Lincoln National Corp (LNC) 2005 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Jefferson-Pilot third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]

I will now turn the conference over to Mr. Dennis Glass.

Good morning. And welcome to the Jefferson-Pilot third quarter 2005 conference call. I'm Dennis Glass, and I'm joined today by Terry Stone, Warren May, Bob Bates, and John Still.

I need to remind you before we start, that we may make forward-looking statements in this call about sales and other JP matters, and about our recently announced merger with Lincoln. Obviously, there are risks and uncertainties that could affect actual results compared to our expectations. We refer listeners to the risks and uncertainties referenced in the last three paragraphs of the earnings release, which is available on our corporate website at JPfinancial.com under Investors Press Releases. This morning we will first focus our attention, both with management's reports and Q&A on the quarters results. Following that, I will make a few comments about the merger and take a few questions.

For the quarter, Jefferson-Pilot reported solid quarterly earnings of $1.00 per share, and Terry will provide details per segment. Jefferson-Pilot's strategic execution remains strong, and our overall good results once again reflected the value of the diversity of our earnings. In our individual products business, sales momentum was very strong. Demonstrating our progress in expanding our wholesaling efforts, and introducing new products.

An important recent development that's not included in the quarter's results, is the introduction at the beginning of this month, of our mass affluent market initiative. The mass affluent entry is a comprehensive and focused product suite, sales support, point of sale tools, and reengineered manufacturing plant focused on the mass affluent market segment. We believe this initiative will significantly enhance individual life growth prospects over time.

Benefit partner sales were solid in the quarter although earnings were affected by higher claim levels in the group disability and life lines. While Bob Bates will, of course, add more color, I want to point out that the loss ratios we saw in the quarter, were within the range we consider normal fluctuations.

Investment results continued to be very good. Although new investment yields did remain lower than our portfolio rates, with new investment yields running at little more than 90 basis points, under our current fixed income portfolio yield during the quarter. Another 40 basis point rise from today's level, however, would equalize new money investment yields to the current portfolio rate.

Bond portfolio quality remained excellent and our commercial mortgage portfolio always a strong performer, reported the lowest level of delinquencies and foreclosures in several years. We bought 836,000 plus shares of our stock in the quarter. Returning $41 million to our shareholders and bringing the buyback total for the year to almost 3.2 million shares, or $156 million.

Terry will now give you a more detailed review of our financial results, followed by Warren with a review of individual marketing results, and Bob with a look at Benefit Partners. Terry?

Good morning. In the quarter ended September 30th, Jefferson-Pilot earned $1.00 a share, a 4% increase over the third quarter of 2004. Year-to-date we earned $3.13, an 11% increase over 2004. The results I've quoted are on a diluted basis before realized gains and cumulative effect. Jefferson-Pilot continues to deliver strong tangible returns to shareholders through cash dividends and share repurchase activity.

At current trading levels, investors in our stock enjoy a healthy 3.2% dividend yield. Through the third quarter of the year, we have returned $321 million in cash to shareholders. 165 million in the form of cash dividends, and 156 million in share buybacks. 42 million of those buybacks occurring in the third quarter. This repurchase activity depleted our plan to share buybacks for the year. Excluding unrealized gains, book value per share quarter end was $25.13, 9% higher than our book value at September 30th, 2004.

We continue to register industry leading returns. Return on equity was 16.2% for the quarter. And 17.2% year-to-date. In the third quarter, major revenue areas progressed very strongly. In particular, Universal Life product charges advanced 9%. Consistent with our very strong sales growth this year. Investment income grew 5% overall, and broker dealer concessions registered a 22% increase.

In the quarter just ended excluding realized gains and losses, consolidating revenues were up 5% compared to the third quarter of 2004. Three of our operating businesses, Individual, Annuities, and Communication showed positive earnings progression. Reported results for our Benefit Partners business suffered from heavy claims experienced in August, in Long Term Disability and Life. Overall, reportable segment results of 136 million were up 4 million, or 3%. All in, we're pleased with the quarter, particularly strong life insurance sales and good earnings in both life and annuity. On a year-to-date basis, reportable segment results before gains were up 9%.

