Lincoln National Corp (LNC) 2004 Q4 法說會逐字稿

Good morning, everyone, and thank you for joining us for Lincoln Financial Group's fourth quarter 2004 earnings conference call. At this time, all lines are in a 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 firmly press the star key followed by the 0 button and someone will help you.

This call is being recorded and will be available for replay beginning today through February 17th, 2005. The replay can be accessed by dialing 1-888-203-1112. Again, that number is 1-888-203-1112. And enter the pass code of 4120960. That's 4120960.

Before we begin, I have an important reminder for you about Lincoln's earnings release. Any comments made regarding future expectations, trends, and market conditions, including premiums, cash flow, pricing and lost cost trends are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in Lincoln's most recent reports on Form 8-K.

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

Thank you. Good morning and welcome to Lincoln's fourth quarter earnings call. You just heard the Safe Harbor cautions so I won't repeat them. We appreciate your participation today and we invite you to visit Lincoln's 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.

A full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity to their most comparable GAAP measure is provided in our press release and in the statistical supplement posted on lfg.com.

Now, I would like to turn the call over to Jon Boscia, Lincoln's Chairman and CEO, and Richard 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. As we transition from the realignment of 2003, we looked to 2004 with the clear intent of executing on the goals we had established for ourselves and guided by our strategic intent to be the partner of choice to create, protect and enjoy wealth.

The quarter and full-year results underscore the commitment Lincoln employees made to delivering on our strategy despite the numerous regulatory distractions and the competitive pressures that were present throughout the year. The results also validate our strategy in terms of our strengths that product, distribution and brand provide.

With that, let me share with you some highlights from the quarter. The fourth quarter capped a year of strong results with many new records established across several segments, both on a quarterly and full-year basis. In the aggregate, gross deposits were a record $8 billion in the quarter, up 35 percent over the prior-year quarter. For the year, gross deposits were up 61 percent, reaching a record $30.5 billion.

Net flows, a key contributor to earnings growth, also hit record levels. For the quarter, positive net flows across all domestic businesses were 4.6 billion, up 84 percent over the prior-year quarter. For the year, net flows of 14.5 billion were up 135 percent over 2003 levels.

Underlying Lincoln's results are 2 very important differentiators. First, the breadth of solutions we are bringing to key partners with whom we do business. For example, of our top 25 relationships, almost 90 percent offer 3 or more Lincoln products to their clients.

Second, the depth of the relationships that we are building. When comparing 2004 against 2002, our research shows that in 5 of our leading firms we saw dramatic increases in the number of producers who sold 2 or more Lincoln products. This demonstrates the effectiveness of our business model to cross sell at the advisor level.

In addition, we also saw significant increases in the number of producers who sold Lincoln products in these firms. Increasing market share with our key distribution partners doesn't happen by accident. It requires product excellence, quality customer service, and robust wholesaling support.

Now, let me turn to the segments starting with Retirement. In our Retirement segment fourth quarter and full-year variable annuity deposits achieved record levels. Total variable annuity deposits for the quarter were nearly $2.2 billion, up 43 percent over the prior-year quarter. For the year, variable annuity deposits of 8 billion were up almost 66 percent, driven by a 94 percent increase in individual variable annuity deposits.

Fourth quarter annuity net inflows were a record 794 million, 48 percent over the prior-year quarter and contributing to a year where net inflows of $2.9 billion simply overshadowed prior year results. We're very pleased with these results given the number of companies that have entered the living benefits arena and the increase in the variety of product offerings available to the consumer.

We believe our success this year is the direct result of thoughtful product design, expanded distribution coverage, and an uncompromising, but measured approach to risk management. I'm extremely pleased with what we have accomplished, but at the same time keenly aware that we need to stay focused to maintain that momentum.

I would also like to highlight our success with income for life this year in the $410 million of new deposits we collected. We have talked about the need for retirement income as baby boomers enter the retirement phase of their life cycle and we are clearly beginning to see the demand increase for innovative solutions.

Now, let's turn to the Life Insurance segment. Retail first-year premiums were $231 million, a decrease of 5 percent from the prior-year quarter. For the year, record first-year premiums of 813 million were up around 2 percent, driven in part by strong MoneyGuard sales of $244 million, which were up 9 percent. The Life segment results are strong evidence that balanced product and distribution capabilities are both critical factors for driving growth when market conditions are shifting.

