Lincoln National Corp (LNC) 2004 Q2 法說會逐字稿

Please stand by, we are about to begin. Good day, and welcome to the second quarter 2004 earnings conference call for Lincoln Financial Group. At this time, all lines are in listen only mode. Later, we will announce the opportunity for questions and instructions will be given at that time. If you should need assistance at any time during the call, please press the star key, followed by the zero button, and someone will help you. This call is being recorded and will be available for replay beginning today through Friday, August 6th. The replay can be accessed by dialing 1-888-203-1112, again, that number 1-888-203-1112. And enter the pass code of 399701. Again, that's 399701

At this time, I would like to turn the conference over to the Vice President of Investor Relations, Ms. Priscilla Brown. Please go ahead ma'am.

Good morning and welcome to Lincoln's second quarter earnings call. You heard the safe harbor cautions while in queue, so I won't repeat them. We appreciate your participation and invite to you visit Lincoln's website, LFG.com, where we have posted slides of the reference for today's call, and where the statistical supplement and other pertinent information can be found. An updated equity market guidance spreadsheet will also be the posted on the website, and in an 8K later in the quarter. The equity market guidance spreadsheet was modified for the second quarter to incorporate the accounting changes prescribed by SOP 0301.

We are pleased that this quarter's estimates were again in line with actual results arising from changes in the equity market. Last quarter, we announced the sale of Dial, our London based international investment management unit. We also provided you with certain with and without metrics, in order to give you a snapshot of the impact on reported results. The deposit and net phone numbers that Jon Boscia will share with you this morning do not include Dial results as we expect the transaction to close late in the third quarter.

For your convenience, the second quarter statistical supplement includes pages that represent the results with and without Dial. A full reconciliation of income from operations to net income is provided in our press release and on the website. Now, I'd like to turn the call over to Jon Boscia, Lincoln's Chairman and CEO, Rich Vaughan, Lincoln's Chief Financial Officer. Their brief comments will be followed by a question and answer period. Jon?

Thanks, Priscilla, and thanks to all of you for joining us this morning. The second quarter marked another period of solid execution and sustained performance at Lincoln, as sales and earnings posted strong and in some cases, record results. We saw little change in the equity markets as news on the war and the threat of inflation weighed heavily on the public's mood.

Despite the lack of growth in the equity markets, we benefited from organic growth and favorable investment related results. With that, let me share with you some of the highlights from the quarter.

Aggregate deposits in the second quarter continued at a strong pace. We recorded gross deposits, excluding Dial, of $6.1 billion in the second quarter, a 76% increase over the prior year quarter. We attribute our strong overall sales through Lincoln Financial Distributors to three basic themes: First, we continue to acquire and grow key accounts that have the potential of delivering strong results when reinforced with LFD's, coordinated marketing and wholesaling efforts. Second, we are adding multiple products on these platforms. Third, our continued investment in wholesaling is enabling us to execute this key relationship, multiple product strategy with a stronger force of experience and effective wholesalers. Our sales reflect activity in firms where we have gained access, added products, and are seeing recent market share growth.

With respect to total net in flows, we reached $2 billion across all domestic businesses in the second quarter, a nearly three fold increase over the prior year quarter and continuing the strong trend of recent quarters. Let me turn to the segments starting with retirement. In our retirement segment, we were pleased to see second quarter variable annuity deposits establish another quarterly record, given the tremendous growth we already experienced in the first quarter. Total variable deposits of nearly $2 billion were up 94% over the second quarter of last year, and individual variable new deposits of almost $1.5 billion or more than double prior year results. Variable annuity deposits in choice Plus and American legacy increased significantly in the second quarter, over the prior year, and earlier during this month of July, year to date deposits in these two products surpassed the full year deposits for 2003. Annuity net inflows of $700 million were very close to the record achievement in the first quarter, and were the highest on record for a second quarter. Let me point out that the net flows included the surrender of a $65 million variable annuity contract that Lincoln owned as a natural hedge for the Lincoln deferred compensation plan. You may recall that net flows in the fourth quarter of 2001 included the 50 million deposit which was made when we initially made the investment. Our trailing 12 months net inflows are $2.2 billion which clearly indicate the momentum that retirement has achieved.

As has been the case in recent quarters, most of the net inflows are coming from the variable side given the weakness in fixed annuity deposits. Interest rates did improve in the quarter, however, new money rates continue to lag Portfolio rates, so spread compression and our ability to achieve target spreads on new business remain a challenge for us. Now, let's turn to life.

