Lincoln National Corp (LNC) 2006 Q1 法說會逐字稿

Good morning, and thank you for joining us for the Lincoln Financial Group's first quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). 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 loss 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 filed with the SEC, including the Form 8-K filed yesterday.

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

Good morning and welcome to Lincoln's first quarter earnings call. You just heard the Safe Harbor caution, so I won't repeat them. We appreciate your participation today, and invite you to visit Lincoln's Website, LFG.com, 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.

Thanks, Priscilla, and thanks to all of you for joining us this morning. As you know, the merger between Lincoln Financial Group and Jefferson-Pilot was completed on April 3. So this is the last Lincoln only quarterly earnings call before we begin to report on a combined basis. Included in the statistical supplement we filed last night are several pages that summarize the first quarter results of Jefferson-Pilot. Dennis will make a few comments on those numbers in addition to Lincoln's results.

With the close of the merger now behind us, we have put into motion the integration plans that had been developed in the months following the announcement and leading up to the close. The organization structure is in place. Management teams have organized their respective businesses and functions, and we are operating as one company. The effort on the part of all employees has been nothing short of outstanding, as I see the professional commitments and personal sacrifices each employee has made to ensure our success.

Whether we're talking about integration or operations, the common thread has been execution. Companies often use integration as an excuse for a slip in operating results. And we have had our share of challenges as we execute on a transaction of this magnitude. However, as the numbers indicate, effective planning, coupled with efficient and focused execution, have delivered another quarter of not only strong results, but results at or near record levels on many fronts, including total gross deposits for the quarter of $11.7 billion, up nearly 50% over the prior year quarter. Domestic net flows of $6.2 billion in the quarter, up more than 60% over the prior year quarter. Operating earnings per share of $1.25, one of the highest on record, and certainly one of the strongest first quarters on record. And operating return on equity of 14.9%.

Economic conditions have certainly played a positive role, with the equity markets up 9.7% over the trailing 12 months, as measured by the S&P 500. While not having a material impact to the quarter's results, long-term interest rates are now cooperating with the ten year treasury up 70 basis points this year, and new money rates now approaching portfolio rates. In fact, unless interest rates reverse themselves, it now appears that the continued risk of spread compression has been minimized. Fred will say more about this later.

The competitive landscape has not been as accommodating. Life Insurance sales continue to be hard fought, with companies finding success in pockets of expanded distribution and in narrow pricing or risk ladders. The annuity marketplace continues to see new entrants in the race to secure a position in a growing retirement income marketplace. If you watched any of the NCAA Basketball Tournament on television, the number of advertisements for retirement products and services was astonishing. However, Lincoln continues to leverage our distribution relationships to expand or maintain market share.

In April, following the close of the merger, we held our first Board of Directors meeting for the combined Company, as well as our first official meeting of our new senior management committee. Those meetings solidified our view of the opportunities and challenges in the market we serve, and to revalidate the strategic vision of the Company.

Coming out of those meetings we remain committed to being the partner of choice for the accumulation, protection and the enjoyment of wealth, recognizing that the products we now offer provide greater access to the clients we wish to serve. Our three strategic pillars of product, distribution and brand have been strengthened considerably by the merger. Likewise, our core strengths of an A player workforce and sound risk management have been enhanced by the merger, and we now possess an expertise and operational efficiency that is unmatched.

The size and diversification of our balance sheet and earnings provides us with the capital and leverage we need to continue to offer innovative products for today's consumer, and to have the financial stability expected by our shareholders and employees as we continue to invest in distribution and other long-term initiatives.

Continued outstanding organic growth and integration will remain our top priorities in 2006. The momentum that the business lines enjoy today serve to expedite a successful integration by forcing us to concentrate on what is important, and that is growing this Company as effectively and efficiently as possible. With that, let me turn it over to Dennis.

As Jon said, it is very encouraging that we enter into this merger on such a positive note. Heading the integration planning during the past six months has given me a detailed view of the product offering and expanded distribution capability of the merged companies, which will position us well for leadership in our markets.

Let me run through a few of the operating highlights for Lincoln's first quarter, share some comments about Jefferson-Pilot's first quarter results, and some comments on the progress of the integration.

The Retirement segment first. In the first quarter gross deposits in the Retirement segment were a record $2.9 billion, up over 9% from the prior year quarter. Lincoln's Choice Plus and American Legacy variable annuity products continue to deliver strong year-over-year sales growth in the wirehouse and planner channels, while Income for Life elections also continued to post strong numbers in the first quarter, reaching a record $350 million, almost double the elections in the prior year quarter.