I'll walk you through the business segments, commenting on various numbers on a pretax basis. And also summarizing certain bottom line results on an after tax basis. After tax results in Individual were 77.5 million. A 3% increase versus third quarter 2004. Year-to-date results were up 5%.

Core sales were very strong. Warren will describe sales activity in a moment. Fund balances in Universal Life increased 5% for the quarter, and 4% year-to-date. Universal Life Basic was up 2% for the quarter, and year-to-date. Pretax earnings in Universal Life were up 6% in the quarter, with that good momentum tempered somewhat by Traditional Life trends, as our Traditional business continued to decline.

Year-to-date the individual segment is up 5% after tax. With UL-type products registering an 8% gain in pretax income. A result we're very pleased with, particularly in this low interest rate environment. We would note in particular that in UL-type lines, interest margin increased 2.5 million, or 4% for the quarter. And was 2% ahead for the year-to-date.

This solid interest margin performance reflects good investment management results and responsible crediting rate actions, appropriate to the interest rate environment. Total product charge revenue was very healthy at 193.4 million. A 15.9 million, or 9% increase for the quarter. And 40.6 million, or 8% advance on a year-to-date basis. Cost of insurance charges were strong, growing at 6% for the quarter.

Revenue from expense charges grew to 40.1 million versus a lower than normal amount of 30.7 million in the third quarter of 2004, when the SOP adjustment and other unlockings reduced this line by 7 million. Mortality was favorable this quarter, while within the range of normal. Expenses excluding DAC rose by 0.5 million compare to the 2004 quarter, but were 5 million lower year-to-date.

Gross general and administrative expense was up in the quarter and year-to-date, due to strong sales activity and also to the start-up investment in our mas affluent initiative. All set forth in the expense exhibit at the back of your package. DEC Amortization of around 56 million was in-line with recent quarters, but higher than the third quarter 2004, when we had substantial unlockings in the line. We unlocked a positive 1.4 million of DEC pretax this quarter, compared to a positive 13.8 million in the 2004 quarter.

As you know, each quarter there are a variety of actuarial adjustments to various line items, such as DAC amortization, expense charges, and policy benefits. The combined effect of all these adjustments was $1 million less of after tax contribution this quarter, than in the 2004 quarter.

All in, this was a very good quarter for Individual, with great sales results favorable mortality, and good spreads management, producing the reported growth in operating income. We reported earnings of $24 million in our annuity line, up 6.4 million from the year earlier quarter. 4.7 million of the increase came from the FAS-133 adjustment which was a positive 2.9 million this quarter, versus a negative 1.9 million last year. When you adjust for the FAS-133 item, can you see that the line had 1.7 million positive bottom line growth versus the 2004 quarter. So ex-FAS-133 earnings for the segment were up 9% quarter-over-quarter.

Year-to-date results are ahead 4.8 million of which 2.2 million is attributable to the FAS-133 swing. Fixed annuity sales for the quarter were down 16% compared to last year, continuing the trend we've experienced year-to-date. We're pleased with our fixed annuity spreads ex-FAS-133 of 1.82%. On a quarterly and year-to-date basis, both with and without FAS-133 effects spreads are widening.

Base spreads are progressing positively, as high credited rate multi-year guarantee products roll off. Spreads benefited only modestly this quarter, about 7 basis points from incremental investment income above base. Our last rate increased to 18.7% as the rolloff of high credited rate multi-year guarantee products continued. Nonetheless, fixed annuity fund balances still advanced 2%, compared to the 2004 quarter, with declines in annual recessed and multi-year guarantee balances, offset by an increase in equity indexed annuities.

Total average segment fund balances increased 5% for the quarter and year-to-date. The growth in balances combined with increased interest spreads, resulted in positive earnings progression in the line. Lapsation behavior is in-line with our current DAC models, so no incremental adjustment of DAC for lapses was required this quarter.