Retail first year life deposits were just under $198 million, an increase of 14% over the prior quarter, and over the prior quarter with universal life deposit, including money borrowed, up over 13% compared to the prior year quarter. Looking at universal life insurance, our sales growth has been driven by the three pillars of excellence we've previously discussed. Product, brand, and distribution. Product: We have been able to leverage our long-standing UL product leadership. Brand: We have scale and name awareness in the UL marketplace and the MGA channel where much of this product is sold. And our distribution strength has allowed us to grow sales in the face of increasing competitive pressures by expanding to other growing channels. We have seen a significant change in the pricing of products, most notably on universal life with secondary guarantees.

Life insurance is a core franchise at Lincoln, and we will continue to focus on distribution strength and product innovation, balanced against sound risk management, as the means to grow market share. Variable life deposits continued at modest levels, but we expect our new variable universal life product, VUL-1, to generate renewed interest with producers and clients, due to the flexibility it offers in terms of performance and protection. We are excited about our continued innovation and the positive comments we are hearing from the marketplace.

Turning to Investment Management, Delaware posted another strong quarter for both deposits and net flows. Second quarter deposits excluding Dial, totalled $3.6 billion, nearly double the prior year quarter. Domestic institutional deposits set a new record with deposits increasing 224% over the prior year. We attracted deposits in several asset and product classes with fixed incomes and value stock showing the strongest growth. On the resale side, deposits were up 65%, compared to the prior year. Combined institutional and retail total net flows of just under $1 billion, increased over 270% from the prior year quarter, and our trailing 12 months net flows were 4.3 billion, and as with retirement, clearly evidences the momentum in this business. That wraps up my comments on the quarter. I know there are at least five companies in our sector that will be holding conference calls today, so we've tried to keep our prepared remarks brief. After Rich completes his comments, we will turn it over to Priscilla for Q and A. Rich?

Thanks, Jon. Yesterday, Lincoln reported second quarter net income of $187 million, or a $1.04 per diluted share, and income from operations of 181.4 million, or a record $1.00 per diluted share. For those who uses the equity market sensitivity spreadsheet on our website, your calculations would show that we had virtually no benefit in the aggregate from the equity markets this quarter. A noticeable departure from recent experience. There were, however, a few items which did effect earnings that I'll briefly touch on.

During the quarter, we saw more activity related to prepayment and make whole premiums. The average quarterly commercial mortgage loan prepayment and bonds make hold premium for 2004, is about three times what we experienced in 2003, when it averaged 3.2 million after DAK and tax per quarter. With appreciated commercial real estate prices and an attractive interest rate environment, sales and refinancings are likely to continue. At what level and for how long, I don't know. April and May were big months, but June was almost nothing. July is once again seeing substantial premiums so there is no predictable pattern developing, other than on average they have increased.

We also will a very good quarter for our limited partnership investments. As we talked about in the past, the earnings can be volatile on these investments. Last year, they performed poorly, yielding only about 2% after tax. So far this year, they have yielded about 12% after tax, on an investment of about $260 million. On the expense front, we did see a spike in the quarter, some of which we touched on in last quarter's call. We had an increase in our branding expenses due primarily to our national media plan. We also adjusted our incentive compensation accruals reflecting mid-year performance.

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 third quarter estimates. In retirement, besides the prepayment and partnership results I just discussed, spread compression is also affecting us given current interest rates. In prior discussions on spread compression, I've explained the difficulty in projecting future spreads due to the size, age and mix of our business. With that said, if you adjust for certain investment income items in the current and preceding quarters, we a saw 9 basis points drop in fixed annuity which, equates to about $4.5 million. In the next few quarters, we would expect to see a drop of 4-5 basis points per quarter assuming no radical changes in the interest rate environment. As you know, Greenspan has recently hinted at increases, that could mitigate the compression we are seeing, but there is currently a gap between our portfolio rate and new money rates, until that gap closes, spread compression will continue.

Moving to distribution, the combined loss for LFA and LFD in the second quarter totalled 11.8 million, compared to 18.1 million a year ago, and 13.3 million in the first quarter. LFD's revenues were consistent with the first quarter, but we did see increased expenses associated with wholesaler expansion, as I had mentioned last quarter would occur.