Multiple product offerings combined with expanded wholesaling support has provided us with the opportunity to sustain stable growth across a broader spectrum of the market. Universal Life remains our core product, but this flexibility affords us the opportunity to maintain market share on our terms.

Turning to Investment Management, Delaware posted an impressive string of record results for both the quarter and for the year. Fourth quarter deposits totaled almost $5.3 billion, up 45 percent over the prior-year quarter. We saw strong double-digit growth in the quarter for both retail and institutional deposits as well. Retail deposits posted a 51 percent increase over the prior-year quarter and institutional deposits of 2.75 billion increased 39 percent or more than 3-fold if you adjust for DIAL.

Full-year deposits were equally impressive, reaching a record $20.3 billion, a 77 percent increase over the prior year. Net inflows for the quarter reached a record 3.3 billion driven by net retail inflows of 1.2 billion, and institutional inflows of 2.1 billion. Record net inflows for the year of $10.3 billion were over 2.5 times last year's number.

Delaware's investment performance and the track record that's been established, continue to be the primary focus of the management team. On the retail side, strong 1, 3 and 5 year performance in all Lipper categories continue to drive deposits and net flows. On the institutional side, we see the evidence of consistent performance against relevant institutional indices in the number and size of institutional mandates we are winning. Evidence that Delaware's investment teams are highly regarded and they are able to deliver.

With that, let me turn it over to Rich.

Thanks, Jon. Yesterday, Lincoln reported fourth quarter net income and income from operations of 189.9 million or $1.07 per diluted share. Return on equity for the year was a record 14.3 percent. Overall, the results were better than expected, due in large part to favorable capital markets and continued growth in assets under management resulting from the record net inflows that Jon referenced.

I will go through the results by segment, but before I do that, let me provide some details on several components of earnings, including DAC unlocking GMDB and GMWB reserves and related hedging, prepayment and make-whole premiums and spreads.

At our November investor conference, I announced that we were moving to an enhanced reversion to the mean approach for amortizing DAC in our variable annuity and unit length business starting in the fourth quarter. This new approach applies only to equity market related changes in the variable products that do not change our best estimate of long-term profit expectations.

In other words, we are not changing our assumptions for long-term equity market returns based on short-term volatility. As a result of this change, we did not have any equity market related unlocking in the quarter for the affected lines of business, and only minor adjustments related to retrospective assumption variances.

Going forward, the results of future DAC reviews will depend on the magnitude and duration of the movements in the equity markets, either positive or negative, and how those movements relate to changing our long-term assumptions. While this approach reduces adjustments to DAC due to short-term volatility, significant changes in the equity markets that extend beyond 1 or 2 quarters could result in an unlocking charge or pickup.

Turning to variable annuity debt and withdrawal benefit reserves and related hedges, we did have a net pickup in the quarter of about $2 million after DAC and after tax versus our expectations. We expanded our hedging programs to include almost all of our death benefit reserves and adopted a 3-Greek strategy hedging not only the change in the markets, but the impact of interest rates and volatility on our GMWB embedded derivatives.

With respect to prepayment and make-whole premiums, we saw a decline in the quarter relative to the first 3 quarters, but still well ahead of last year's quarterly average. In 2003, we averaged about $3 million per quarter after tax and after DAC, and in 2004 we averaged about $8 million per quarter. The fourth quarter was midway between the 2 years averages. We continue to believe that we will experience some level of prepayments and make-wholes going forward, but they are difficult to project.

With respect to spreads, we obviously benefited from prepayment and make-whole premiums. In addition, we had favorable investment returns in some of our asset classes relative to expectations, and buyer behavior played a role in terms of transfers from fixed to variable accounts. Given where interest and crediting rates are at, we continue to believe that 4 to 5 basis points per quarter is still a reasonable spread compression expectation at this time.

Now let me turn to the segments, starting with Retirement. The Retirement segment reported income from operations for the quarter of 100.5 million, which included a net tax benefit of 3.5 million arising in large part from Microsoft's extraordinary dividend. As a result, we saw a decrease in the effective tax rate due to the increase in the dividends-received deduction. Retirement also benefited from prepayment and make-whole premiums, but this is the seventh consecutive quarter where we experienced favorable levels in one or several lines of business.

