Lincoln National Corp (LNC) 2006 Q2 法說會逐字稿

Good morning and thank you for joining us for Lincoln Financial Group's second quarter 2006 earnings conference call. Today's call is being recorded. 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. (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 such comments about premiums, expenses, purchase accounting and income from operations 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 report 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.

Thank you. Good morning. And welcome to Lincoln's second 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 web site, 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 supplements posted on the LFG.com Web site.

This quarter represents the first quarter we are reporting actual results on a combined basis following the merger of Lincoln Financial Group and Jefferson-Pilot. The statistical supplement filed last night has been revised to not only reflect the merger, also the resegmentation of our businesses. These changes will presented were presented in a special call to analysts and investors last month, and that call is still available for replay on our website. Now I would like to turn the call over to Jon Boscia, Lincoln's Chairman and CEO. Jon?

Thanks, Priscilla. And thanks to all of you for joining us this morning. As you might expect, we have a fair amount of ground to cover during our call today and we want to leave ample time for your questions. I will give my perspective on the quarter and the overall market conditions, then toss to Dennis and Fred to cover in more detail.

Simply put, I cannot be more pleased with the progress we have made, as borne out in the results we announced last evening. We are on or ahead of plan across all major initiatives, hitting our key integration milestones while driving organic growth in our key businesses.

Strategically, we're focused on the following major initiatives. First, meeting and exceeding integration targets while minimizing disruption on the production side. Second, investing in growth initiatives that include the continued buildout of Lincoln Financial Distributors, supporting a robust product pipeline and developing new distribution outlets for our consolidated product portfolio. Third, launching our new Employer Markets organization, building off a quiet but sizable platform to reinvigorate growth in this high return business.

Fourth and finally, perhaps most importantly, positioning the Company to capitalize on the impressive opportunities we anticipate in the retirement income securities space. It seems each quarter, we're seeing real breakthroughs in our industry when it comes to the retirement market. This past week brought the House and Senate passage of HR4, known as the Pension Protection Act of 2006, which contains attractive and socially important provisions such as automatic enrollment in defined contribution plans, post-retirement income provisions, codification of COLI best practices, higher contribution limits for defined contribution plans and IRAs, and much-needed and demanded retirement investment advisory capabilities.

Add to this the inclusion of long-term care riders on annuities, and you have a bill that falls right into the sweet spot of Lincoln's strategy.

Turning to highlights for the quarter, operating earnings were certainly a highlight, coming in at around $350 million for the quarter. The increase in earnings was, of course, impacted by the merger. However, our major businesses reported good organic operating results which Fred will cover in more detail.

Variable annuity deposits and flows set yet another record, this despite increased competition and choppy equity markets. We once again generated balanced deposits and flows in both our American Legacy and Choice Plus products. From a risk management perspective, take rates and utilization rates on our SmartSecurity Advantage GMWB riders remained well within expected levels.

Further evidence of the strength in retirement markets, income for life rider elections continued their high growth rates with second quarter elections approaching $400 million, up 70% over the same period last year and representing the 11th consecutive quarter of record elections. As important, 85% of these elections represent new money to Lincoln.

Despite competition heating up and competitive products flooding the market, the strength of our wholesale distribution platform continues to drive growth within our key strategic partners. This is a business that is evolving in many ways, and we need to evolve with it. So we're actively looking at product enhancements, as always, with a complementary investment in risk management.

Market conditions in our Life segment continue to be a challenge. However, as you dive deeper into the results, you see signs of light and encouragement. Production is modestly down as compared to the previous year, but comparing productions to 2005 can be misleading in that both companies were transitioning in two important ways. First, we were transitioning away from the investor-owned life insurance or IOLI business, some of which leaked into 2005 results as both companies installed more rigorous screening. The second transition occurred with pricing and product design as we move to shore up returns given the reserving issues around AG38. With our product harmonization plans underway, distribution and our retail platform settling down and explosive growth in the wire channel, our outlook for Life sales is improving.

There are very real challenges to contend with, but we're building off an improved foundation with the strength of our combined distribution, product portfolios, and scale. Our Life wholesalers are just now realizing the powerhouse we have formed and are eager to put it to work.

One of the exciting developments this year is the creation of the Employer Markets segment. To assist in understanding our results, I want to spend a little time describing our product and market strategies. As you know, we report on three businesses under Employer Markets. First, the retirement products, primarily the variable annuity business within Employer Markets focused on the fours -- that is 401(k), 403(b), and 457 plans.

Next, the executive benefits and others, which includes the COLI and BOLI business along with a closed block of pension business. And finally, Benefit Partners, our group disability, life, and dental products business. I would like to speak to retirement products, as that is the largest component of earnings and really the new story for the combined company.

There are three significant products that drive results in our retirement business. Multi-Fund is an employer-sponsored individual fixed and variable annuity product targeting mid to large size health-care systems, not-for-profits, and universities. There are over 10,000 plans, 400,000 participants, and $13 billion of account value comprising this product line.