Lincoln Financial advisors operating loss improved, and that was attributable to both revenue growth and expense reductions. We are seeing phase one of the consistency of excellence business model initiative implemented within LFA and progress to date has been good. Phase two will take place next year, and is focused on providing choice and transparency in compensation.

With respect to expectations for the full year, our previous guidance projected a combined distribution loss of around $42 million. We're still comfortable with that projection. Lincoln UK's earnings of $10.7 million were in line with expectations as we saw the seasonality that effected certain revenue expense items in the previous quarter reversed. We are continuing to forecast operating earnings of $38 million for the year. Of course, this may change depending on how the equity and currency markets perform.

Before I turn it back over to Priscilla, let me give you a brief update on our stock repurchase program. During the second quarter, we re purchased $148.3 million of Lincoln stock, bringing the total amount repurchased year to date to approximately 213 million. We expect to repurchase between 300 to 350 million in stock for the year. This target range excludes the use of proceeds from the divestiture of Dial, and is 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 that, I'll turn it back over to Priscilla.

Thank you, Rich. We would like to open the call for questions 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 one, on your touch-tone telephone. We will compute in the order that you signal. If you find that your question has been asked and answered before you can ask it, and would like to remove yourself from the question roster, please firmly press the pound key. Also, if you are on speaker phone, make sure that your mute button is disengaged so your signal can reach our equipment. Again, if you would like to ask a question, please firmly press the star key followed by the digit one. And for our first question, we go to Andrew Kligerman with UBS Securities.

Rich, you mentioned portfolio versus new money yield, can you just specify each currently and I'll follow up with another question?

The new money yield, we are currently seeing a ten year treasury rate that in the 460 range, spreads over that with a BBB/A kind of portfolio, it would be somewhere at 100 to 105 basis point range, so you can judge from that, that's sorts of the new money rate, and portfolio, after you take out some of the noise factors, is running just under 6% right now, about 596, I think, is sort of the underlying portfolio rate on the fixed annuity portfolio, so we've got about 30-40 basis points probably spread between new money rates and portfolio yield rate right now .

And you can mitigate some of that with your credited interest?

There's still some opportunity there.

Okay. And just in the UK, could you talk a bit about your commitment to that business, what type of return you are getting and --

Andrew, we remain committed to the UK business, we are able to achieve returns that especially when applying the corporate leverage to it, are in excess of our cost of capital, so the business is providing just steady consistent source of shareholder value to us.

Alright. Thanks a lot.

For our next question, we go to Jimmy Jeweler with JP Morgan.

I just wanted to see if you could comment on just trends in the life insurance business. I saw your universal life sales were up pretty strong. Are you seeing rebound in the variable market at all? Or does it look bleak?

We are seeing a start of a little bit of a rebound when looking at a year-over-year type of basis. The early indicators, if you looked at illustrations, inquiries that are coming in, we believe are encouraging, particularly associated with a new product that I referenced earlier, that's the UL one, but life insurance is a very, especially at the high end, a very complicated involved process, involving lots of medical testing, et cetera, and physical so it takes a while for that early interest to actually begin coming through and to pay it up in to paid contracts.

Okay. And then just a question on your spreads, I know your spreads are strong this quarter, but they benefited from like you said, commercial mortgage pre-payments. You are assuming that spreads, or indicating that spreads might go down a little bit. What sort of an assumption are you making for commercial mortgage prepayments going down if they decline at a pretty sharp rate would your spreads come down more than you are expected right now?

The impact of the commercial mortgage loan prepays and bonds make holes, we quantified, this was a very unusual quarter, where we had substantial amounts, and amounts that came in this quarter would have an impact ongoing of about $500,000 after tax per quarter. So they have some impact on earnings. There's even with that number, there's some conservatism built in to it, because as we did the underlying calculations, we assumed the money out was going in general portfolio rates as opposed to going back into the commercial mortgages, which would negate some of that compression going forward as well. So it's rather minor as far as the impact on operating earnings going forward.

Okay. Thank you.

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

Good morning. Obviously an exceptionally strong quarter, and I commend you on that. I have a couple of questions, I was wondering if we could get an update on your variable annuity hedging program, and specifically if you'd expanded that, I guess, to replicate what Hartford is doing in adjusting volatility, and if you could confirm, in fact, to date whether you've actually put any hedges on, and secondly, I was wondering if you would be prepared to respond to Moody's recent comments, as well as some others out there, with respect to pricing on universal life products, and if they are fully factoring in potential statutory capitol increases that may come down the road.