Benefit Partners lost results came at the high end of their targeted range this quarter. Consequently results were down versus last year's third quarter and versus the second quarter of 2005. This fluctuation was primarily associated with adverse claims experienced in the month of August. Bob will give you the details on the quarter, and on otherwise good ongoing progress of the merged Benefit Partners, Canada Life operations.

The Corporate line had little activity of note this quarter. Increased floating rate debt costs of roughly 2.6 million pretax offset solid performance in expenses and investment income. Before gains and losses, segment results were 5.2 million after tax, a 300,000 decline from the comparable quarter. In the face of a sluggish advertising environment and difficult comparisons with last year, Jefferson-Pilot Communication had a record third quarter and 9 months, in terms of net income. Jefferson-Pilot Communication registered bottom-line growth of 3% for the quarter and 6% year-to-date.

We continue to focus on three key management disciplines, delivering strong audience rating, growing revenue market share, and maintaining expense discipline. Revenue growth in our business was 2% this quarter, compared to the year-to-date revenue growth pace of between 3 and 4%. In the quarter, Radio's revenues grew in the low single digits, while TV's revenues declined versus third quarter last year, when political and Olympic-related advertising was strong. Overall growth in advertising revenues in our Radio markets was lackluster at 1%.

However, we focused on one of our core management objectives, revenue shared growth, and picked up revenue market share in our radio markets overall. Our television stations focused on strong performance in local sales to replace as much as possible of high share of heavy political advertising revenues earned in Charlotte and Charleston last year. Our collegiate sports business continued its very strong year and basketball is virtually sold out for the balance of the season. Momentum in the sports business fueled by very strong sales productivity and the expansion of the ACC to 12 schools, has been a major contributor to JPC earnings growth this year.

Expenses in the communication business were well-controlled, advancing at 3% this quarter on an operating basis, and down sharply in the nonoperating areas, as we curtailed spending response to market pressures on the revenue side. Our radio TV and sports properties continue to perform at the top of their industries and ratings in industry recognition. Our radio stations and talent received 8 Marconi nominations, these are the radio equivalent of Oscars, and won two. One by Atlanta STAR 94, and one for our Smooth Jazz station, KISM, in San Diego. Reflecting its news leadership in northern Virginia, our Richmond television station recently hosted the only statewide debate between the candidates for Governor of Virginia. Demonstrating their ability to mobilize their audiences, our broadcast team raised close to $7 million for hurricane relief.

Warren is now going to give you the details on our strong sales quarter.

Thank you, Terry. Good morning. As a brief overview, life insurance sales did continue to reflect 2005 quarter-over-quarter momentum. When compared to a soft third quarter of 2004, the numbers look exceptional, but the reality is sequential growth and a meaningful run rate over the last three quarters, as new markets and field expansion continue to deliver great results.

The annuity business, driven by the equity index annuity sales dropped in the third quarter, both sequentially and when compared to 2004. Increased competitive forces and a degree of uncertainty that was created by an NASD letter to members, potentially positioning index annuity products as registered securities, each contributed to our sales decline.

Now, let me add a little more detail of results beginning with the life insurance sales. Total life sales for the third quarter totalled 80 million. A 26% increase over the second quarter 2005 results. Individual market sales results, that is our non-community bank business, were strong in our independent general agency and IMO channels. The results did include several large cases, which we do not view as recurring. But excluding those large cases, which equalled approximately $15 million of premium, sales remained up sequentially and up 35% compared to the third quarter of 2004.

Of particular note, more than 30% of the third quarter 2005 sales were delivered by distributors who were not affiliated with Jefferson-Pilot 24 months ago. The strategic focus on national accounts, wire houses, and specific geographies with an expanded wholesaling force, is now delivering measurable results of consequence.

On a year-to-date basis, total life sales are now 31% ahead of 2004 results, and are indicative of our momentum. Sales results are driven by the well-rounded product portfolio that's been delivered to the marketplace over the last 12 to 18 months. No single product represents more than 25% of our sales, and no additional individual product introductions took place in the third quarter.