Retirement net flows rebounded from the last couple of quarters to a record level of $858 million, driven primarily by the strong individual deposit results.

Let me turn to the Life Insurance segment. Total retail first-year premiums of $204 million were up 14% over the prior quarter. Lincoln saw double-digit increases in sales in several key channels, including the wirehouse and the expanding independent planner channels. To support continued growth, we recently launched a new version of our Single Life Individual Universal Life product with the lapse protection rider. The new product continues the standing commitment to strong guaranteed performance and incorporates the 2001 CSO mortality tables. We believe the new product is well-positioned in key markets that we serve.

Variable Universal Life sales were up 5%, driven by our individual VUL 1 product. A new survivorship VUL product is being introduced, and should help total VUL sales growth over the year.

In summary, Life Insurance sales benefited from a diverse portfolio of competitive products, broadening market segments, and the ongoing expansion of field sales support in our various channels.

Now Investment Management. First quarter deposit results were excellent, totaling $8.6 billion, a 66% increase over the prior year. Net flows for the quarter were $5 billion, up 79% over the prior quarter. Total assets under management, excluding Lincoln's general account, reached $86 billion, a 48% increase over the prior quarter, and 12% up from the year-end 2005. Deposit growth was in part driven by excellent Investment Management performance. Reflective of this is that in all of the 1, 3, 5, and 10 year periods, over 70% of Delaware's Mutual Funds were in the top half of their LIBOR category. Institutional investment performance mirrored the retail performance.

Retail sales of 3.8 billion included 900 million of our International Value Equity ADR, a product which is now closed. New product development is underway to replace this offering, but the next several quarters' run rate will be affected due to this closing, although there will be some continued amount of sales in this fund.

Institutional sales of 4.8 billion, included 32 new clients, averaging $72 million each. Fred will discuss how this excellent investment and deposit performance is translating into ongoing earnings strength.

Now let me turn to Jefferson-Pilot. JP's first quarter earnings results were generally very good when taking into account the unusual items in the quarters, and results consistent to somewhat better than expected on our premerger discussions. As noted in the data provided in the statistical supplement we filed last night, operating income of 142.9 million was down 9% from the prior year quarter. Adjusting the first quarter of '05 and '06 for nonrepeatable income and expense items, and the approximately 7 to 8 million earnings benefit from the quarter's favorable loss experienced in Benefit Partners, results in mid single digit earnings growth quarter over quarter.

Benefit Partners saw significant improvements in its non-medical loss ratios, particularly lower incidence levels compared to recent quarters, along with the benefits of continued improvements in its claim operations. In individual products the earnings were bolstered by improved spreads, and quarter over quarter growth in Life Insurance face amount and assets. Annuity and investment products earnings were solid, the outlook for this segment helped by rising intermediate term interest rates.

The Communications Company continued to deliver solid earnings after adjusting for the pending sale of a radio property in San Diego. Margins and cash flows were strong. As has been the case in the past, expense management allowed us to achieve desired targets.

Now turning to the integration effort. We began integration planning immediately following signing and accomplished the following prior to closing -- identified and internally announced the majority of the first four layers of management totaling some 100 plus managers; prepared an integrated cost system, which enabled a comprehensive cost picture reflecting the combined organization; identified the integration logic, priorities and timelines in detail for 2006, and a clear view for the entire integration period. The dual goals of maintaining topline growth and achieving the identified cost savings were the high-level criteria that drove the integration priorities and timelines.

Having new Lincoln's leadership in place, and a clear view of the plan enabled us to begin executing the plan immediately upon closing. On the cost front the initial wave of personnel reductions and other integration changes produced a significant step toward our annualized $90 million pretax and DAC target for the first 12 months. Also, as Jon mentioned, despite the heavy planning over the last six months, our aggregate topline momentum of the organization has continued. During the planning period we have also paid attention to identifying and investing in new projects for additional future growth.

Let me now turn it over to Fred.

Yesterday Lincoln reported first quarter net income of 221.2 million, or $1.24 per diluted share, and income from operations of 221.8 million, or $1.25 per diluted share. As Jon mentioned, operating return on equity for the quarter was 14.9%.

The first quarter story is very similar to the fourth quarter of last year, strong deposits and flows, combined with favorable equity markets, driving account value and asset growth. In the first quarter we again experienced a number of positive items which on their own are not particularly significant. Favorable investment income, hedge performance, mortality, and lower expenses combined to boost earnings by about $16 million, or $0.09 per share, over what we would consider a normalized quarter. There were a few other earnings items, which I will cover in the segment highlights starting with retirement.