Next in our Director product, small-case 401(k) group annuity product making up approximately $7 billion of primarily variable account value serving small corporate and privately owned businesses with over 14,000 plans and 280,000 participants. And finally, Alliance, a mutual fund and fixed account product with $6 billion in assets under administration targeting larger health-care systems and corporations in the $10 million to $250 million case size. There are currently 190 Alliance plan servicing 260,000 participants.

These combined products are sold through varied distribution channels including wholesalers, retirement consultants, and advisers inside an array of intermediaries. These products are sold into the 401(k), 403(b), and 457 markets. As you have seen in our statistical supplement, this is a high return business benefiting from a mature block of steady 403(b) business and relatively low equity allocation given the low risk profile of the business.

There is a seasonal component to production results and the institutional nature of the business can be lumpy. Market conditions are generally healthy in the small and mid case market, and more challenging as you go into the larger cases. The same could be said for Benefit Partners' group insurance businesses. Strategically, we expect Director and Alliance to be our primary growth engines.

As Wes Thompson and his team transition to the implementation phase of their business model, we expect to invest in both product and the continued build out of distribution.

Turning to investment management, Delaware Investments recorded their eighth consecutive quarter of $1 billion in positive flows. Deposits inflows were down when compared to previous quarters, but that was expected due to the closing of the International ADR managed account product, which we mentioned in last quarter's call. We also reached capacity in two of our Large Cap Growth products.

Also, prior year results included unusual -- unusually high deposits from the new teams that joined the firm, as well as robust markets on a relative basis. Performance remains very strong and our institutional pipeline is healthy.

Capacity is a critical issue to contend with when considering the outlook for production in this segment. It's really a good kind of problem in that it's only a problem if performance is strong and assets are flowing our direction and in size. We have capacity issues with some of the products managed by our long -- our Large Cap Growth team for this very reason.

We are very pleased with the results of our investment business, having added roughly $50 billion of retail and institutional deposits since the beginning of 2004, and are excited as we prepare for another stage in our strategy which includes maintaining strong performance, building assets under management, and expanding margins in the process.

Before I turn the call over to Dennis, as all of you are aware, we announced the departure of Jude Driscoll last month. And I would like to take a moment to thank Jude for his unwavering commitment to driving performance at Delaware and for his leadership during a critical time at the firm. Jude is a respected leader and investment professional, and we wish him nothing but the best.

We're fortunate to have Pat Coyne, a veteran of Delaware and a close colleague of Jude's, taking over the helm. Pat has been with Delaware for 17 years and has been involved in all strategic, investment, and operational aspects of the Company, so he is well-prepared to take Delaware to the next level. Pat is well known in the investing community as our former head of both equity and fixed income. Pat has quickly jumped into the driver's seat, providing for a seamless transition. With that, let me turn the call over to Dennis.

Thanks, Jon. I am going to focus my comments on our production results, some near-term market conditions, and a brief update on our integration efforts. Included in the statistical supplement filed last night are sales exhibits that restate prior period results on a combined basis.

As Fred covered on our financial reporting call last month, we have also established a new definition for the reporting of life insurance sales, moving from a deposit based measure to paid annualized premium measure, sometimes referred to as a [LIMRA] basis. My comments on life insurance sales results will be based on the new measure.

Let me talk about our wholesaling force first. Underpinning our individual sales results is a continued expansion of the LFD wholesaling force. The merger has increased LFD wholesaler count to a total of 442, an increase of 19% since year-end 2005. We're also seeing increases in our average wholesale tenure which will have a positive impact on productivity and sales. As Jon said, continued buildout and investment in LFD will be a priority for the balance of the year.

Let me turn to Individual Market annuities. In the second quarter, total deposits in the Individual Market's annuity segment posted strong results of 2.7 billion, up 25% over the prior year quarter. Variable annuity sales of 2.4 billion were up 31%, representing the greatest variable annuity sales quarter in Lincoln's history, a remarkable accomplishment. Variable sales were up across all channels when compared to the second quarter '05 with wires up 35%, independent planner channel up 21%, and banks up 79%. We expect variable annuity growth to remain solid and consistent, as our results have proven resilient to increasing competition on our living benefit designs.

Further, wholesale expansion has already increased from 15% at year end, supporting the sales growth that we've seen.

Fixed annuity sales for the quarter were up 2% versus second quarter 2005 and up 29% in sequential '06 quarters. We continue to view the fixed annuity marketplace as attractive. Distribution opportunities resulting from the merger offer encouragement for expanded fixed sales, particularly in the index annuity product.

Let me turn to Individual Markets Life. Individual Life Insurance sales were down 4% from the prior your quarter and down 3% for year-to-date 2006 results on a combined basis. As Jon mentioned, '05 sales results include both IOLI and SOLI sales, which both companies stopped excepting and mid to late '05. Sequential quarter '06 individual life sales are up 10%. Inside of that, MGA sales where most of the '05 IOLI/SOLI business was generated, are also up 10% sequentially in 2006.