The community bank business remains pressured in the low interest rate environment. But again with recent increases in 10-year treasury, we will continue to monitor this opportunistic market. Our premiere partners who have already qualified or that are on-pace to qualify, are now a solid 24% ahead of 2004 levels. Life insurance inventory remains strong, as application counts continue to exceed prior year levels.

As Dennis noted, on October third, the mass affluent Advantage platform was delivered to the marketplace. Products, sales support, planning tools and a new efficient processing factory, were all rolled out to our broad base of distributors. New product illustrations and application flow commenced in the first week. Our first issue date for Advantage products is today, so results will be available to you when we review Q4 '05 results. The interest and excitement by distributors is strong.

Now, a few comments on the Annuity business. The third quarter annuity sales totalled 263 million, a decline of 9% from previous quarter, and 16% below third quarter '04 levels. Year-to-date sales of 798 million are now 13% behind 2004 levels. The competitive environment remains intense, with longer duration, higher compensation products still driving the business.

But in addition, the agency channels in particular were challenged in the third quarter as the NASD issued a notice to members, suggesting broker dealer supervisory responsibility for the sale of index annuity products. The notice created uncertainty in the minds of producers, broker/dealers and manufacturers, about how best to interpret the notice. We do expect further clarification over the next several weeks. This regulatory uncertainty combined with increased competitive forces in the EIA marketplace, resulted in our agency channel sales decreasing 17% from Q3 '04, and 16% sequentially.

On a positive note, the financial institution's channel, which is less affected by the NASD letter, delivered its biggest quarter in 2005, with sales totaling 77 million, a 14% increase over the previous quarter. New bank relationships noted last quarter are now delivering results. In the fourth quarter will deliver the rollout of EIA products to another new and significant bank relationship. Equity index annuities represented 73% of our sales in the third quarter, and are now 75% of our sales on a year-to-date basis.

A couple of comments on Jefferson-Pilot Securities. Jefferson-Pilot Securities Corporation sales and revenue growth remains strong in the three quarters of 2005. Third quarter GDC of 29.1 million, which is reported net of JPV/UL is 22% greater than the third quarter 2004. And on a year-to-date basis GDC is 11% greater than 2004.

Our registered representative recruiting activity in the third quarter saw a 44% increase over the third quarter 2004, as we added new quality representatives to the firm, and began to recognize the benefits of our national advertising campaign that kicked off in the second quarter.

So in summary, the third quarter of 2005 further demonstrated the growth momentum in the core life insurance. As with the three previous quarters, the third quarter of '05 represented the largest third quarter in our history. Our sales support teams continue to grow. Our geographic expansion is delivering results. Our sound diversified product portfolio is being well received and our efficiency through technology has broader applications for our distributors.

Of specific note our new web-enabled illustration system hit the marketplace in August to a very positive reception. Combined, these deliverables in the affluent marketplace with the rollout of the Advantage platform for the mass affluent, and things are moving quickly and profitably at Jefferson-Pilot. That would conclude my remarks.

Now I would like to turn it over to Bob Bates.

Thank you, Warren. Benefit Partners earnings fell short of last years quarter. Earnings were 15 million versus 19.7 million for the same period last year. Year-to-date earnings are 70.1 million, versus 50.8 million year-to-date last year, a 38% increase. These results were driven by elevated loss rations simultaneously in our two major product lines, Life and LTD. And to a large degree confined to one month, August. Our short term disability and dental lines performed well for the quarter.

Premium income for the quarter was 287 million, up 1% from 284 million the same quarter last year. Year-to-date premium income is 886 million, versus will 824 million last year, a 7.5% increase. The relative modest premium growth reflects somewhat higher than expected lapses that occurred in the Canada Life block earlier this year, and the runoff of another small closed block. Our core business premiums were up 19.4% for the quarter and are up 19.5% year-to-date.

Our total non-medical loss ratios increased to the high end of our expected 72 to 75% range, at 75% for the quarter. With respect to total non-medical loss ratios, we would expect results to continue to be within the 72 to 75% range, and trending more towards the mid-point. I would also note, that over the past 23 quarters our total non-medical loss ratio has only exceeded 75% three times.