Todd, do you want to take person on hedging program -- Todd Stevenson?

Yes, certainly Rich.. We have been as we have from the inception of our principal security, Lincoln principal security product and the hedging that accompanied that continuously reviewed our hedging program, both strategically and tactically, and of course, our hedging program is grounded and designed from the product and the product attributes itself. It's important to remind ourselves that we're hedging the gap income statement volatility both what comes from the withdrawal benefits subject to FAS 133 and also the death benefit hedging subject to, or under the accounting provisions, SOP 0301. We have from day one been engaged with a leading actuarial consulting firm, we have more recently provided and participated in an in depth review with a leading investment banking firm who obviously is very familiar with the capital markets, but as importantly, if not more so, really knows and understands insurance products, understands and can help validate the modeling of policyholder behaviors, and so forth, that are so important in the equation.

To bring you up to date on a couple of the developments to date as a result of that effort and others, we have during the third quarter expanded our hedging program for the death benefit exposures. If you will recall, we had about 50% of our death benefit hedged either hedged in the total with exposure, or account value. We've now moved that to substantially all of our death benefit exposure in the third quarter. We continue to look at the specific cost and efficiency of expansion of our hedge program relative to withdrawal benefit.

At present, we have no reserve that we're carrying on the withdrawal benefit. That's a function of the reserve flooring at zero. That created as a result of the fact that markets have generally appreciated since we introduced the withdrawal benefit product, as well as taking into account relatively conservative policyholder sub account allocations at this point. We continue to look also at our appropriateness of our benefit charge on Lincoln principal security, and at 45 basis points, part of the work we've done has validated the appropriateness of that again given our expectation as to contract holder profile, we're also looking at how we would put in place more expansive hedging strategies to reflect any incremental risk that would be present with any future designs that we're considering with our principal security plus.

So we've, we've done a lot of work and evaluation on our hedging program. Feel very satisfied that it continues to reflect and protect us against the substantial, substantially all of the liability volatility on a withdrawal or death benefit. For example, we have back casted the withdrawal benefit exposure of roughly 2 billion. Currently, back against the time periods of 2000 through 2004, and the result to date of a delta only hedging program would provide coverage for substantially all of the indicated reserve level changes that had, or would have occurred had that business been in force during that particular time period. We continue to do substantial work in evaluation as to the next steps and the timing there of our hedging program. At this time, not prepared to indicate what changes or if any, or when those changes would be effective.

Before we go to the life thing, just to be specific, to date, the only hedge Lincoln has not expanded is hedge program formally beyond the delta hedge.

That's correct.

And secondly, currently, you have no reserve set up for the GMWB, and in fact, put no hedges on due to your comment that markets have generally risen since you started writing it.

We would be carrying statutory reserves of about 3.4 million for the GMWB rider. But the methodology under FAS 133 for the GAAP calculation in the statistic modeling that generate that -- Indicates that zero reserve because of the flooring I mentioned.

Okay. I'm going to ask Gary Parker, our Chief Product Officer to comment on the pricing question. Gary?

Sure. Jon, Colin, as you know, that Moody's report was focused on kind of primary pricing assumptions associated with secondary guarantee universal life products, specifically portfolio yield, lapse rates, letter of credit costs and mortality rates. Our product, we're very comfortable with the assumptions that we're using in all of those areas and the pricing of the products we've -- As you know, because of our market focus being in the affluent markets, even our non-guaranteed products assume pretty low lapse rates in our pricing, so the differential between what we might expect on a guaranteed product versus a non-guaranteed product is probably a lot smaller than it would be for most companies that aren't in up markets like we are. We do a significant amount of sensitivity testing as well, beyond our normal expected pricing to include very low lapse rates and low investment returns, and these sensitivity tests also, of course, include cost of capital issues, expense issues, reinsurance costs and so forth, so at this point, we're very comfortable with the way the products are priced. We -- And we're very comfortable with the way the products are designed from a statutory reserve basis.

For our next question, we go to David Lewis with Sun Trust Robinson Humphrey.

A couple of questions, Rich. Was there any mortality fluctuations that need mentioning in the quarter? And two, just to kind of look back at a run rate, I guess I ran through some calculations and assuming prepayments come down a little bit in the third and fourth quarters from the higher level second quarter, you have a little bit of spread compression and a couple of other minor factors. It seems like coming off the dollar per share, you would ends up with something like 2-3 cents below that. If you assumed the equity markets remain flat. Does that seem reasonable?