The Retirement segment reported income from operations for the quarter of 123.1 million versus 98.6 million a year ago. The quarter included about $9 million of favorable items, including higher investment income and favorable net hedge performance. Variable annuity account values grew 20% over year ago balances, together with revenue from our popular withdrawal and Income for Life features, drove year-over-year growth in expense assessments of 29%.

The hedge program supporting the change in GAAP reserves for our GMDB and GMWB riders performed better than expected, as was the case last quarter, running a positive $1 million on a net basis versus our expectation of a net quarterly cost of $1 million. It is worth mentioning that as the amount of living and death benefits has increased as a percentage of our in-force variable annuity business, our risk management capabilities behind the scenes have continued to improve.

We now have approximately $10 billion of variable annuity account value with a guaranteed minimum withdrawal benefit rider. In the first quarter the FAS 133 value on the guaranteed minimum withdrawal benefit decreased by just under $44 million pretax, while the change in the value of the corresponding hedge decreased as well by $41 million. The FAS 133 value is now negative, or can be thought of as being in an asset position. The net quarterly result of the change in the FAS 133 value and the hedge program was a net after-tax, after-DAC gain of less than $1 million.

This illustrates the effectiveness of the hedge program in a time when the FAS 133 value had significant change as well. As our exposure increases and market movements become more significant, the net gain or loss on the hedge program will increase. Overall, we're very pleased with the effectiveness of the program to date.

Spreads in our fixed annuity line saw a noticeable uptick as a result of yield enhancing strategies executed throughout 2005. On an adjusted basis, that is adjusting for prepays, make wholes and other unusual investment income, our average spread for the quarter was 228 basis points, about 9 basis points higher than the preceding quarter. This is high given our experience in recent years, and is not indicative of what we would expect to occur on a going forward basis, all things being equal. As interest rates increase, spreads will continue to be managed through interest crediting rate actions, as was the case during periods of declining rates.

In our Life segment, we reported operating earnings of 82.2 million versus the prior year quarter of 67.7 million. Growth in in-force led the way to a 6.5% increase in the net amount at risk, and account values grew 8.2%, both measures as compared to first quarter of 2005. Similar to the Retirement story, the Life segment spreads also benefited from unusual positive items, contributing better than 20 basis points to their results. We estimate normalized spreads to be approximately 160 basis points for the quarter.

To compare and contrast the two quarters, all of the key drivers that worked against us last year worked for us this year. Mortality, expenses, spreads and DAC unlocking all combined to produce a very solid quarter. I would estimate that in aggregate the quarter included about $3 million of favorable unusual items, again, the sum of a number of smaller items.

Turning to Investment Management, they reported earnings of 20.3 million, almost three times the earnings reported in the year ago quarter. As you might expect, the main driver behind these earnings growth rates was the 43% increase in external advisory fee revenue, driven by significant growth in assets that Dennis mentioned previously. Total operating expenses grew at less than 11%, resulting in improved margins for this segment.

While this quarter's earnings are indicative of the earnings power of Delaware going forward, I do want to point out a change that will occur as a result of the new reporting segments starting in the second quarter. Included in Delaware's reported earnings are the results associated with the group variable annuity-based 401(k) product known as the Director product. Under the new reporting structure this business will now be reported in our new Employer Market segment. Director earnings in the first quarters of 2005 and 2006 were 4.3 million and 4.7 million, respectively. This isn't the only business that will be moving to this new segment, but I wanted to give you a sense of the magnitude of how Delaware will be affected on a going forward basis.

Turning to the Lincoln UK operation, earnings in the quarter were 10.7 million, slightly above expectations. The UK has enjoyed strong equity markets with the FTSE 100 Index up 22% during the 12 months ended March 31. This is helping to offset earnings pressure from the normal runoff of the book and exchange rates. Assuming no significant changes in either the equity markets or exchange rates, we still would expect to deliver annualized earnings in the mid to upper 30 million range for 2006.

Briefly turning to corporate and distribution, our combined distribution loss of 9.8 million improved by 28% over the prior year quarter, driven by the changes in Lincoln Financial Advisors' business model and related infrastructure expense efficiencies. As I mentioned in the press release, corporate had about $3 million of favorable expense related items also.

Because there has been a great deal of activity surrounding our deal financing and the implications it has on capital management since the end of the first quarter, let me take a moment to update you on the current status. When we announced the merger in October of last year we said we expected to fund the transaction with a combination of senior debt and high equity content capital securities. While our high-level strategy for funding the merger consideration and associated stock repurchase has not changed, we have been working diligently with both our bankers and the rating agencies since announcing the transaction to better define the optimal mix of securities.