Looking ahead, hedging and a new approach to the amortization of DAC will reduce the segment's exposure to the volatility we have seen in the equity markets, although we will continue to see fee income movement tied to account values. Routine unlocking to reflect actual experience versus DAC assumptions will continue, but the impact should be less onerous barring any material changes in the underlying business.

In the Life segment, earnings of 74 million were about as expected, with several small variances netting each other out. The inforce business will continue to drive a stable source of earnings, but as we have discussed in the past, the earnings power of new business will be tempered somewhat by the constant pressure on margins and by the normal attrition inherent in any large, mature book of business. However, we benefit from a broad range of products and expect this line to contribute to bottomline growth in 2005.

Investment Management earnings of 5.2 million were down for the quarter, with about 4.5 million of the sequential decline due to the sale of DIAL. In terms of unusual items affecting operations post DIAL, the quarter included about 4 million of items including severance, higher performance based incentive compensation, and higher transfer pricing due to record deposit levels. Because distribution expenses related to investment products are expensed as incurred, there tends to be pressure on earnings during periods of strong deposit growth.

Delaware's prospects continue to improve. Certainly from the perspective of assets under management and their performance metrics. Margin expansion is a key focal point, as well as continuing to enhance the performance of those few asset classes that are below their Lipper averages.

Moving to distribution, the combined loss for LFA and LFD in the fourth quarter totaled 6.6 million compared to $15.1 million in 2003's fourth quarter. For the year, the combined loss was 41.5 million versus a loss of 66.6 million in 2003 or about a 38 percent improvement. Both LFA and LFD saw significant improvement in their respective bottom lines.

LFA streamlined its structure in order to deliver top-tier planning services on a much more efficient and consistent basis. And LFD drove revenue growth by expanding its wholesaler presence in key accounts and increasing market share in these firms. Going forward, we expect the combined loss to continue to decline, but not at the pace set in 2004. However, I would caution that results are sensitive to sales and revenue patterns, along with wholesaler and planner attrition, hiring and related expenses.

Lincoln UK's operating earnings of 16.6 million were in line with expectations. If you exclude the receipt of the 5.9 million after-tax insurance recovery against the selling claims paid in the past. For the year, operating income of 43.5 million was also as expected excluding the insurance recovery. For 2005, assuming normal equity and currency markets, we believe earnings in the $36 to $37 million range is realistic. However, the seasonality of premium payments for certain pension plans means that earnings as in 2004 are expected to be around 20 percent higher in the second half of the year than the first half.

In the corporate segment we had a pickup in earnings of 4.4 million associated with a reduction in the deferred tax asset valuation allowance in our Barbados Insurance Company. Future adjustments to the allowance will be dependent upon the amount and timing of taxable income that is generated in the Barbados Company.

Also in the corporate segment we expect our interest expense to be about the same as in 2004, as we see the full-year benefits of recent debt issuances offset by rising short-term rates. With respect to the Lincoln redeferred gain, we expect the amortization to run about $49 million for 2005.

Let me just touch on stock repurchases before turning it back over to Priscilla. During the fourth quarter, we repurchased $64 million of Lincoln stock, bringing the total amount repurchased for the year to just over 350 million at an average share price of $46. We expect repurchase activity in 2005 to be in the $100 to $200 million range until we receive more clarification on regulatory capital developments related to Universal Life and variable annuity guarantees.

With that, I'll turn it back over to Priscilla.

Thanks, Rich. We'd like to now open the call for your questions. In order to provide an opportunity for as many callers as possible, we will take one question and one follow up from each caller. Rufus?

(Operator Instructions). And for our first question we will go to Eric Berg with Lehman Brothers.

Thanks very much. With respect to the Life business, I think, Rich, that you said that you now expect -- that you expect the Life Insurance business to contribute to your earnings growth. Does that represent a change in your thinking from what you said at your Investor Day?

Not in a significant way. What we are basically look at here is a growth pattern that is going to be positive in '05, but certainly not at the kind of levels we would like long-term. If you will recall, back about a year and a half or so ago we said 2004 would be a relatively flat year and we wouldn't get out of the earnings pressure until about the first quarter of '05, and we are moving towards that point now, so we expect to see some growth in the business.