With respect to our Life line, the loss ratio was elevated to a level we have not seen since the third quarter a year ago, and slightly below fluctuations we experienced in the first quarter of 2004, and the fourth quarter of 2003. This was driven by higher overall claims incidents including higher incidents of claims over $100,000. Our thorough review of this experience does not indicate any systemic problems in our block. This is simply the type of fluctuation that will occur, and that we have experienced from time to time, followed by more favorable and expected experience.

With respect to Disability, our STD line continues to run exceptionally well. Our elevated LTD experience for the quarter, was a function of several performance metrics, deviating from historic levels. Two factors are contributing to this adverse LTD experience. New claims approved for payment increased slightly above our recent trends. And concurrently, claims terminations for the quarter, were below our historical performance levels. Though we believe that there are environmental factors possibly impacting these results, we also feel to some degree this is operationally driven.

During the past year as we have grown and integrated the newer staff in our claims operation, the continued focus remains on their training and development to achieve full proficiency, while excellent progress is being made, we're not yet up to our usually high standards.

With respect to the potential that we might continue to experience somewhat higher levels of incidents than historical performance. We will continue to closely monitor industry incidents data, as well as our own. Though these environmental factors may self-correct, we have been proactive by enacting a significant rate increase in the first quarter of this year, in response to the emergence of this data.

Additionally, we earlier engaged outside actuarial consultants, who reviewed our results and during the past quarter, we asked another third-party to thoroughly review our underwriting practices. Neither of these external reviews suggested systemic deficiencies driving LTD results. Despite those findings during the current quarter, we will again increase rates, we believe these proactive actions, combined with the continued development of our people, will continue the very positive results that we have delivered for the past six years, since Benefit Partners was formed.

Our disability margins and ROEs have consistently been among the top level of performance in the industry. Sales for the quarter were strong, 57.8 million, versus 46.7 last year, a 23.7% increase. Year-to-date, sales are 180.6 million, up 21.4%. There are two very positive aspects to the growth. First a very significant portion of it is in our sweet spot. The 200 and under market. 56% in that segment versus 51% last year.

Secondly, we are seeing some real traction developing from the many new sales reps we have added the past 18 months. Since the beginning of 2004, our sales force has increased from 87 to 124 reps. As we have utilized expense savings from the Canada Life acquisition, to invest in our core growth.

Finally, as we head into the fourth quarter, notwithstanding the fluctuations that are inherent in this business, we believe that our underlying business fundamentals are solid. Our significant expense advantage versus the industry, our more conservative plan designs, our unique business model, and our highly productive distribution system position us well for the future.

Thanks, Bob. This completes our formal remarks about the quarter. And we'll now take questions from you.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question is from Saul Martinez with Bear Stearns.

Good morning. Just sort of a housekeeping item, are you taking questions on the transaction later after you make some remarks Dennis, or should we ask questions specific questions about the deal? Or can we ask specific questions about the deal now?

Saul, I'd like to separate the quarter from the merger, so after we exhaust the questions on the quarter, I'll come back and make a couple remarks about the merger, and then take questions again.

Okay. That's fine. Terry, if can you talk about your capital position, how you're looking at excess capital today? And then secondly, if we can talk a little bit about your spread resiliency in the fix annuity business. And I guess I'm breaching the subject of the merger a little bit.

But you've spoke innocent past about issuing funding agreements as a means to offset, as a means to replace some of the multi-year stuff that's coming off your books, and maintaining your spreads. Is that still part of the strategy going-forward, especially as the deal comes through, and would that sort of spread -- would that strategy still be in place post-Lincoln deal?

Saul this is Dennis, let me talk about the annuity spread resilience first. Year-to-date the spread is 189, versus last year's year-to-date of 187. For the fourth quarter, we're expecting to maintain the 189.

With respect to the second part of the question that has to do with funding agreements, everything that we might have done before the transaction, will have to be looked at through the view of the combined companies. And so I can't be specific about that.