David, I look at it a little bit different because I can't predict the prepays and make holds. I know there's going to be some. We know we've already got some in July. But excluding sorts of the unusual amount of that, what I saw this quarter as far as a change from the last quarter. And last quarter we said the under line rate was around 91 cents, but this quarter, we had obviously nice, positive net flows which across the various businesses adds about 3 cents a share to the earnings run rate. Compression took away about a million or about 1 cent, a couple million dollars, about 1 cent a share. That takes me up to about 93 cents, and on top of that, we're going to have something more, I think, from a prepaids and make holds. Obviously, I don't know what our partnership earnings are going to do, but that's sort of where I see it right now.

The partnership earnings, that wasn't included in the 10 million, was it?

No.

and the question on mortality?

Mortality was not a big issue this quarter. It was a small variation, I believe, on the negative side as I recall, but it was relatively benign.

For our next question, we go to Bob Glasspiegel with Langen McAlenney

Two questions, expected proceeds in Dial, and use of proceeds. Have you firmed that up?

We're just saying, Bob, that it's going to be used for general corporate purposes.

And remind me on the pretax amount.

It's in the neighborhood of, the proceeds from the sale about 170 million, all in. Capital freed up et cetera, looking at about 190 million.

Okay. And you said that could be used on top of the 300 million for buy back potentially?

It's available. At this point, we are just saying general corporate purpose, but the deal hasn't closed and until it closes, there's nothing available.

We go to Eric Berg with Lehman Brothers.

Thanks very much, and good morning. Rich, I apologize, I joined the call late because I had difficulty getting out of the Safe Harbor, mini conference that you have on the side there. Did you say in your prepared remarks, I thought I heard them all. Normalized level of earnings in your view in the quarter was significantly less than what it actually reported what exactly did you say?

You are breaking up, I can't hear your question.

Can you hear me now, Rich?

Ask your question again, please.

Sure, if you can hear me, I asked whether you had gone over what you believed to be the normalized level of operating earnings per share.

I guess all I can do is, I can't understand completely, but I think you are looking for normalized earnings and what I answered in relationship to Dave Lewis' question was this quarter had moved up from what I saw last quarter and this is ex the unusual prepays, make holds, partnership earnings from about 91 cents to about 93 cents and then I would expect something on top of that going forward, both from business growth as well as from prepays and make holds, which I don't anticipate going away anytime soon.

Can you hear me now?

I think so.

Okay. Okay. I'll try my best. If you can't hear me well, go to the next questioner. My last question goes to the life insurance business. While I see the strong level of sales, it still seems to me that you are selling a lots of -- You know, selling a lot of term insurance which is obviously, does not produce the dollar profit that permanent insurance does, and more importantly, it seems to me that to the revenues of the business, continues to be flat-ish, owing to, I believe, flat-ish et amount of risk. If I'm right about that assessment, what is it going to take to get those revenues really growing, and do you believe you are in this regard achieving progress?

As we commented on last quarter's call, we would expect to see relatively flat earnings in the life insurance sector/segment for the next few quarters, probably until the end of this year, first quarter of next. Over the last few periods, we've had face amount reductions being a major cause, rise in some reinsurance costs, internal replacements where in effect, reinsurance cost remained high even though the business revenue side came down. Those all are going to take a little bit of time to get through in effect be digested in the business to where we can get sales contributing to growth in earnings again, and as we indicated, in into this year or next year, it's before that will be likely to be behind us. We are looking at '05 growth as opposed to '04 growth.

For our next question, we go to Vanessa Wilson with Deutsche Bank.

Thank you. Rich, could you give us a sense of how we should think about the cash flow in terms of statutory earnings this quarter, and how much do we add in for asset management in the UK?

Asset management and the UK or --

I guess added, in addition to the U.S. statutory earnings just a cash flow number.

I haven't really nailed down any cash flow numbers. The earnings coming off the Dial specifically were about 4.1 million this quarter. So if that ends up closing in the third quarter, we will be, you know, getting a good portion of that in the third quarter, but then after that, likely would be gone. Our UK earnings are continuing in the life insurance business, are continuing to perform as we expect. We've been getting substantial cash flows coming to us from our UK operation as that business reduces its risk profile and is able, therefore, to free up capital and send it back to the US. Those are been nice contributors. As well as cash flow from our Investment Management operation has been growing with the earnings growth that they've had. Does that help?