Specifically, our current funding strategy includes $1 billion of senior debt, and $1.3 billion of tax-deductible capital securities to fund the 1.8 billion cash component of the merger consideration and a $500 million accelerated stock repurchase program, or ASR.

As you are all probably aware from our announcement a few weeks ago, we have borrowed under a bridge facility to close the transaction, and have since issued $1 billion of senior debt and $275 million of capital securities. The proposed funding strategy will retire the remaining amounts owed under the short-term bridge facility. The change in structure reduces our funding costs by approximately $20 million after-tax, and improves our financial flexibility in avoiding the future dilution of the mandatory convertible security originally contemplated in the financing mix.

The funding strategy does not alter our position with the rating agencies. On the contrary, it strengthens our cash coverage ratios, a critical measure of financial strength. A word of caution. While we have hedged most of our exposure to the recent rise in interest rates, there is currently a level of disruption in the capital securities market as spreads have widened, and we are patiently monitoring the situation to decide when best to tap the market.

Turning to capital management, we did not repurchase any stock in the quarter due to the merger related blackout. Consecutive periods of strong earnings have yielded an 11% increase in book value, this despite our strong dividend payout.

Upon the closing of the merger on April 18, we issued approximately 112 million shares, essentially representing the shares issued under the exchange rate of 1.09 shares for every share of JP common, less the 1.8 billion cash component of the consideration. On April 3, we entered into a $500 million ASR, which has the initial effect of repurchasing approximately 8 million shares. There is a final settlement process under the ASR expected in the third quarter that may increase the actual number of shares repurchased. The true-up will be based on the volume weighted average price of the stock during the program period. Looking at the remainder of 2006, we expect to repurchase between 350 and $500 million of stock, provided capital conditions remain healthy, and we're not presented with a higher and better use for the capital.

We have projected another $500 million of repurchase throughout 2007, again depending on conditions. We will update our repurchase forecast each quarter and give a more detailed outlook for 2007 during our investor conference later this year.

Before I turn the call back over to Jon, I want to take a few moments to talk to you about projected expense saves, onetime costs and segment reporting. With respect to the saves, as Dennis noted earlier, we remain committed to our target of $180 million of expense saves, with the timing consistent with what originally was reported in October.

We continue to fine-tune the timing of integration expenses and will provide updates on our quarterly calls. I do want to revise comments made on the day we announced our closing. As we sit here today, integration costs remain in the 180 million territory, with those costs skewed more into the second year of integration, with a modest portion of costs occurring in the third year of integration. This change is a result of advancing our thinking on the timing of shared service and IT costs.

It remains our intention to host an investor/analyst call to review our new segment reporting and details on our new statistical supplement. Work is progressing on restating the historical data in order to provide you with a basis for updating your models. We are currently targeting late June/early July to host the call. And an announcement will be made as soon as our plans are finalized.

With that I will hand it back over to Jon.

If looking at our accomplishments to date is an indicator of what to expect going forward, we are in excellent shape. The merger closed on time. The management teams are in place. Our integration planning has successfully transitioned to the implementation phase. And the results of the quarter tell us that we're carrying a great deal of momentum heading into the future on a combined basis.

Dennis and I are keenly focused on those levers that drive our success. The discipline required to operate more efficiently and effectively means our employees will be constantly looking for ways to enhance and measure the value we deliver to both clients and shareholders. It is this kind of commitment that has been behind our past accomplishments and will drive future success. With that, I will turn it back to Priscilla to launch us into Q&A.

Again, in order to provide an opportunity for as many callers as possible, we will take one question and one follow-up from each caller. Those we don't have a chance to get to in the next half-hour, as usual, Jim Sjoreen and the rest of the team here are happy to talk with you one-on-one. Rufus, do you want to open up the lines?

(OPERATOR INSTRUCTIONS). Andrew Kligerman with UBS.

Congratulations on closing. A quick question on expenses. The operating and administrative expenses in Retirement declined from 10.5% in the first quarter of '05 down to 9.6% in the first quarter of '06. And the same thing happened in the life area. It went from 8.4 to 6.8. What I wanted to get at is is that sort of a base to work from as we look at the combined Company, or was there actually something unusual there?

This is Fred. The answer is yes to both of your comments. But let me see if I can help you with some more of the details. First and foremost, there was a minor geography issue, and that is that we did move branding expenses, which run around 5 to $6 million a quarter out of allocating into the business units and pulled it into corporate. This had an effect of about $2 million in each of Retirement and Life's operation. About $2.2 million in Retirement and $2.1 million in Life. That is just a geography issue.