Okay. Just a follow-up on that, what proportion of your fixed annuity account values today, are in equity indexed annuities now?

Let's get that fact for you. Warren, do you have that available?

About 30%.

30%. Okay.

Just on the excess capital question, Saul, we would estimate that at 9/30, in the neighborhood of about 350. So kind of in-line with the levels we've been talking about.

Okay. And that's based on the assumption of maintaining a AAA financial strength rating?

It's based on our current status quo.

Great. Thanks a lot.

The next question is from Edward Spehar with Merrill Lynch.

On Benefit Partners, I think last quarter, there was a comment made about the 72 to 75% benefit ratio. And the expectation I think to sort of be toward the lower end, and I heard more toward the mid-point now, maybe you covered this and I'm just missing, but what is it that's sort of changing? If this is a normal fluctuation, what would make you think that maybe the loss ratio would be a little higher, and related to that, some of the things that you're talking about, in terms of incidents, et cetera, are sort of the opposite of what we heard yesterday from Stan Corp., so I'm just wondering if you can help us understand a little bit more, what's going on in the Benefit Partners, and then just one final question, for Terry.

Beyond the FAS-133 adjustment, is there any other what you would consider to be unusual items? I know you covered the DAC, but in terms of excess net investment income? Thank you.

Yes, this is Bob Bates. With respect to loss ratio guidance, this incidence may clear up on its own, there's certainly is substantial incredible industry data, that suggests that higher incidence industry-wide is following lower job formation during this jobless recovery from the past recession. That may well be impacting us, it may not. If it is, it may clear up on its own, it may not.

As I indicated in my comments, we believe that some of our higher incidence is operationally-driven. We believe that as our new people are integrated into our claims operation and their proficiency levels get to our standard proficiency levels, that could have an impact on both incidents and claims terminations. So there are a number of factors in play, which I mentioned. We're simply being cautious if indeed there is an environmental factor at play, that may continue, it may clear up. And we're simply trying to be cautious and guide to you a more central zone of the range.

With respect to this being different from what you may have heard yesterday. One company's block of business can well perform differently than another companies at various points in time. We've gone through periods of time where competitors were reporting certain movements within their block, and we didn't experience that. So we can only report on what we know, and what we're experiencing. So we're simply trying to be cautious as we try to guide you.

Is there any element of this cautious, or a little bit more cautious view, that relates to the development in California with Union Provident, in terms of the potential expanded definition of disability?

No, there isn't. We are very familiar and aware of all the points of those issues, and we comply very well with what would be requested from the Department of Insurance. So that does not have an impact. It's simply the trends that have emerged, and our hope that they will clear up, and we're certainly taking proactive pricing actions, as I've indicated. But they may or may not in the next quarter.

This is Dennis, on the investment income question. We have incremental investment income above the base yield of the portfolio every quarter. It just so happens this quarter, we have the least amount of that of any of the previous six quarters, so I think it's really an incidental number in the context of the overall discussion today.

Thank you.

The next question is from Vanessa Wilson with Deutsche Bank.

Bob on the claims in the disability business, you segregated it into incidents, and then also change and recoveries, could you help us understand how much -- in terms of magnitude, how much of the issues in this quarter related to existing reserves, versus actual new new claims that showed up?

Well, that's pretty tough to do, because at best it would be imprecise. But I can tell you the things that we do know. We do know that incidents on our new claims is above historical performance levels.

Okay.

We know that terminations of claims are below our historical levels. We do know that there is credible industry data suggesting that there is an upward trend in industry incidents, and ours has been tracking that somewhat, and we do know that we have more new people in our claims operation, as a result of our growth.

And that their proficiency is not up to our usual high standards quite yet, though great progress is being made, and we measure that quite regularly, it would be very imprecise to speculate specifically which came from which, but we do know that those factors are in play, and we're addressing all of them, both with pricing actions and our claims processing training.

Okay. And Terry, I just -- I didn't get or understand the FAS-133 conversation on the annuity business. The net investment income is 157 million this quarter. The way I calculated it, it's almost 15% up year-over-year. But the fund balances are only up about 5%. Could you help reconcile that a little bit?