Okay. And, back on the question of the hedging on the GMWB, you are charging 45 basis points for the rider. Is the 45 basis points just going in as revenue and there's no offset of expense in the income statement so it's falling completely to the bottom line on a GAAP basis?

It won't fall directly to the bottom line because ever the DAK offset, but about 6 RK factor on that business runs about 60 basis points or 60% in effect of what you would get against the 45. So a goods portion of it gets absorbed by DAK, and then obviously, taxes. So those would be reductions of what's coming through.

We'll go next to come Thomas Gallagher with Credit Suisse First Boston.

Hi. Just a question on your comments on expected spread compression, Was that really just related to your fixed annuity block, or also universal life? I ask that because I presume, and I know you are close to contractual minimums on your fixed annuity block but I presume you can continue to lower crediting rates on Universal life to offset that pressure.

My comment was related to our retirement segment and the fixed annuity block, we're not seeing much on the life side at this point in time.

Thanks.

Next question we go to Steven Schwartz with Raymond James. Mr. Schwartz, your line is open.

Can you hear me now? Priscilla, can you hear me? A couple of questions for Gary Parker. First, I was, I wanted to confirm, was Gary's point of view that the lapse rates were already so low on the high end business that you do, that the growth in the life settlement business really was not of particular worry to Lincoln national?

Steven, yeah, I guess the point is that, with our market focus, as you know, being up market and the financial planning approach to the business we do, whether the product is guaranteed or not, we are expecting fairly low lapse rates in our pricing to start with, so for the guarantee products, the differential we might use, might not be as much as it would be with other companies that are not as up market and financial planning focused.

Okay. And then, the second question I guess, maybe you can touch on A/ X X X reinsurance and what you see happening there. there's been a lot of noise about that subject.

Sure. Obviously, the reinsurance marketplace is tightening in general with regard to life products. For both our permanent products as well as our term products, and that's, you know, obviously, to date, at least, we've been able to pretty much mitigate any increases in our pricing. It remains to be seen what will happen as we go forward. With regard to the A/ X X X reserves, that's a competitive marketplace as well right now. Obviously, a lot of companies are using letters of credit to support those reserves, offshore reinsurance, and you know, we're pretty much in the same boat with the rest of the companies in looking for creative solutions to mitigate the effect of the higher guideline A /X X X reserves, and we are working on some solutions as we speak.

For our next question, we go to Ed Spehar with Merrill Lynch.

Thank you. I wanted to go back to the spread issue in the retirement segment. Rich, if you look at the, you know, I guess around 21 billion of fixed annuity reserves, I thought you said we should be looking for 4-5 basis points of compression each quarter going forward. And I guess if I do that math, and tax effect it, looks like that's more like 3 cents a share, so what am I doing wrong? Versus the 1 cent that you mentioned.

What I was mentioning was the experience that we had in this quarter as opposed to what we expect going forward.

What was the four to five basis points?

that was expectations going forward with, that we would see spread compression excluding prepays, make holds and those kinds of impacts of about 4-5 basis points. That's what we would see the yield on the portfolio, expected to decline relative to what we would be able to do from changing crediting rates. So compression of about a 4-5 basis points per quarter over the next few quarters obviously, it starts mitigating as you go out in time and the total portfolio rate comes down closer to new money rates.

Okay. So if I'm looking, but then if I relate that to the 93 cents or better run rate earnings that you were suggesting, absent anything else, there's a drag each quarter going forward of, you know, approximately a few pennies a share.

Yes, that's true.

Okay. Thank you.

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

A couple of numbers questions to follow up. Could you tell us what percent of the fixed annuity book is currently at the minimum crediting rate, and could you tell us what the average minimum crediting rate is on the book?

Todd, do you have that information or --

Yes, we have at present 61% of our retirement segment fixed to comp values at the contractual minimum. In terms of the average crediting rate in the second quarter, that was 3.93% on our fixed annuity portfolios.

Great. Thank you very much.

For our next question, we go to Mario Mendonca with CIBC World Markets.

Good morning. Last quarter, you gave us some information on what the excess prepayment was, about 10.2 million, unless I missed it, has it been quantified so far in this call or in the material you distributed?

It hasn't been quantified.

Okay. Is that by design?