My follow-up question, separate question and this is my last, is help me understand the -- not really the economics, but sort of the bookkeeping of Delaware with respect to really strong performance? And what I mean by that is I think it said in the narrative of your news release that the results were hurt by incentive comp, but assuming I have that right, the incentive comp is taking place only because of extremely strong performance, which in turn translates into higher fee income. So do the earnings benefit from strong performance or at least initially? Or is there in fact -- is that sort of a negative initially with the benefit down the road? How does the accounting for strong investment performance work?

There is a couple of moving parts there, Eric. First on the bonus side, much of the bonus in Delaware, obviously, for the portfolio managers, et cetera, relates to their investment performance and so in the fourth quarter we had a couple million dollar additional cost related to incentive comps because of their strong performance. Over time that strong performance obviously drives net flows, and what we are starting to see, have seen during 2004, is improved flows -- net flows into the business. Of the net flows you have got the deposit piece and in the investment management world, unlike the insurance world, when we pay comp over to LFD and out to ultimate distributors that is not capitalized, it is expensed, so that is one of the reasons why the underlying earnings get depressed in times of strong deposit growth. Obviously, the earnings come later so you end up having embedded value in the business, both from the performance of the funds, as well as the flows of the assets into the business.

I understand. Thanks very much.

For our next question we go to Nigel Dally with Morgan Stanley.

Thank you. First question is, I was wanting to discuss how your views of consolidation in the Life Insurance market has changed following the MetLife/Travelers acquisition.

Nigel, I think what is possible to happen is a combination that I would say going all of the way back to GE's decisions last year to spin off Genworth, then looking at the Hancock Manual Life, and more recently Travelers and Met and American Express' decision to spinoff AFA. If you put all of that together I think what you might begin to see here now is a little bit of worry on the part of some of the consolidators out there that things are happening and they may be left on the sidelines.

So I wouldn't be surprised to see a step-up in activity resulting from a desire of people to be a continuing significant player in the market and worry that there won't be a lot of companies left if they don't act sooner rather than later.

Just on my follow-up. Looking at the spreads, adjusted for prepays, the spreads rose and I think you said that was because of good performance of the underlying assets. If you could just elaborate on that and also discuss whether it incorporated any corporate joint venture income?

On the spread side, we had some benefit from default securities paying interest, so that contributed. It was sort of unusual or unexpected in the quarter. Hopefully, it will become very usual as they continue to perform. We also had some positive in some of our alternative investments that contributed to the earnings positive in the quarter, so we didn't see the spread compression that we would have expected for the quarter. Not to say that it going to go away by any means.

We also had some positive benefit from the fact that we had customers transferring from the fixed to the variable accounts, which meant there was assets in effect still present to handle new money coming in the door so we didn't have to invest at lower rates to maintain the portfolio.

Great, thank you.

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

Thank you. Rich, just 2 clarifications, you mentioned when you were talking about GMDB, GMWB risk management, $2 million after tax. Could you just clarify what that is and was that above the line in operating earnings?

It is above the line in operating earnings and what it boils down to is we had about a net positive 1 million from the combined programs, in effect, fee income coming in, hedging costs, et cetera. That is relative to our expectations for a quarter of net costs of about $1 million. So that is where I get a 2 million positive variance from our expectations.

So it was $1 million of earnings, you would normally expect $1 million of expense.

Correct.

So there was not 2 million above the line?

Correct.

And then the other point that you made when you were talking about the Life segment, I got the impression you were saying that new business is coming in at lower margins than inforce business. Is that the correct understanding?

No, I wouldn't say it is coming in. I'm just saying that the inforce block and the profitability inforce block and changing composition as business migrates off the books and new business comes on is going to put a little pressure on what would otherwise be earnings growth from the new business. It is not saying that new business isn't as profitable by any means.

Thank you.

We go next to Steven Schwartz with Raymond James.