I think what we told you is that if you look at -- I guess I apologize one more time in one more quarter, about how all of these impacts are flowing through the annuity line, and it makes for a great deal of distortion, I think in what you have to look at. On a line-by-line basis, but the EIA option adjustments, there's two types, one is the type that is completely hedged, and that is on the current choices of our annuitants, and that's going to flow through and distort the net investment income line. And in an almost exactly equal amount, it's going to distort the policy benefit line. That's why the investment income looks so strong, compared to the fund balances. There's the separate issue of the FAS-133, which is separate.

And you said that was 2.9 million?

Yes, and that's listed right on your exhibit amount. And that is the amount that our results, we would say distorted in terms of the bottom line. The first set of changes offset one another. And, therefore, when you look at pretax margins, they're equal and offsetting and therefore they don't distort the bottom line result.

The FAS-133 is a swing which is a purely accounting swing, that is talking about what will might happen in the future, on what I'm going to call the tail of the business, which is not currently hedged. Because we're not in those periods. And that's the part that we ask you to consider, and that we put right on the face of the exhibit here, the FAS-133 adjustment, which in this quarter was after tax 2.9 million, as compared to 1.9 million to the other direction in the comparable quarter. So if you back that out of the results, which we would do, to try to get the fundamental progression of the line, you have a 1.7 million increase bottom line to the line, without that distorting accounting affect. That's what we review as the fundamental progression in the line, which is up 9%.

Thank you.

Your next question is from Tamara Kravec, Banc of America.

Good morning, thank you. Just a question on your sales and distribution. You said of particular note that more than 30% of your sales were delivered by distribution, not affiliated with the company. In terms of your growth and wholesalers and channelling into wire houses, can you give us a sense of how much more you have to go on that initiative? Are you happy with the number of wholesalers you have, and how that's developing?

I would tell you that we are continuing to expand the wholesaling force, the impact that they're having, in both the existing same-store relationships, as well as the expansion into the new worlds, say we have room for more, so we're continuing to search the marketplace for more talented people, and we'll continue to add folks to that force.

As it relates to the new relationships when I use the 24 month commentary, some of those are actually just within the last 4 to 6 months. We have a lot of room to grow with some of those newer relationships. The gestation period to on-board familiarize with product and capabilities and where our products best fit, does take a period of time. And so I would suggest to you that we have plenty of room to grow, specifically with some of the larger national accounts that are now placing Jefferson-Pilot on the platform, and then the wire house business, which is really one of the 2005 forays for us, is really just beginning. So we still have plenty of room to go.

Can you comment on the competitive environment and the shelf space that is out there right now, that really seems to be shrinking, what is your view on that?

I think it is a highly competitive environment. It is an obvious reflection of why we thought mass affluent would be a nice compliment to the affluent world, to round the book of business. I do think that as we look at some of the national accounts and larger distributors, they are trying to narrow their field, and find diversification along with the objectivity of several carriers, but the historical fleets of 10 to 20 companies on the platform has narrowed substantially, and we fight every day to position ourselves there, and we are positioning ourselves with the value proposition.

It's not purely driven by product, it's not purely driven by people. It's not purely driven bring underwriting. And it's not purely by technology, it's a combination of all those things, that I think position us well to get on to those platforms, and so far well received.

Okay. And then just one follow-up question on the Benefit Partners. How would you view your pricing, relative to other pricing in the marketplace, and I ask because we generally do a survey, and it seems to be coming up that your pricing is viewed as being a little bit more aggressive, and I just was hoping for a comment on whether you think that will pose a problem for rate increases going forward, or the reason for the incidents going up, or if you could just reconcile that as well?

Yes. The data that you look at that would suggest in a our pricing might be more aggressive than others is interesting data, but really doesn't tell you very much. That would be similar to comparing one company whose average life insurance policy size is a $1 million, to another company whose average policy size is 1.3 million.

What you really have to get at is the benefit that you are underwriting, referred to as monthly covered payroll in long term disability jargon. And that's what you have to really get at. And I have that data.