We're seeing excellent life sales growth in the wire channel, a key strategic effort with sales up 81% over prior year-to-date results. While growing off a smaller base, we expect continued solid growth and once again are making further investments in wholesaling to expand this channel sales results.

Our Lincoln Financial Retail Distribution results are up 8% over the first quarter. The merger provides significant increased retail scale and focus, allowing cost-effective recruiting, further wholesaler additions, and a very attractive retail offering for planners and producers.

MoneyGuard felt the pressure of competing products in the first half of 2006, with sales down 6% and essentially flat with the first quarter '06. In response to the market we have retooled the product, including a greatly simplified underwriting process, and are aggressively expanding our field and internal wholesaling force. We're seeing the first result of expansion as we're experiencing growth in our wire and independent planner channels.

Now, let me turn to Employer Markets. With Jon's strategic comments as backdrop, deposits in our retirement segment totaled just over 1.1 billion, but as noted in our press release, included 130 million of assets transferred over from the Jefferson-Pilot 401(k) plan. Adjusting for this internal transfer, deposits were approximately 1 billion and flat when compared to prior year's results.

These results can be deceiving in that the business is very lumpy, particularly Alliance deposits where the large-case orientation of that business makes quarter to quarter comparisons difficult. Some of the sequential weakness is a result of natural seasonality in the business. The first and fourth quarters are typically the strongest.

Director continues to the provide momentum in this segment, with sales adjusted for the J-P assets increasing 18% over the 2005 period. The overall sense for the remainder of the year is continued growth of first year sales and a boost from a renewed investment in wholesaling, adding six wholesalers to the territories poised for expansion. We've seen some weakness in the Alliance pipeline. We believe this is a national result of having a relatively new Alliance sales team and expect productivity to improve with experience. Overall, we view these issues as temporary and expect production results to improve going forward.

Benefit Partners posted one of its better quarters and earnings perspective and Fred will cover that in more detail. On the production side, sales declined in the larger case market drove overall results. This is consistent with LIMRA reporting in Q1 which indicated the large-case market was weak. As is always the case, this market is price sensitive and we believe the price increases put in place by us at the tail end of '05 have indeed affected sales in the first half of the year.

Let me move onto Delaware and Investment Management. First, let me also add my thanks to Jude for his efforts and contributions he made while at Delaware. I would also like to welcome may congratulate Pat Coyne is our new president of the Investment Management company. We're fortunate to have a successor of Pat's caliber, and I know the employees at Delaware and Lincoln share my views well.

2005 was a very successful year for Investment Management in terms of the convergence of strong performance, strategic lift outs, and generally favorable market conditions, resulting in very strong deposits and flows. 2006 has also produced impressive year-to-date results with total retail and institution deposits or net flows of 15.1 billion and 5.9 billion respectively.

Asset accumulation slowed in the second quarter, however, as we closed, and as Jon already mentioned, a very popular International ADR product in the managed account space and reached capacity in two of our Large Cap Growth products. Managing asset flow in a disciplined an efficient manner is the key to maintaining the highest investment results and performance standards, and our recent performance results are proof of that.

Despite these closings, we had ample capacity with other equity product offerings including our large cap value, international value equity, and small cap core products to gain further asset growth. Our fixed income managed opportunities are also positive, with several final proposal opportunities underway.

Going to performance, [on] performance remains strong. For the one year period, 64% of Delaware's mutual funds were in the top half of their Lipper category. And in the three, five, and ten-year periods, 70% or more were in the top half. Institutional Investment performance continued to perform at strong levels consistent with prior quarters.

When looking at our other company peers in the asset management space, our net flows as a percentage of beginning assets, a key ratio in the industry, stood at 7.6% for year-to-date 2006 and has been consistently ahead of peer group for the past several quarters.

Before turning to Fred on earnings, I'd like to make a few comments on integration efforts. The simple message regarding our integration activities is that we're on plan and on budget. Behind the simple message is the fact that employees at all levels of the organization are experienced in executing successful integrations, and that the process is well planned and closely monitored to eliminate or manage execution risk. The overall sales and income performance being outlined today is the best validation of our integration progress.

In the near-term, our primary focus is the integration or harmonization of our life insurance product and administrative platforms. As we communicated early on, the decision was made to run the Life platforms on parallel tracks to minimize the disruption to our new business activities. We expect the new portfolio to be ready in the first quarter of '07.

From an operational standpoint, we have announced the closing of two offices -- Schaumburg, Illinois and Portland, Maine. Both offices are expected to be closed by mid 2007. The term operation -- Life operations located in Schaumburg will be transitioned to Greensboro and the administration group pension business in Portland will be transferred Fort Wayne.

With respect to merger-related saves, we have realized approximately 18 million of saves already in the quarter, translating to about 75 million of annualized saves and well on our way towards our achieving our targets of the $90 million in annualized savings in the first 12 months of the merger. Our total estimate of $180 million remains unchanged, as does the 50% target in year one.