Good morning. Rich, I just want to go over the numbers to get to some kind of normalized thing here. You reported $1.07. I'm figuring excess prepays about $0.03. The corporate tax thing and the UK reimbursement $0.03 a piece. That would be $0.09, bringing it down to 98. Adding back maybe another $0.03 cents for -- well, actually you would take off about $0.01 for the hedge gain. Add back about, call it $0.03 for Delaware. Would that be about right?

The only number in there that sounded totally off base was the prepays. I think you said how many cents there?

I was thinking about $0.06 for the prepays.

About half that.

About half that for the prepays?

About $0.03 for the prepays. They're about 5.5 million after DAC and after tax, that's about $0.03.

And then a separate question just on AG 38 and particularly in New York, if you can give us some insight on how you are looking at that and what that might mean.

I'm going to have Mike Smith answer that question.

Yes, this is Mike. The impact is best to think of it in 2 components. First, there's the impact on our New York subsidiary where there is a small increase in reserves that does flow up to the parent company, but has a very minimal effect on LNL. LNL itself is an Indiana domicile company, and so the RBC that we report will not be affected by the changes in New York. However, New York -- we are an accredited insurer in New York and that means we report reserves to that state on their basis. At this point, we don't expect the additional amount of reserves we hold in New York to have any impact on our ability to pay dividends or the level of capital we are holding on an Indiana basis.

Mike, if that were to expand would that be -- if that was ultimately adopted or some similar model, how would that leave you? Would that be a major, major effect?

It would be an effect. I don't know that I would characterize it as major, major. There would be an increase in the reserves depending on the exact form of how it is adopted at the NAIC.

Thank you very much.

We go next to Joan Zief with Goldman Sachs.

Good morning. I have 2 questions. I guess 1 and a follow-up. So if interest rates stay at these levels, would you change your spread erosion? Would that go up or is your interest rate assumption basically interest rates are going to be staying here through the year? And if there is anything else related to the interest rate environment that I need to think about. So that's my first question. And then my follow-up question is just your statutory results, if you could give us a feel for what your stat earnings, capital and RBC ratio is likely to be.

Okay, Joan, this is Rich. On the spread compression at the investor conference back in November we indicated 4 to 5 basis points spread compression expected on a quarterly basis. The long-term assumption over the next couple of years that we were going to see a 50 basis point rise in the longer term interest rates in the area of the market that we invest in.

And that over a 12-month period comparing the third quarter of '04 to the third quarter of '05 our expectation playing that out 50 basis point increase in rates, 4 to 5 basis point spread compression resulting with compressed earnings on a quarter-over-quarter basis, ie, a full year's change in the earnings power. The Life and Retirement segments combined at 3.2 million. If that can help you, that is information that was in the slide at the IR Day.

And the second question related to statutory earnings. We have not yet completed that process or made any announcement relative to that, so we are not in a position to talk about statutory results at this point.

Okay. But let me just make sure I understand what you said to me when you answered the question. All right, you were saying 50 basis points, third quarter '04 to third quarter '05, that was what was indicated at the analyst day. All right, well, interest rates are lower than that and if you are saying -- if interest rates are not 50 basis points higher than they were in October or September -- October, whatever that is, then are you saying that it could be more than the 4 to 5 basis point erosion?

Absolutely.

Okay. Okay. Thank you.

We go next to Suneet Kamath with Sanford Bernstein.

My first question is a follow-up to Nigel's on the M&A environment. Jon, you mentioned that some companies may be a little bit more aggressive in terms of M&A activity. I'm just wondering what your thoughts are in terms of Lincoln's positioning, maybe if the Travelers business is something you would have looked at? And then I'll have a follow-up.

Suneet, we don't comment on any business that we do look at, so I can't say whether we were involved in any of the activity associated with Travelers.

Okay. But what about your feeling about Lincoln's positioning in an environment where you have these 2 large life insurance companies consolidating?

I believe if you look at the results for 2004, our ability to grow organically continues to be the best in the entire sector. Lots of companies are looking at acquisition and consolidations as ways to be able to achieve growth or get better operating margins, and having one of the highest ROEs in the sector already and having the highest growth rate across all of our products, we can do it the old fashioned way.

Okay. And my follow-up is about the trends in the living benefits business. As that field gets more crowded with new products and more competitors, do you think that there is going to be some pressure on pricing there? And is price going to be say a different point of differentiation relative to say where it is today? Thanks.