There were other things going on as well though. One of the things that you were witnessing as we progressed through 2005 was a gradual increasing in accruals related to incentive comp, as we started to perform better and better throughout the year. We tend to set accruals for incentive comp early in the year at or around target, and so you see a little bit of an adjustment for that. The movement of that -- those dollars as we go forward throughout the year obviously depends greatly on how we're performing as we continue through the year, and so they are a little bit more difficult to predict. But that is in part why you might see higher fourth quarter in particular expenses than you do in the first quarter.

There's another element going on here too. I would characterize this as a bit in the minor category, but it is indeed having an impact. And that is there is a natural pausing that takes place in expenditures when you are readying yourself for integration. These would be things like hiring that may be more on a traditional path had we not announced the merger. They include things like consulting expenses, and in some cases IT related expenses that I would characterize as being in sort of a pause mode right now while we get clarity on the platforms and start back into these plans.

These don't have great impacts in terms of order of magnitude. As I look at the numbers I would suggest to you that that probably amounts to between 1 and $2 million for each of the Retirement and Life operations. So hopefully that gives you a little bit of color as to how to look at the quarter's expenses.

It did. Okay, thank you very much.

Ed Spehar with Merrill Lynch.

The first question I had, Fred, on the spread in Retirement, the 228 basis points, which I think you said excluded unusual items.

Yes.

Could you talk about what it is that makes you feel that is higher than normal, and what is normal?

Yes. Sure. Just to kind of level set for everybody, we reported, as you know, 240 basis points of spread. Normalizing that predominately for pre-pay and make wholes of around 13 basis points brings you down to that 228, and what we would call more normalized spreads.

That is higher than what we would normally expect, and that is predominately for a couple of reasons. One is we did have some -- we did take on some strategies throughout 2005 that benefited us in the first quarter. I would characterize these as yield enhancement strategies, but more specifically what they were was selling out of some lower yielding securities throughout the year and investing in the higher yields that were afforded us by a rising interest rate market.

You also had a shifting towards more floating-rate securities, which benefited from the rising short-term rates. Also, cash, just the natural liquidity we hold, has benefited throughout the year with the rising short-term interest rates as well. All those things have coupled to move spreads up.

But the reason why I suggested in my opening comments that we wouldn't expect to continue at the 228 basis point level is because we have indeed made some moves on crediting rates, most notably a large Employer Markets related business where we moved up the crediting rates about 10 basis points. This will have about a 4 basis point impact on spreads. I wouldn't characterize this as symbolic of action we're taking across the board. It was very much a unique action we took on a specific block of business for market purposes. Don't carry that too much further. But that is why I want to calm you down a little bit from the 228 basis points we reported.

Is that sort of the magnitude of the overall adjustment we should be thinking about, kind of 5 basis points lower?

I think that is approximately correct.

Bob Glasspiegel with Langen McAlenney.

I was wondering if you could give us the pro forma book value and pro forma diluted shares outstanding, is the first question. Secondly, it looks like you're looking for 850 million to 1 billion of buyback. And I thought initially you said 1 billion, and then you said it could be a little bit more than that because you hadn't been buying stock back because your conservative read of legitimate accounting. It seems like you're moving us down a hair on the buyback prospectively. Is that driven by either capital, cash flow generation, stockprice considerations or what?

Let me kind of reverse the order a little bit. I will nail your first questions real quickly here. Book value will tend to be around -- I'm going to round a little bit -- but tend to hover around $11 billion after we're done with the deal. As you know, we're still going through all of the mechanics to put forth our first balance sheet as a reported Company, so I would caution you. Shares outstanding, again, if you kind of run on down through the trajectory of what I talked about in my script with the shares we issued and the accelerated share repurchase, if you put all that together, you would be running in and around 282 million shares outstanding in the second quarter.

That is primary, right?

That's right. And so moving to your question on share repurchase, my comments should not be interpreted as throttling back on our share repurchase activities, or any sort of outlook or concern relative to risk. I think when we announced the deal, we talked about doing of course the $500 million at or around closing, which we did accomplish.

Then we talked about doing approximately another $1 billion or so of repurchase over the course of the next couple of years. That really remains our rough trajectory on it. I gave a range in the rest of 2006 of 350 to $500 million. Again, I don't see anything that stands in between us and moving to the high-end of that range. But I do want to caution in that as you would expect any company managing capital, if there ends up being a higher and better use for that capital for the shareholders, we still want to have the ability to entertain that. But again, that is the trajectory we have committed to as we sit here today.