Regarding the cost integration, our target of approximately 180 million also remains unchanged. And during the quarter, we realized 17 million of costs primarily associated with severance and other employee related costs. We're making great progress on all fronts and most importantly, are shifting into business as usual in many areas of the Company as alliance between integration and normal operating activities are quickly merging.

Now, let me turn it over to Fred to discuss our earnings in the period.

Thanks, Dennis. Yesterday, Lincoln reported second quarter net income of $349 million or $1.23 per diluted share, and income from operations of $351 million or $1.24 per diluted share. Operating return on equity for the quarter was 12.4%.

Reconciling the unusual positive and negative items, the quarter included about $27 million of favorable items, including investment returns over our expected levels, positive DAC (technical difficulty) unlocking and favorable loss ratios in Benefit Partners. This offset by the after-tax impact for merger-related expenses of approximately $11 million and a modest impact from the markets on our variable businesses. All told, about $0.05 per share of net positive impact when thinking about our new run rate earnings trajectory and excluding merger expenses.

As a reminder, the 2005 quarter included two large positive earnings items related to taxes and investment income totaling approximately $50 million. Last month, we hosted a call to take you through the changes in our reporting structure that included not only combining the two companies' financial results, but also incorporated the new segments and with it, changes in how we allocate expenses, investment income, and capital among our businesses.

Where possible, I will provide commentary to help you understand the changes, but will focus more of my attention on the normalized and current period results and some color on what to expect going forward.

I would like to first spend a minute on purchase accounting impact in the quarter and projections going forward. The purchase accounting projections I am about to discuss our inherently uncertain as they are impacted by market, economic, and credit conditions such as the timing, magnitude, and frequency of changes in interest rates which impact the amortization period for the premiums and discounts on the acquired securities, and also by management actions taken such as deciding to sell certain acquired securities before they mature.

From a consolidated perspective, the purchase accounting impact on the overall earnings netted to a positive 3 million impact. I expect purchase accounting to contribute another 10 million to earnings for the remainder of the year. The impact in 2007 is essentially neutral to earnings.

At the segment level, there was very little impact on Life & Annuity's earnings in the quarter. There was a positive impact on Benefit Partners, a few million dollars, the result of active [OBAY] amortization, offset somewhat by $2 million of negative impact to the Media company earnings resulting from -- that negative impact resulting from amortization of intangibles. Finally, there was a positive impact on debt expense of about $2 million in the marked-to-market of J-P acquired debt and the premium amortized back into earnings. Overall we're pleased the noise level was minimal, particularly given the size of the transaction and complexity of the work involved.

Let's move down to the segment starting with Individual Markets and Annuities. Second quarter income from operations for the Individual Annuities segment was $89 million versus $52.5 million for the same period a year ago. Approximately 50% of the growth in the segment's results was driven by the merger, essentially pulling in Jefferson-Pilot's $9.3 billion of fixed annuity platform. The balance of the increase is attributable to organic growth in the VA account value, driving a 38% increase in expense assessment revenue.

We had very little noise in the quarter with approximately 3 million after-tax of net favorable items, primarily related to better-than-expected investment income and favorable DAC unlocking.

Focusing on the hedge program for a moment, the after-tax and DAC impact on the quarter was a negative 3 million. We continue to be pleased with the effectiveness of the hedge program, recognizing this was a quarter of choppy market conditions. Spreads adjusted for the inclusion of J-P assets, carving out the fixed employer markets business and normalizing for excess income came in at 183 basis points, and are representative of what we would expect to see going forward.

Individual Life Insurance income from operations was 147.1 million compared to 62.6 million in the second quarter of 2005. The year-over-year variance was primarily driven by the merger, which accounted for approximately 80% of the increase in earnings. The 2006 quarter benefited from approximately $10 million of net positive items, the combination of excess investment returns and positive DAC unlocking.

In terms of earnings drivers, the merger resulted in adding approximately $160 billion to face amount in force and $11 million of account value at fairly similar mortality margins, spreads, and growth rates. On a pro forma basis, that is adjusting to remove the impact of the merger, face amount grew at about 5% and is in line with the mid single digit growth rates experienced by both companies in the past several quarters. We expect account values to grow at their historical rates of 6 to 7% per annum.

Adjusting spreads from roughly 15 basis points of excess investment yield, they came in at around 161 basis points and are consistent with what we would expect going forward as we have very little planned in the way of crediting rate action.

Starting first with the retirement products segment of our new Employer Markets division, second quarter income from operations was $54.3 million versus $45.3 million for the same period a year ago, and included $2 million of better-than-expected earnings from investments. This segment, with the exception of expense and capital allocation changes, was not impacted by the merger. The earnings drivers in this business are substantially similar to that of our Individual Annuities business.

Expense assessments driven off of growth in variable account value, and spread income on the fixed portion of the business.