Suneet, I would hope that it doesn't. I'm hoping that seeing what happened with a number of companies that were trying to be price leaders as they were dealing with risky embedded options inside of their products taught the whole industry a lesson. We are not seeing any indication at this point in time that the key players out there are trying to lead by price. They are just really focusing on good quality risk management and getting appropriately compensated for the risks they are taking. And I would expect differentiation to be more along the lines of distribution, breadth expansion and distribution depth expansion as well, rather than price led.

Okay, thanks.

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

Good morning. I would like to talk a bit about the VA business and, obviously, John, it is hard to imagine that this is a unit that had negative net flows just a few years ago. Can you comment on how sales are looking so far in '05 and how much, perhaps your just sort of general outlook, how much longer Lincoln can keep this going focusing on the net flows? I'm looking at, I guess, the industry numbers last year, I think sales were up about 3 percent and yet Lincoln has got the strongest growth of the top 25 companies. What is it about your products that is doing it and it's obviously not doing it for your competitors?

I would say first it is continuing, Colin, through January we are up about 30 percent, so that growth is continuing to occur in the Company. And I don't believe that we can say it is any 1 thing. One of the points we tried to drive during our IRB conference in November is that it is the interplay of product, distribution and brand. And all 3 of those are working very well for us right now. We do have products that are competitively positioned in the marketplace.

I talked in my opening comments about both the breadth of distribution increase that we are seeing and the depth that the individual advisor level that we are seeing, and we have had the benefit of very, very strong brand awareness growth over the last couple of years as well. So all 3 of those are coming into play in a very strong fashion.

Just one last comment I would make there is, as you may recall that at the IRB conference that we had, I said if a company doesn't do any of those 3 well, it probably won't succeed. If it does any 1 of the 3, has a killer brand, a terrific product, or unusually strong distribution, it will probably be able to survive as 2 or 3 of those things work in harmony with one another the company is going to have unusually strong characteristics, and that is what we are seeing with Lincoln now.

Then to follow up. Given, obviously what -- the strength of the Company we have seen this quarter, and frankly throughout '04, why are you still not comfortable with providing earnings guidance unlike any of your peers and certainly the targets we know are there because they were referenced when you filed the comp plan [ph]?

Where we are right now is we are conducting a pretty thorough analysis, in fact, of what all of our peers are doing, how often are they updating their guidance, are they doing it once a year, are they doing it quarterly, what are they doing in between quarters. We're looking and talking with our audit committee about what role now in the governance sector does your Board have and your audit committee. As you may or may not know, you can't even put out a press release now without specific audit committee approval of the press release.

So we're working through all of those issues, and we are not ready to say that we are going to provide guidance or we aren't going to provide guidance, but different from where we were in November when I was asked that question and I just flat out said we're not going to do it, at this point we are really undertaking a comprehensive analysis of what is going on and what the implications are.

Thanks, Jon.

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

Thank you and good morning. First question was just I wanted to just follow up on some of the M&A comments. And, John, when you talked about having strong organic growth prospects, high growth rates, ROEs, et cetera, the first thing I really thought of is that -- I guess the question is, do you believe that you're going to get approached by another company?

Jason, at this point I would have to be foolish to say anything other than I would expect that every company out there that likes this business sector has Lincoln on the top of its list. Whether or not I think we will actually be approached or that we have been approached, I can't comment on that. But you could just talk any banker and know that Lincoln is at the top of everybody's wish list.

Okay. Understood. And then just a clarification on the VA comment that you just said with respect to them being up 30 percent next year. If I look at the first quarter of last year, I'm using a number of about 1.86 billion, which would assume that the first quarter would come out at about 2.4 billion in sales that would be a big breakout from the last 2 or 3 quarters. Is that an accurate interpretation?

No, it is not. I didn't say that I expect '05 sales to be up 30 percent.

Oh, I meant just in the next quarter.

Yes. All that I had said was that through January versus January of last year we were up 30 percent.

Okay.

I don't know what is going to happen in February and March.

Good enough, thank you.

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

A couple of questions. First, Rich, in past quarters you were -- you gave some quantification of the equity partnership income when it was below expectations and what the effect was. Can you do the same for us this quarter if it was contributing positively above expectations or was it pretty much in line with what you have seen historically?