I got you. I've got to reread the transcript from the fourth quarter, but I thought you said sine you had been out of the market, conservatively that number could be a little bit bigger then 1 billion.

That's true. I think as we --.

And now you are a little bit less than 1 billion.

Yes. For all the reasons I mentioned in terms of being out of the market for a few quarters, and then some other activities that had taken place, which has added to share count, we may be able to do better than that. But right now we're going to remain conservative on our projections, and really get a read in particular of all of the [P GAAP] adjustments and really the balance sheet that we're going to settle into in the second quarter before I move that dial up too much more aggressively.

Jimmy Bueller with JP Morgan.

I just have a quick question for Dennis. In the past several quarters you have had very strong growth in the group benefits business. I think this quarter it was actually a decline. Could you talk about just competition in that market, and if you have taken any price actions on -- or just discuss why the sales declined in group benefits?

The sales results are a little bit down this quarter from the last quarter. I would say that the competitive market is as competitive as it has been. I don't know that it has increased at all. We do continue to focus particularly in the disability business, on making sure that our pricing is right. We have had some pricing increases there over the past 12 months.

I would point out though that in our core business, which is employers of 200 or less -- with 200 or less employees, we are up about 12%. It is in the business lines in the employers that have more than that number of employees where we're off a little bit. Probably some of the pricing that we have done affected that marketplace a little bit more. But we're comfortable that we're going to have a good year in Benefit Partners. Certainly the earnings in the first quarter have rebounded dramatically from the fourth quarter and third quarter, reflecting some positive trends. We're making some price movements. We're increasing distribution. We have more productivity coming out of distribution, so we're hopeful for a good year.

Could you also talk briefly about your Universal Life business? We have heard from a few competitors saying that you're actually in the upper quartile, or aggressive in terms of your pricing. How do you view your position in terms of your pricing in the UL business?

May I ask you to be specific about which company you're talking about or --?

Jefferson-Pilot.

Jefferson-Pilot. Our pricing practices have not changed at all over the last 24 to 36 months. We target being within 10% of the most aggressive pricer in the marketplace. Seldom do we find ourselves the most aggressive pricing, although from time to time in a particular sell that may be the case.

The competitiveness in the Universal Life marketplace is defined not only by the premium paid, but also by the relative aggressiveness or conservativeness on your underwriting practices. You can make quite a bit difference in terms of sales volume if you get aggressive on underwriting. I would say on the underwriting side, our competitors might call us a little bit less -- a little bit more conservative than average.

Tom Gallagher with Credit Suisse.

Just a few questions for Fred on the funding. In terms of the estimated book value, Fred, can you just give a ballpark estimate for goodwill? And then the follow-up is, I would presume the 1.3 billion or so of capital securities are going to be perpetual preferreds. And if you can remind us how much you were originally expecting to issue of convertibles. Thanks.

Sure. In terms of the goodwill, goodwill we think will be coming in right around 3.3 to $3.5 billion roughly. In terms of the capital securities we plan to issue, they are tax-deductible. They are not the same as the original preferred stock securities we were contemplating when we announced our transaction in October. Those securities not being tax-deductible primarily, but also caring different noncumulative perpetual nature to them versus a capital security, which as you might have noticed from our retail offering, does have a finite maturity of 60 years, in the case of our retail offering.

The mandatory convert that we originally contemplated in our modeling was roughly $500 million when we structured the deal. Again, that is a security that can be sneaky, if you will, in terms of looking at its impact over the course of a short-term planning period. The tax-deductible nature of the security during the three-year planning period is all well and good, but of course at the end of those three years when it converts you've got a price to pay in terms of shares coming into your denominator. That is really a big -- the removal of the mandatory convert is not so much a major swing in interest expense throughout the planning period. It is more the notion of avoiding the problems associated with issuing more shares in year three.

We should also expect a comparable in terms of the capital securities you're going to have of finite maturity, but it is going to be far out -- is that what --?

That's right. They tend to -- it tends to be very, very long dated, which is one of the primary requirements to get the equity treatment. You also tend to have two other features in the transaction. And that is you've got something that is called replacement language, where should you call the securities in or retire them for any reason, you would agree fundamentally to replace them with a like equity treatment security. And there is also deferral triggers, mandatory deferral triggers that are typically structured similar to that as a covenant on a bank deal, for example. Covenants tend to be -- or the triggers tend to be revolving around minimum risk-based capital thresholds and some form of minimum capital threshold. I would tell you that both those triggers tend to be very far out of the money when you're talking about an A rated Company like ourselves -- senior debtwise.