Expense assessment increased 11% in the quarter over the same period in 2005, the result of a year-over-year increase in variable account value of roughly $2 billion.

Spreads in our fixed business around 246 basis points after adjusting for excess investment income and are trending down as we have increased crediting rates in recent periods. From a competitive standpoint, while benefiting from strong investment results, we would not expect these spread levels to be sustainable over the long-term. In the current interest rate environment, likely rate increases from competitors may result in pressure from both producers and large clients to increase our crediting rates.

When allocating capital, these businesses tend to fall in the low-risk classifications with more limited ALM risk, that is asset liability management risk, both the result of a lack of guarantees on the variable products and favorable liquidity risk characteristics on the fixed side. The favorable return on account value, favorable spreads and capital all combined to produce ROEs in the 20% range, not uncommon when looking at our peers in the industry.

The executive benefits and other subsegment, our pension, COLI, and BOLI business, reported income from operations of 16.2 million, an increase of 11.9 million over the prior year quarter. Approximately 50% of the increase in earnings was the result of the merger, with the remaining increase coming from margin expansion, most notably mortality margin, and a favorable DAC variance due to negative unlocking in 2005.

For the second quarter, Benefit Partners' income from operations was $37 million. Benefit Partners experienced another quarter of significant improvements in its nonmedical loss ratios. The consolidated nonmedical loss ratio of roughly 65% was primarily the result of very low short and long-term disability loss ratios just under 60%, benefiting from both favorable incidence and claim termination experience as well as operational improvements. We estimate the better-than-expected loss ratios translated into about $11 million positive to the quarter's earnings. We would not expect these favorable loss ratios to be sustainable, however, and are holding to our guidance of 71 to 75%. We would expect to be in the low end of that range as the year continues.

Investment Management reported income from operations of 12 million for the quarter compared to an operating loss of 1.4 million for the same period a year ago. Year-over-year growth was primarily attributed to the 29% increase in third party assets under management, and recognizing there were $4 million of onetime costs experienced in the comparable 2005 quarter.

Earnings were negatively impacted by the markets, a little over 2 million in recorder, but we also experienced a change in earnings run rate associated with the installation of our new internal charge for managing the Life Insurance company general account. As I noted in our July call in the financial reporting, we changed the asset management fee down from 16 to 9 basis points. The change was expected to be revenue neutral, but after officially installing the intercompany arrangement, the actual pricing change together with a modest increase in headcount to absorb the new assets had a little over $1 million after-tax impact on the segment's earnings. This impact is now part of their run rate going forward.

During our July call, we discussed providing more detailed earnings outlook for our smaller businesses. Based on our internal forecast, we expect Delaware earnings for the year in the mid 50 million range.

Turning to Lincoln UK, operating earnings in the quarter of approximately $10 million were in line with expectations. For the full-year, our forecast is for income from operations in the mid to high 30 million range.

Lincoln Financial Media income from operations was 11.9 million in the second quarter. Adjusting for purchase accounting and option expensing, earnings were down 3% as compared to last year's quarter as we experienced weakness in auto company national and local advertising and political ad revenue in our major locations. We are forecasting earnings in the upper 30 million range for the year, recognizing this represents three quarters of results.

Other operations recorded an operating loss for the second quarter of 26.1 million versus income from operations of 30.1 million in the second quarter of 2005. The second quarter of 2005 included a $23.5 million after-tax reduction in the deferred tax asset valuation allowance and $25 million of excess investment income.

Other operations has undergone significant change with the merger. Even when adjusting for our new segmentation as we did in the most recent statistical supplement, for the merger -- from a merger standpoint, you have the impact of financing, corporate held assets at the former Jefferson-Pilot, and income on unallocated capital. This line was also impacted by the expense allocation methodology.

As you know, we're including merger-related expenses and restructuring charges in our operating earnings, and specifically in the other operations segment. As Dennis noted earlier, we recognized 17 million of pre-tax restructuring charges and merger expenses, having an $11 million after-tax effect impact on operating earnings. We still expect these costs to reach approximately $180 million pre-tax over the course of our three year integration effort.

The magnitude and timing of these expenses are very difficult to pin down in the early months of integration. For the remainder 2006, we expect the combination of restructuring and merger expenses to be in the range of $20 million pre-tax for each quarter and will update these numbers as our plans mature. In effect, we're seeing an accelerated pace of integration is also accelerating saves and costs, and it now looks like we'll realize roughly 40% of the integration costs in the first year of our merger.

Turning to capital management, we repurchased 8 million shares a quarter via the initial delivery of shares under a $500 million accelerated stock repurchase program. We closed out our accelerated stock repurchase program during the month of July and took delivery of another 800,000 shares. Looking at the remainder of 2006, we expect to repurchase between $350 and $500 million of stock. In order to efficiently execute on this plan, we intend on entering into another $350 million ASR as soon as practical.