It was pretty much in line this quarter. That's why it wasn't mentioned.

Got you. The next question I had is, can you just a talk about where you stand now in terms of excess capital? And kind of how you are thinking about the potential of regulatory changes as it relates to AG 38? And is that going to prevent you from being aggressive, let's say, in buying back your stock in the near term while there is still uncertainty there?

You have got that exactly right. We do have some excess capital. Our last numbers that we had from an RBC perspective was in the 325 percent range. That would imply with our leverage situation where it is 300 to 500 million of excess capital, but we are not carrying that excess capital because we think that is the prudent think to do for no good reason, we think that it's the prudent thing to do because there are risks out there.

And as I indicated we do plan on doing share buybacks in 2005 currently targeting between 100 and 200 million. And if we get some clarification and certainty around where we are from a reserving statutory perspective on some of these issues, we could raise that. But we are being cautious at this point in time because there are some risks there and we believe it prudent to carry the -- hold the capital until we know where those risks start settling out.

And 1 last question. Do you just comment on the success of your new 1-year step-up GMWB product and are you seeing other companies selling anything with close to that feature? I haven't heard of any one else out there with that specific product. I'm just curious if you are seeing competition with regard to that?

The product has got out of the chute very quickly, so I think we did 260 million of that in the fourth quarter and just started selling it in October. I think it represented about 30 percent of our SmartSecurity sales. 70 percent was the 5-year step-up and 30 percent was the 1-year step-up. It is gaining traction fairly quickly and, I think it is an attractive product and the pricing on it hasn't deterred the buyers from wanting that kind of a feature.

I don't know if others have anything similar to it. There is a lot of variability in product out there and, I think a lot of it has to do as far as attractiveness with the distribution capabilities of the wholesalers pointing out where and how it is best sold and for what kind of needs it becomes a solution.

Okay. Thanks.

(Operator Instructions). We go next to Bob Glasspiegel with Langen McAlenney.

Good morning, everyone. Question on the Life strategy. Should things stay competitive -- and by the way, I do applaud you for taking a more restrictive underwriting approach towards the product, but should things stay over competitive for a long period of time? Does it make sense to stay in the manufacturing side of the business? That is my first question.

And the second question is, should the sales decline in '05, I understand your strategy on selling other products, but should the overall flat revenues continue, does this business generate a lot more capital and does it change sort of your excess capital calculation that you are projecting for '05?

Bob, I -- I believe that we're in a period right now that all business lines face, meaning at any given point in time you have a lot of things lined up against a particular product. And based upon lower levels of sales in some of the pricing that is out there in the marketplace, our -- my preferred route is just to pull in temporarily and not try to price lead or put products out there that have poor risk management associated with them.

Generically though, however, if I look at underlying demographics, Life Insurance is going be a very important product for many, many years. In fact, you could even say a couple of decades to come. So I think its best years are yet in front of it rather than behind it, so we intend on remaining a very major and strong provider of Life Insurance.

Now, at any point in time that may mean that you have more capital tied up. As Rich has indicated, some of the issues that we are waiting to sort through here on the regulatory front and that we may need on a long-term basis, but if we can get good attractive free cash flow returning more than our cost of capital, that is not a bad holding position to be in until the recovery of the sector comes back on a stronger basis.

I'm not sure I understand the why staying wedded to the marketplace long-term, which I certainly agree with, negates over a short period of time, using a generic -- using a private label manufactured product. Why are they mutually exclusive?

Well, we don't make money on distribution. We make money on underwriting. You see the distribution cost as it comes through LFA and LFD, and you see the manufacturing profit, the underwriting profit as it comes through the Life segment. And once you make a decision that you don't want to be a manufacturer again, you can't get back into that side of it. And underwriting is where we believe you can make very attractive returns over a long period of time.

Got you. Let me pursue that with you the next time I see you longer.

I can't tell you the policy any more. That's forbidden so.

And for our next question we go to David Lewis with SunTrust Robinson Humphrey.

Jon, do you believe that annuities might gain any tax benefits in 2005? And do you see the regulatory issues developing with the 1035 exchanges?