Well, one of the problems we have if we quantify it, you know, as I indicated, we expect it to continue, and while the amount varies quite a bit, this quarter obviously, was an unusually high amount. As soon as we quantify it, that numbers tends to get taken out of earnings, and we don't expect it to go away, and that's the reason we hesitate to quantify it in a very specific way.

and just to quick follow up. Anything you can give us on the take up rate on the guarantees, GMWB's? Anything unusual happening in that respect?

No change virtually from last quarter.

For the next question, we go to Jeff Hopson with AG Edwards.

Is it reasonable to assume if the Dial deal closes that will be used for share re purchase number one. Number two, Delaware previously had some margin goals over the next couple of years. How would those be affected by this transaction? And then, any change in retail flows across the business as the quarter went on? Delaware did very well, relative to the mutual fund industry, just curious if some other areas were affected by a choppier equity market in the quarter.

First, talking, taking the one about the proceeds of Dial, by saying that we're going to be using that money for general corporate purposes, that means we will trade off all of the effective uses of that money. One potential use would be share re purchase. Not prepared at this time to say that's the only use, that it's the highest use. It's one of the uses of it, and we'll look at other opportunities there as well. We have not seen industry data yet come up for the quarter on, I believe, either life insurance or variable annuities, but the indication that we do have based upon maybe the first month in one situation, first couple of months of the quarter, is that just as with Delaware, we did gain market share in our retail variable products pretty much across the board there. With regard to the Delaware margin and the impact on that, I'll ask Hugh to comment.

The impact for '04 will be minimal, probably about 1 percent. And going forward with the retail component of the international business that we own, we expect that to get back to normalized in the same margins, or maybe a little bit better on the margins.

So fairly minimal impact is what you're saying?

Very good, thank you.

We go next to Joan Zief with Goldman Sachs.

Good morning. My first question really is just to follow up. I heard Vanessa ask you what your statutory earnings were, but I'm not sure I got the answer.

We haven't released anything on statutory earnings yet, Joan.

Okay. My question has to do with your comment about spreads on new business. We've been talking a lot about the implications of the in force, but you seem to allude that spreads on new business were a challenge, and I wanted to know if you could just talk about that in the sense of new business spreads being under pressure because of increased competition, is it the interest rate environment, the flattening of the yield curve, and does it effect not only your fixed annuities, but are you seeing that also affect other areas, other products in the insurance line.

I think the question is, what Rich was referring to specifically there, Joan, was in looking at the year-over-year change in the fixed annuity deposits that are coming in, and because of the current interest rate environment, and our pricing discipline to have acceptable return on equities, we have always indicated and continue to maintain that fixed annuities will vary quarter by quarter as we have the opportunities to achieve pricing objectives, we'll sell more when we don't, we'll sell less, and this past quarter, we really didn't see a fixed annuity marketplace that was attractive to us, so therefore, we, you know, just willingly voluntarily gave up sales on that.

But was that because the yield curve flattened, was it because you saw more competition that you felt was inappropriate?

I would say that it is a combination, a little bit of interest rate, but probably a lot of just companies out there wanting to maintain market share and being willing to sacrifice, you know, their margins, their goals, in order to maintain shelf space somewhere, and since we have never used fixed as a core product, or as a loss leader type of a product, we don't have that same type of a competitive rationale with it.

We go next to Al Cupercino with the Columbia Management Group.

I want to clarify one thing, the lapse rates assumed on the guaranteed business versus the non-guaranteed business, I think you said it was fairly close, Is one higher than the other? Are you assuming a higher lapse rate or a lower lapse rate on the guaranteed business?

Gary?

Al, we are currently in the products that we are pricing today assuming a lower ultimate lapse rate on the guarantee business that we are on the non-guaranteed business.

Okay. Thanks very much.

We go next to Sonid Comas with Sanford Bernstein.

Great. Thank you. Two questions on its WB product, first, I think you gave some information in terms of the 45 basis points and how we can think about what falls to the bottom line, or what is falling to the bottom line, but what is the aggregate total account balance for all variable annuities with this feature, just to get the face we should use to do that calculation, and second, I think Todd mentioned some stress testing of the WB to get comfort around the 45 basis points. I was curious in your stress testing what you assumed for the utilization rate of the feature and then how that compares to the level that you are seeing right now. Thanks.

Todd, you have the account balances subject to the WB 45 basis points somewhere in the 2 billion-dollar range?