After-tax interest expense for the period was $42 million, an increase of 28 million over the same period in 2005 and impacted by the inclusion of pre-existing Jefferson-Pilot debt, merger-related financing, and purchase accounting adjustments on the marked-to-market of debt instruments of the former J-P. From a run rate perspective, we expect quarterly interest expense after-tax in the range of 45 million.

Before I turn the call over to Q&A, a couple of comments on the third quarter. First, we have entered into a preliminary agreement to settle with our insurance carriers on claims associated with past sales practices in the UK. Upon final settlement and receipt of cash, we expect to book that income in the third quarter which on an after-tax basis will contribute roughly 17 million of operating income to our other operations segment. We may use some or all of the proceeds to fund growth initiatives before the year is out. We would expect to update you as these plans develop.

Second, as is traditionally the case in the third quarter, we will be conducting our annual comprehensive review of assumptions underlying DAC (indiscernible) and deferred front end loads. As part of the review, we will also be harmonizing certain assumptions and processes used by the former Jefferson-Pilot and Lincoln. As has always in the case, we will detail for you the impact of these changes, both on the current period's results and their impact on future earnings patterns.

With that, I will turn the call over to the operator to start into our Q&A session. Operator?

(OPERATOR INSTRUCTIONS). Tom Gallagher, Credit Suisse.

Good morning. A couple of questions here. First one is I guess more logistics. Fred, in terms of how we're going to see the expense saves come through, should we expect those to emerge mainly on the Individual Life side? And then, are we going to continue to see the restructuring charges come through corporate and other?

You'll continue to see the restructuring charges and merger-related expenses coming through corporate and other. In terms of the saves, they are indeed spread throughout the Company, and you'll see that coming through in the form of operating and administrative expenses reducing over time. And the best way for you to see that is to see that in the expense ratios of the Company as we move forward.

And that's why we started the process of including some of that ratio analysis in our statistical supplement, but you would expect us to point out where we are seeing the benefits of the saves in that regard going forward. Otherwise, when you factor in the growth of our businesses and so forth, it's difficult to really pinpoint in looking at any particular line item, the express dollar value. We'll obviously outline that for you on these calls. We'll include it in our disclosures, in our 10-Q and then we'll point to it in terms of what line items are being impacted by the save efforts.

Okay. And just a couple of follow ups. One is, how should we think about the funding on the 350 to 500 million in buyback? Is this coming from mainly debt? And then, is that debt cost already reflected in 2Q results? Secondly, I guess in the press release, the commentary about IOLI sales -- curtailing IOLI sales hurting production, does this imply that you sold a substantial amount of IOLI in prior quarters? Thanks.

I'll take the ASR question and maybe Dennis can comment on the IOLI question, since he's been discussing production with you today on the call. But from an ASR perspective, we would expect to fund the ASR through a combination of capital on hand, cash flow, and borrowings. The interest expense associated with those borrowings are somewhat factored into my run rate expectation for debt expense after-tax of 45 million that I mentioned on the script.

As you might recall from how these ASRs work, we would then take delivery immediately of a set amount of shares. It won't be the entire $350 million worth of shares. There's a true up process that takes place over a period of time just as we experienced here in the last ASR we have done. But that's how we expect to fund it, Tom. On the IOLI, Dennis?

It's Dennis. Let me first say that in the definitions of IOLI and SOLI, there's a variety of different products that can get swept into that definition, and so it's not always exactly easy to identify what's IOLI and SOLI and what isn't. So in terms of the combined production of both companies, we've done analyses. And our best guess is that throughout 2005, somewhere in the neighborhood of 10 to 15% of Life sales were reflected by the kinds of products in that definition.

So round figures, that's -- is the guidance on that. But I would caution that there may be some product that's slipped through that [in fact it was] IOLI or SOLI that's not in the 10 to 15%, but we think it's a pretty good estimate.

Just to follow up on that, Dennis, is there a concern here given that maybe upwards of 15% of sales were IOLI, that it's going to drag on future margins?

No. The issue -- in the aggregate, the amount of sales of -- the combined amount of sales were 10 to 15%, but in terms of margins and so forth, probably not going to have a significant effect.

Thanks.

Colin Devine, Citigroup.

Good morning, couple of questions. Fred, I'm glad you brought up the DAC issue, and it's time to look at that again in the third quarter because certainly in looking at variable annuity sales are up so much. But of course, (indiscernible) are up about 33% year-over-year and Lincoln does have one of the older blocks in the industry. Can you give us any initial thoughts?

Are you going to have to change the DAC policy on the older blocks since they seem to be lapsing sooner? And I was wondering also, the lapses on investment licensing seem to pick up significantly. Was that just the addition of Jefferson-Pilot or was there something else going on this quarter?

In terms of the third quarter unlocking and prospective assumption analysis we go through, I would expect as is normally the case there'll be a series of positives and negatives from an unlocking perspective as we true up the various assumptions. Right now, it's too early in the process for me to give you any kind of gauge as to what direction on the margin that [may get]. But at the moment, I don't have any information that suggests to there will be any material issues involved in that process. But it is going to be an involved process, as it always is.