I do believe that there is a reasonable chance, David, to see some tax benefit in 2005. As I have personally talked with Congressional leadership in both the House and the Senate and on both sides of the aisle, there is very solid support for a tax benefit to be granted to annuities if they are life contingent. In other words, immediate pay annuities. And it is a very -- again, it's supported on both sides of the aisle and in both chambers. So I think that is encouraging.

And I also would point out that as President Bush has talked about Social Security Reform, his administration has also talked about the role that annuities would pay on the privatization side of that, too. So not only might we have tax benefit, but we could also have governmental leadership towards annuities taking place. We'll have to see what happens. I'm sorry, your second question, David?

I guess if there is any regulatory issues that might develop in trying to control the 1035 exchanges?

I hope -- we have hoped for a long time that we see more regulatory scrutiny for 1035 exchanges. We -- I think it is safe to say we have seen clear signs in most major distribution firms that the firms are paying more attention to 1035 exchanges than they had previously, meaning they are down from what they had been. And I would just hope that we do have more actual regulations around it rather than just temporary, maybe knee-jerk reactions to regulatory inquiries. I don't know that it is going to happen, though.

Back on the tax benefit side the immediate pay, you had -- would guesstimate that if they were to put something in place it would more likely come in the form of distributions under a capital gains tax versus an ordinary income?

No, actually what is being promoted most and legislation actually forming, is that there would be an exclusion of taxes on any basis to -- an exclusion of 50 percent of the income coming out of the annuity up to a maximum of $20,000. So what that means is you have $40,000 of annual income that would be tax advantaged in that situation.

Great. Thanks very much.

And we go next to Jeff Hopson with A.G. Edwards.

Thanks. A couple of questions on Delaware. Your margins are still considerably below the industry, even if you add back the unusual items. Curious beyond just organic growth, if there is anything else you can do to get the margins up there? And then you mentioned the small number of products that are underperforming. What would those be? And are you making changes at this point to personnel, et cetera, or what actions are you taking to repair the small number that are not doing as well?

Jeff, on that, we at the November IRB conference we had talked a fair amount, you may recall, about our margins at Delaware. Jude and his team had put together a presentation and illustration showing the types of margin improvement that they expect to achieve to get back up to industry levels. And at our asset base at Delaware we are making consistent progress, but we are still a few years away from industry average multiples simply because of our starting point. Net cash flows are contributing significantly to it. But you have to build that year by year.

On the what else can we do front, there -- the major things that you look at there are acquisitions and there are 2 ways to do acquisitions. There is acquisitions of legal entities and acquisitions of talent lift-outs. We have up to this point in time, preferred the talent acquisitions. Our first big one was obviously the one that brought Jude himself to Delaware when we turned around the fixed income operation by bringing him in. Last year we brought in one of the best value management teams in the industry into the organization. So we have a good track record and skill base in doing that.

The underperforming areas have tended to be our mid-cap and large-cap growth stock sectors and we are looking at different ways of being able to strengthen ourselves in those areas. Again, in response to an earlier comment about what we might be doing on the legal entity acquisition side, I'm not going to speculate or comment on that.

Very good. Thank you.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Boscia, I will turn the conference over to you for any closing remarks.

Okay. Rufus, thank you very much. I'd' like to close this session by acknowledging that this will be the last conference call that Richard Vaughan will be participating in. You're all aware that Rich will be retiring before the end of this first quarter and Fred Crawford will be the CFO upon Rich's retirement. But I would like to acknowledge what I think has been true industry leadership in the area of transparency, of financial management, and outstanding risk management, and I know there were times over the last few years where investors got pretty frustrated with us because of our transparency in our accounting. But I think history has shown that was clearly the right approach and decisions to have taken.

And Lincoln is absolutely and unequivocally a better company today because it had the advantage of Richard Vaughan as its Chief Financial Officer for the years that he was in that role. And I would like to thank Rich for all of his leadership and service and welcome Fred into the role of CFO upon Rich's retirement.

Thanks, Jon. And thanks to all of you out there. It has been a great time working with all of you over the last 13 years. Your questions have been appreciated, I think they've also resulted in some changes here and keep coming with the good questions.

Thank you, Rich, you are the best. As always, we will take your questions on our Investor line at 800-237-2920 immediately following this call. Have a good day.

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