outside audit fees. It will cost us in resources being tied up in doing in effect the documentation and testing. We are on track on our plan to implement all the documentation. We are -- we have got our documentation done. We are now in the process of training the testers and will be starting the testing this summer and we expect to be in full compliance by year end as required.

We go next to Jason Zucker with Fox-Pitt Kelton.

Thanks and good morning. Just two numbers questions. Going back to the retirement segment, I was curious to know if you could tells how much of the general account assets are at minimum crediting rates and the second part of the question is, could you tell us what the average minimum crediting rate is for the in force block?

I think we can give you some information, maybe not answer the question exactly as asked. Todd, do you have the numbers there on the retirement side on the fixed business of just maybe the ones that are at CD rate and minimum rate which, my recollection was it was about a total of 63%?

Yes, 61% is at effective April 1, and we use that date informally because we did reduce on our largest block of fixed business crediting rate and for the second quarter. But 61% is a contractual minimum after that effective after that April 1 crediting rate reduction.

Okay.

We will be including in our 10(Q) that we will file later this week the typical schedules that so shows in effect all the business relative to their minimum crediting rates.

Okay. Is there an average that we can think about? I mean I'm looking back now on the page where we list the spreads. And you've got the crediting rate down to 397, it goes down about ten basis points a quarter for the last three or four quarters and I guess my worry is, are we at a point where we are going to hit up against an average minimum for the book?

I don't think you can look at it as an average minimum. That's why with give so much detail on the que. You will have to take a look at that detail and make your own assumptions as to where interest rates are going to go in the future and on flows, et cetera, because those all come into play as to hitting and starting to see more spread compression. As we've indicated with interest rates at this level you will see more spread compression from where we are today.

For our next question we go to Tom Gallagher with Credit Suisse First Boston.

Just another question on the sale of Dial. How much cash after taxes will actual will be freed up after the sale? And are there any related expense savings over and above those that were incurred? And that will be going away from an employee standpoint. And let me ask it another way. What's the bottom line benefit going to be here? I presume there's going to be some at least small EPS pick up? Thanks.

There's a lot of detailed mechanics in determining the cash flows. We indicated in the press release the purchase price is 172 million. We would actually expect in addition to the purchase price we'll be taking some dividends out, i.e. free cash-flow or excess cash in the business. All told we are expecting on an after tax basis something in the neighborhood of $190 million of available cash. In thinking about it from a earnings per share basis, we also have the benefit of picking up the -- what is currently in the diluted earnings per share calculation from the stock options that will be forfeited. That'll add or reduce the share count for the diluted share calculation buy about 400,000 shares. You could make the assumptions that all the proceeds would be used for share repurchase and it would actually be accretive to earnings per share.

If you could pull it off immediately upon receipt of the cash. That's, I think about all we can give you at this point. The impact as we said from an earnings perspective that contributed about 11.7 million to 2003 earnings, 3.5 million to the first quarter, that's about all the information we've got. Using it, in doing the -- the -- getting the gain in effect from an earnings per share calc example that I put together for myself using a 50-dollar per share stock price so fairly 10% up from where we were trading this morning.

We go next to Jeff Hopson with A.G. Edwards.

Hi, sorry to belabor this point but on the Dial it just seems that you're getting 30% of your earnings from that business, 30% of the assets are management, a higher percentage of flows so I just don't see, and it might be slightly accretive so I don't understand exactly the reason for the transactions, unless if you're sure that the margins on the rest of the business will go up.

On a margin basis, Jeff, that was probably one of our lower overall margins when you look at its contribution to profitability relative to the assets under management. And the contractual nature of the revenue sharing inside of the business would hold it at that level. We do believe that the other businesses inside of Delaware are higher margin businesses with outstanding growth prospects associated with those businesses. And one of the primary reasons that we are doing this is to be able to really focus our efforts on improving Delaware on an overall basis and their EBITDA margin.

Very good. Thank you.

We go next to Saul Martinez with Bear Stearns.

Good morning. Actually my questions have been answered, thank you.

For our next question we go to Sanif Kammat with Sanford Burnstein.

John, with your , to evaluation improving here even today as I look at the quotes, just was wondering if you have any thoughts on consolidation and you know, what sort of transactions you might be thinking about doing with this currency that you now have?

I believe, Sanif, that we will be seeing a time period where rating agency capital requirements are going to be similar in the insurance industry and acting as a catalyst to what Federal Reserve requirements were for the banking industry back in the 1980s, meaning we now have, perhaps, an external catalyst that will favor or encourage industry consolidation. From Lincoln's perspective we really do -- I really do believe that the businesses that we have now have very attractive operating characteristics. Our own desire in using our currency to help consolidate the industry would be focused primarily in those businesses that we already have exposure to.

I'm not looking to get into brand new things like a residential mortgage servicing or, maybe, crossing back into some health type lines or anything like that, I really want to keep the focus on wealth accumulation, wealth protection types of businesses. So we would be looking to do those things to take advantage of our existing scales, might complement some product capabilities, some distribution capabilities. But nothing outside of our current operating framework.

Maybe just as a follows up, could you give your EPS accretion targets and ROE targets for any deal that you would do?

Yeah, I think, you know, you'd have to look at each deal on its individual merits and you might come across a deal that, let's say, is potentially accretive in its very first year but it just doesn't fit strategically or it would cause operating proper problems or social issues or whatever it might be and you would perhaps decline that. On the other hand you could look at another transaction that may have some acceptable level of dilution in the first year but it's longer term strategic benefit is so compelling that you still would want to go ahead and do it. In general I think we recognize that very clearly you don't want to do transactions that are deeply dilutive for long multi-year periods of time. So we are not going to do anything foolish on that type of side but yet I don't think there's a single ROE accretion dilution, EPS ROE accretion dilution or time period accretion dilution that applies equally to all opportunities.

And for our next question we go to Ira Zuckerman with Nutmeg Securities.

Most of my questions have been answered. The one question I've got on this whole acquisition question, any further thoughts on what to do with the U.K. operation? It seems to be obviously stagnant and not likely to add stagnant and not like to the add anything going forward? Is there any opportunity to monetize that?

What we have looked at, or what we are doing with the U.K. right now is very consistent with what we had indicated previously which was, to put it into a mode where we can turn it into long-term type of an annuity payment in effect to the corporation. We have something approaching 1 million policies in force I believe over there. And, you know, have an income stream that when applying the corporate leverage factors clearly produces returns in excess of our cost of capital. So as a result it continues to add a value to the organization and we're satisfied that it has evolved just as we had indicated a couple of years ago we hoped that it would.

Thank you all for your questions. I think that concludes the time that we have. As always we are available in Investor Relations to answer any questions that come up after the call. Thank you and have a great day.

And ladies and gentlemen, this does conclude today's first quarter 2004 earnings conference call for the Lincoln Financial Group. We do appreciate your participation and you may disconnect at this time.