There aren't any dramatic DAC amortization policy differences between the companies or adjustments we would expect to take based on the way we see the blocks of business performing. Much of what you see in this year's performance has long ago started the process of being taken into account as we look at our DAC amortization practices. In terms of investment management, let me make sure I understand your question. Are you talking about the redemption rates at Delaware in the investment management area?

(indiscernible) business -- lapses seem to be up.

In the investment management business?

No. On interest-sensitive life.

On the interest-sensitive life?

There was a fairly significant spike in withdrawals.

Mark, do you have an answer to that question?

(inaudible) like they doubled.

I don't know exactly the number that Colin is looking at, but we don't see a significant difference in the experience between the legacy Jefferson-Pilot block and the legacy Lincoln block as it relates to lapses. Essentially they're on top of each other from a percentage standpoint.

Why don't we do some more work on this and get back to Colin instead of just speculating on it.

Okay. And one quick follow-up. Fred, with respect to DAC on your variable annuities, (inaudible) policy materially different for the old products you were selling with the death benefit, versus the new ones you're selling with the living benefit riders?

To the best of my understanding, I don't know that there are dramatically different DAC amortization practices between the two products, other than a recognition of the DAC implications, if you will, associated with the withdrawal benefits versus the death benefit in general, just they're priced differently and so forth. There are different assumptions that play into the way in which those policies may behave based on those guarantees, and that can factor into how estimated gross profits are driven on the product. But I don't -- as I think about it, they are not dramatically different approaches.

Eric Berg, Lehman Brothers.

Thanks very much. Good morning still. And I have two questions, one regarding your retirement business and one regarding Delaware. With respect your retirement business, which is a very important business for Lincoln, is it really fair to say -- help us understand why this is a new business? These products, Director, certainly Multi Fund, haven't they been around for years? Is it really fair to say that Lincoln is new to the retirement business?

And perhaps even more importantly, it's strikingly different in success, at least to me, between your nonqualified business and this qualified business in the sense that your flagship variable annuity business seems to be moving forward very smartly with strongly positive note flows. But when we look on page 21 of your supplement at the trends in the retirement business, it seems the cash flows are much weaker both on the fixed side and on the variable side than they are in your main annuity business. Why the difference? And I have one follow up question.

Eric, I think -- I think your challenge of -- argues for the word new is a fair challenge, because as you point out, these businesses have been around for a number of years inside of Lincoln. What is different and therefore new today, however, is the businesses in the flagship; as you called it, our individual variable annuity business has had a strong centralized focus and consistent management team and consistent distribution effort for a number of years. And we are seeing the results of that.

On the other hand, when we go over to the qualified pension business, quite literally, the product and distribution responsibilities for that pension business was anything but focused. We had some product inside of Delaware. We had some product inside of our annuity business. We had some distribution inside of Lincoln Financial Distributors. We had significant distribution inside of Lincoln Financial Advisors. And we had distribution away from either one of those two organizations as well.

So what is new is that we're seeing this is a business that should be able to produce the same type of contribution to Lincoln as our flagship individual variable annuity business, so let's bring it together. Let's focus product. Let's focus distribution and let's really manage it like the single business that it should be in the marketplace, rather than more -- and I will use the word haphazard process that we had used previously.

That's very clear and a good, comprehensive response. It helps me understand. So thank you. My second question is actually also to you, Jon. And it relates to the importance of Delaware inside the Lincoln organization in general. It's not a large contributor to your earnings. I think with the addition of Jefferson-Pilot, it comes about how to about in the current quarter, I don't know about 3, 4%. Help us understand the larger importance of Delaware. Why should we be -- why should we spend as much time focusing on it as you did in this call given nominally a very low contribution to earnings?

Well I think that there's a couple of reasons for it, Eric. One, if we look at where will we have been where have we had in '06, the biggest delta in earnings versus '05, while their absolute level in earnings historically has been low, their delta contribution has been very attractive. And obviously, as you evaluate future earnings patterns in the Company, delta becomes very important there and Delaware is an important contribution to that.

Secondly, when we look at how do we get the extra 25 basis points, 50 basis points or 100 basis points of return on equity inside of the Corporation, Delaware has very low equity assigned to it because of the nature that type of business. So it really allows us to be able to take our core insurance business return on equities to a higher level as a total corporation because of the more attractive ROA characteristics of it. -- ROE characteristics of it. So put them together; delta impact on the absolute level of earnings, and then ROE impact as well is why Delaware is such an exciting and important part of the Company.

Steven Schwartz, Raymond James.

Just so you're aware, on that interest sensitive comment, if you add back the assets added from the J-P acquisition, the ratios do work. I'd like to touch on -- first quick question for Fred. Was there a FAS 133 adjustment for index annuities in the quarter? Did that benefit or hurt earnings if that was included?

It was very, very small; in fact, largely immaterial to the earnings. So I did not make mention -- I know you're used to historically seeing mention made of that in the J-P earnings calls because at times it can be more sizable, and certainly when it is we'll point it out, but it was negligible in this period.