2.2 billion, Rich. And that's about just under 5% of our total variable product account balances.

and the stress testing?

the stress testing as you would expect took not only our pricing assumptions, which without disclosing what those were, were much higher than actual experience has been to date, and then also assumed under different scenarios even higher levels of utilization of the withdrawal feature, and on those, on that basis, large number of scenarios, the end result continued to leave us comfortable. In fact, significant, significantly reinforced our comfort level in terms of the product design, the product attributes, customer behavior and what happens in certain down market, higher utilization scenarios.

And as a reminder, if you would like to ask a question, please firmly press the star key, followed by the digit one. We go next to Jason Zucker with Fox Pitt Kelton.

Just a follow up, Todd, I'm not sure I got the answer I was looking for. I was asking what the average minimum crediting rate is on the book. I think you gave me the June quarter actual reported crediting rate at 3.93.

I'm sorry, Jason. I don't have available right now the, that statistic. We will get back with you on that.

Ladies and gentlemen, due to time constraints, our next question, our final question will be from Eric Berg with Lehman Brothers.

Thanks very much. I just have one follow-up, and it is, it's this: By not holding the reserve at all for the GMWB, are you in effect saying that the option that you've written to the customer is worthless, or am I missing part of the calculation? How could the option be worthless, I guess is my question, and is that what you are in effect saying by not posting any reserve at all?

the, in measuring the option, we take into consideration the future fee income as well as the future cost and bring those back to today's points, to today from present value perspective, on that basis, it would be a asset, and our philosophy is we will not record that asset. We have floored the reserve at zero, that's what that means. So we are not saying it has no value, we're saying that we floored it at zero.

Thank you.

And ladies and gentlemen, we do have a few more minutes for question and answer, and for our next question, we will go to Bob with Langen.

Just one question. It sounds like you are getting a little bit more nervous about spreads today than you were three months ago, and I'm just a little surprised at the timing that we, you're doing this in an environment where loan rates have gone higher, and the fed is starting to tighten. Is there something to the shape of the yield curve or with what you are buying that I'm missing that would make you more nervous about spreads today than a quarter ago?

No, a quarter ago and earlier this year, we talked about the seconds half of the year when we would start to see spread compression become more significant, and that's what we are seeing. Just a matter of time as its portfolio ages, at lower rates, you are going to, you know, continue to see some tightening going on, so it's just now getting to the point where it's starting to have some impact.

But very clearly, we like the direction that Chairman Greenspan, if he follows through it, with continuing to move interest rates up.

We go next to Sonid with Sanford Bernstein.

I just had a follow up to my earlier question about the stress testing. Todd, did you sea in your scenarios, you actually take the pricing of the feature up? I thought that's what I heard, but I wasn't sure. Thanks.

No, some of the specific scenarios would be for utilization levels, well in excess of the pricing assumption. Obviously, a whole range of scenarios are going to include a wide range of utilization rates or scenarios. So in many cases, the scenarios did include much higher utilization

Just to be clear, that does not, does know saying we raise prices in those things, just when you price the product, you can expect a certain level of utilization, and we assume that levels of utilization in excess of what the pricing assumes so that if it puts more stress on the product itself.

We go -- For our next question, we go to Joan Zief with Goldman Sachs.

Thanks, I just wanted to know if you could give us an update on your search for a new CFO. Are you more focused on internal candidates, external candidates? How is this going along?

Gee, Joan, you just hurt Rich's feelings here, he feels like you are trying to push him out.

No, no, no.

When I had indicated, you know, when we first announced this at last year's investors conference, I had said that my timing was going to be in all likelihood a fourth quarter announcement. And that's for two reasons: One, Rich is going to remain on board through the finalization and the production of the 2004 K which will occur in March. And secondly, just as with two CEO's, you risk a lot if you have too long of a period where you have a CFO and a CFO designate in there, so you won't be seeing us, you know, make any announcements on here until we have probably a three month type of a window. As far as internal versus external, I've not been commenting on that. We have good candidates for this position is all that I'll be saying.

And ladies and gentlemen, we have no further questions on our roster at this time. Therefore, Miss Brown, I'll turn the conference back over to you for any closing remarks.

Thank you, and I'm pleased to hear we got through all the questions on the call, but as always, we're happy to take additional questions on details that have been provided here publicly on our investor relations line at 1-800-237-2920. We thank you for your time today, and good luck as you get through all the conference calls and reports. Have a good day.

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