Eric Berg with Lehman Brothers.

One question regarding JP, the other regarding Delaware. With respect to JP, Dennis, if your underwriting hasn't really changed, and generally your pricing hasn't really changed, why the weakness in Life Insurance sales?

The first quarter results are off a little bit from the last comparable prior year quarter. I would say that it is a -- that there is nothing specifically to point to. It is just one quarter results. I know in the first quarter of '05 we had some very large cases that pumped the premium a little bit higher. We didn't have that kind of large case activity in the first quarter of this year. I would just say that it is the first quarter. There's nothing specific to point to in terms of the trends, other than in the first quarter last year we had a couple of big cases that pumped those numbers a bit.

Thanks. That's helpful. Here is my second question for -- actually for Fred. With respect to Delaware, it looks like what is driving a healthy portion -- and I know you referenced this in passing in Delaware's earnings -- is a slower growth of expenses than of revenues, i.e., margin improvement. Because you've indicated that if anything the earnings level should modestly decline from here, at least over the near-term because of the change in reporting structure that you referenced regarding a fund being pulled out, should we assume that this margin improvement has run its course, or in other words that margins at Delaware will be stable from here?

No, let me walk you through it a little bit. What we're doing with Delaware is we're pulling out a product. It is in an annuity-based 401(k) product called the Director product, which represents about $4.7 million worth of their earnings in the quarter. But keep in mind, everything goes with that product to employer markets. Everything meaning all of the revenues and the associated expenses and overhead allocation. The effect on margins with what is left in Delaware is negligible.

The margin improvement at Delaware has really been driven the old-fashioned way, and that is with a significant growth in assets, and the advisory fee revenue growth off of that. And we would expect that trajectory to continue. As Dennis cautioned in his comments, you will see fluctuation in flows. Certainly on the institutional side you see fluctuation because of the natural lumpiness in flows. On the retail side we have run into a situation where one of our popular managed account products is running out of capacity. But that doesn't necessarily have a dramatic impact, if you will, on the earnings throughout the rest of 2006. We expect to continue to build off of the strength in flows and deposits that we've enjoyed over the last several quarters.

Jason Zucker with Fox-Pitt Kelton.

First, last quarter you guys gave us a bit of an indication looking ahead a quarter in terms of how variable annuity sales were looking. I think the words you used last time, you saw some momentum in VA sales. And I was wondering if you could just continue along that line and give us a little bit of a peek of what the second quarter looks to be shaping up like? And then the other question, which is quick, are you exploring capital market solutions now as a combined Company to help fund redundant UL reserves?

I can take the first portion in terms of what April looked like. April continued the trajectory we have been on. It was a strong -- I would categorize it as a strong quarter for our VA sales. If I remember correctly, as an example, in our Multiple Manager Choices Plus variable annuity line, which in the press release we highlighted its strength in the first quarter, April was the highest month that we've ever had in sales for Choice Plus. American Legacy, our single manager product, performed very, very well as well. We continue to see nice momentum growing.

I will take the reserve question. The answer is yes, we do continue to explore what may be the best way of funding those redundant reserves through the use of say securitization vehicles, which is the primary tool that is used out there. We are currently using long dated letters of credit in effect to finance or securitize those redundant reserves. And we have got a very large credit facility that is a five-year facility, which allows us both the capacity and the more dated maturity to be patient on what we pull the trigger on.

I'm very excited to combine forces with the JP actuarial and treasury folks, because both companies have made progress in exploring what might be the best route to take on this. You would expect us to really look aggressively at doing something of a longer-term nature. I would guess throughout 2006 we will be exploring it. Whether or not we pull the trigger in 2006 or early 2007, we will have to see how that progresses. But I would expect to at least enter into either very long dated LOCs or some form of securitization vehicle.

Collin Devine with Citigroup.

Two questions. One on dollar. Perhaps you can just flesh out a little bit more what the expense management was that sort of brought such a dramatic improvement in the Company's profitability. Perhaps if [Gary] is around to talk about it.

And then secondly, just so I'm clear on updating, I know Lincoln doesn't like giving guidance, but just to update the parameters of the JP transaction, Fred, are you saying then net net, going back to what you laid out last fall, the 180 million of expense saves, the financing costs, the buybacks, and as we look at it today the net difference should be 20 million less, and financing costs are about $0.07 a share. Is that correct?

Based on what I have said today, that is exactly right. That would be the way to think about it. Again, one thing I would caution you on is purchased GAAP. We are still working through all of the mechanics of that to see what implications that would have on our go forward earnings. I have previously commented that I would expect it to be a relatively neutral to perhaps modestly negative drain on earnings. But we're still finalizing that, as we speak. And again we will give you much more clarity on that as time goes on here. But the walk-through that you just did in terms of thinking through what has changed, is directionally correct.