For example, looking at the industry as a whole, all cases, our monthly covered payroll averages $3592. The industry's average payroll is $4190. So our average premium life on that scenario would be 184, while the industry's would be 200. If that's all you looked at as a premium for life, you would conclude that we're priced more aggressively. When you look at the monthly covered payroll, and the average rate that is driving that payroll, our rate is $0.43 versus the industry's $0.42. Then as you get down into the smaller indemnities, the lower benefits, which is really our sweet spot, 60% of our business has 10,000 or less benefit, if you get down into the cases that have that type of a benefit, our average rate is 43 versus the industry's 41. And our average monthly covered payroll is 3496 versus 3610.

Have you to go beyond this superficial premium for life, and really understand what is the benefit that's being written or insured, and ours is typically considerably less than the rest of the industry, as indicated by this data. And there's some very valid reasons for that. Suffice it to say, premium for life is not a good indicator of relative pricing effectiveness.

I think we should take one more question on the quarter, and then talk a bit about the merger. That will be help for those that might have to leave at the hour. Next question, please.

Your next question is from Heather Hunt with Citigroup.

Thank you and good morning. I was wondering if we could review your geographic and industry exposure on that disability block. Do you have much exposure in Michigan, where there is a lot of turmoil in the auto industry, and also what was your exposure in the hurricane-affected areas?

Well, first of all, we monitor our exposure as you would expect, and we don't have any real concentrations of risk in any one particular occupational classification, or any geographic area. Clearly we do write business in Michigan, and have a great office in Detroit, and throughout the Midwest where there might be businesses that support the automobile industry, and we're very attentive to the pricing of those particular occupational classifications.

With respect to the hurricanes, we unfortunately, don't have the strongest presence in the state of Louisiana, in terms of coverage. So we really had minimal exposure there. I think we've had only one very small life claim, so we're very attentive to these hurricanes, and at the present time have very little, we believe, morbidity or mortality exposure. Some premium exposure in Louisiana, where businesses, small businesses are having trouble getting back in business, but very modest.

Thank you, Bob. If it's all right with everyone, I'll make a few comments about the merger, and then restart the Q&A. With regard to the merger. Both sides are working very hard to make the regulatory and shareholder approval process as efficient as possible.

And most important to ensure that an effective and thorough integration plan, is in place at closing, and executed after closing with the precision for which both companies are known. I'm confident in our ability to achieve the identified benefits of this combination. It is clear to us that the combination will provide an excellent platform for growth and shareholder value creation, specifically, we believe that the power of Lincoln's distribution, coupled with Jefferson-Pilot's proven ability to operate on the cutting edge of efficiency in the industry, will create an exceptional growth-oriented enterprise for both the top and bottom line.

JP and Lincoln's businesses have little distribution overlap, and that means we can continue to build on our strong individual basis, without loss from redundant distribution. The merger is expected to add a significant 6 to 7% to Lincoln's consensus IBIS earnings per share estimates by the end of 2007, based on cost savings and planned share repurchases. This estimate does not factor in potential topline synergies. Transaction again is expected to create substantial shareholder value in the near and long term.

Near term the capitalized value of the 180 million of planned expense savings is in the range of 1.2 billion, or 8% of our combined market values. 1.2 billion is well over the premium paid by Lincoln. Jon Boscia and I are confident in achieving these savings. As an example and at a high level, driving Lincoln's, life, business, G&A expense ratio to JP's industry low 8%, would provide savings above the $180 million target. These ratios, of course, include corporate allocations, and would reflect cost reductions achieved outside the life businesses direct expenses.

Finally, we expect the benefit from increased scale in every aspect of the operations, including distribution presence as I've mentioned, and for cross-selling, product development, risk management, and best management branding, and capital efficiencies.

So with these brief remarks, I'll open it up for questions about the merger. No questions?

No, sir.

Good. That means we've answered everything satisfactorily. I'd like to thank everybody for their attention. And that completes the third quarter analyst call.

Thank you for attending today's conference. You may now disconnect.