In terms of Delaware, I will make this comment. Expenses were up around 11% versus advisory fees up better than 40%. I would say while indeed there are expense initiatives going on in Delaware, as you would expect to be traditionally the case, there is really more an issue of finally climbing through some of the benefits of scale. Now with better than $85 billion of third-party assets under management, we are starting to see those revenues grab a little bit of traction on the bottom line, having crested some of the scale issues. My view is that is the dominant piece of it, as opposed to real specific acute actions taken that drove expenses down.

And then one follow-up for Jon. You have had six months to study the strategic assets. Perhaps you could give us some update where you stand on those. I'm thinking perhaps particularly the B of A position as a place to start?

I think what we have said before on the strategic assets as it relates to the operating companies, we remain committed to all of the businesses that are included in the Jefferson-Pilot organization. As we look at assets that we hold, whether it is Bank of America or other assets, we will continue to examine what is the best uses of those assets on an after-tax basis, as we look at what our tax cost basis is for those. And we will make decisions according to maximizing the most productive capital structure we can in the corporation. That clearly is in the mix.

(OPERATOR INSTRUCTIONS). Saul Martinez with Bear Stearns.

A couple of questions, first on capital. Given that you have only used 275 million of the available 1.3 billion in capital securities, are you just waiting for some of these dislocations in the hybrid market, Fred, you spoke about to play themselves out? Or are you also thinking about perhaps selling some non-core assets like the Bank of America stock as part of your funding mix?

And then my second question is very much a clarification on the integration costs. I think you said the bulk would come in year two, which would put them in 2007. But I think you issued in your release on April 3, you said the bulk of those expenses would be incurred in '08. If you can just clarify that point for me.

Starting first with the integration costs, yes, I used the term revised in my comments -- prepared comments this morning. And that is to revise our estimates based off of that April 3 announcement. We continue to work on the integration onetime costs to understand when they're coming in. And as our plans progress, we have had some subtle shifts in the timing of what quarter those costs we project to be falling into. This is an inexact science right now, as we are early in the process. But I wanted to true up the comments we made April 3 to say that we now see really more of a skewing towards the onetime expense in the second year of the integration, still a fair amount in the first year, and then a smaller, more modest amount in year three of the integration. If that is helpful. Again, we will true it up with more exacting numbers as we get into it.

The other comment -- I think the other question that you had was on the capital securities.

Basically why you have only issued 275 of the 1.3. Is it related to some of the dislocations in the hybrid market you spoke about?

Yes, a couple of things. One, you are probably all, or many of you, are probably familiar with what has gone on recently with the Lehman Brothers E-Caps issue and the SVO decision to treat those securities as common stock for the purposes of capital. That has really -- what has given rise to the disruption in the marketplace. There is even, I believe, a Wall Street Journal article today referencing Swiss Re's approach to the issue -- potential approach to the issue.

What we're doing right now is working with our bankers and remaining patient as we watch things work through the marketplace, watch the marketplace absorb the information. And try and depict what might be the best timing to go out and tap the market. We've got a number of options available to us. As you can see from the Swiss Re article, when you are a large, well rated company, you can tap multiple markets in multiple geographies to try to get the funding costs down as much as possible. Those are the kinds of things we are reviewing.

In terms of securities, there are a fair amount of securities held at the corporate level. We have talked a lot about Bank of America stock, but there are additional securities held at the corporate level in the former JP. And we are indeed investigating what might be the highest and best use for those securities as it relates to going out and issuing funding. And that is just a mathematical exercise as to what is best for the shareholder, what is best for EPS. And you can expect that we're doing those kinds of calculations.

Just one clarification to make sure that there is no confusion about this. We're not shifting our save targets or anything like this and the timing of it. It is only the one timers that Fred has referenced on the cost side. We really remain very comfortable and committed to the saves.

That is important. It is unfortunate in that both our onetime costs and our save estimates are both $180 million, which means we have to pause a little bit and make sure we're all on the same page with what we're talking about. All of my timing references were related to the integration costs, not to the save expectations. Those remain the same as we have committed to early on.

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

Great. That's great to get through all the calls. As usual, we will take your questions on our Investor Relations line if you have them after the call. That is 800-237-2920, or e-mail Investor Relations at LFG.com. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's Lincoln Financial Group's first quarter 2006 earnings conference call. We do appreciate your participation, and you may disconnect at this time.