Okay. And then Jon, maybe you can talk a little bit more -- I am interested in this -- about pension bill and how you see that affecting your business all the time. There is obviously auto enrollment which should help, I would imagine. I'm more interested product-wise and particularly with regards to Annuities and LTC and how you see that all working out.

Yes, I think Steven, you're pinpointing and on the annuity rider opportunities is really probably the biggest potential differentiator as it's going to impact us. And we worked very hard with members of both houses to make sure that was first introduced in the provision and then subsequently survived the bill itself.

Basically, when you think about what types of risk retirees face in the marketplace or face in their lives out there, the two biggest risks they face are first that they are going to outlive their retirement income or their savings -- whatever it might be. And secondly, they face the risk of some type of disability. What we've seen in the marketplace from our life insurance benefit linked product of MoneyGuard, as you know, for a number of years, very, very strong production because the ability for a person to take what otherwise would be a death benefit and use it to fund long-term care voids out the need largely for stand-alone long-term care. And it's a better utilization of their overall assets.

The way tax policy was written, that benefit linking was only available to life insurance and was not available to an annuity. So therefore, if somebody had an annuity product and an annuity policy out there, and they found themselves in a situation where they needed long-term care, pulling that money from the annuity became a taxable event to them because it was funding something other than what was intended for. So this now puts the annuity product on a similar standing to the life insurance product, where you can take monies that are yours that will be coming to you one way or the other, and you can have much greater flexibility now in being able to transition those monies away from a monthly retirement check or just a balance on a tax advantaged basis moving it over, or on a tax favorable basis I should say, moving it over to fund your long-term care.

And I think Lincoln's expertise in the benefit linked product area of life insurance will translate over into this product as well. We also would expect to be able to make this available now, that it will be permissible not only in our individual annuity products, but also our group retirement product so that a 401(k) Director variable annuity product, a Multi Fund variable annuity product can all have this built into it as well. And I just -- we believe that there's great opportunities here for that.

Jeff Schuman, Keefe Bruyette & Woods.

Good morning. First a question for Fred about executive benefits. A number of factors [to have] a pretty variance year-over-year -- you talked about increase in Jefferson-Pilot, a couple of factors. Were all those factors kind of trendable? Is this kind of a good number to go forward for that segment?

When you're looking at the executive benefits, this would be the pension -- just to be clear, the pension COLI/BOLI area that you're talking about.

Yes.

Yes, I would not be looking at that period-over-period trendline and suggesting that to be a trend to take out into the future. There's a few things to recognize about it, one of which I mentioned which I know you understand, and that is just the merger itself. The merger with Jefferson-Pilot brought in a large BOLI platform, and with it, around $6.5 million or so impact in the quarter. And so you need to immediately adjust for that.

You also need to adjust the fact that it just so happens in the comparable quarter last quarter we had some unfavorable unlocking in the period. I want to say that was to the tune of a couple million dollars or so of variance period-over-period. And then we have been experiencing a little bit better mortality margin on the pension line. This is that runoff pension piece, and that has contributed again a few million dollars.

So there has indeed been organic growth. We've seen some pretty good COLI sales year-to-date versus year-to-date last year. This is basically on the heels of introducing some new products that we put together that is finding appeal in the marketplace. So there has indeed been some organic growth on that front, but you want to be careful about creating a trendline if you will over those two quarters.

Yes. I didn't mean to suggest -- I'm sorry -- about extrapolating the growth rate, but was the current period earnings number reasonably representative or does it benefit maybe a little bit from some better mortality that we see?

Absolutely, it's a good question. And answer is no, it's reasonably representative of the earnings we would expect to have going forward. That is that despite enjoying a little better mortality margin, we would expect that type of margin to continue, so it is representative.

On the Investment Management side, Dennis talked a little bit about some of the factors that impacted sales flows in the quarter. I'm not quite sure where we're left with in terms of the outlook from here. Are some of the same issues around capacity constraints going to impact us over the next couple of quarters? And should we look for flows in kind of the same general ballpark, or is there something that could drive sort of a bounce back to the higher levels?

Let me first talk about 2000 -- the second quarter a little bit. We reported retails of about 2.3 billion and institutional sales of about 2.7 billion. Inside those numbers are about 1.3 billion related to the closings of the International ADR and the Focus Growth Funds. And so net/net, we're looking at retail sales in the second quarter of about 2.4 billion and 2.2 for institutional sales.

It's difficult to predict what's going to happen in the second quarter and third quarter and the fourth quarter, but the 2.4 and the 2.2 it is net of some of these specific situations that we talked about.

We had good institutional sales. Particularly in the first quarter, we recorded $5 billion. $3.6 billion of that $5 billion was not affected at all by the closing of these funds. And we continue, as we reported, to have good performance across the board both on our institution and mutual funds. So we're optimistic. And we have, as I mentioned, a couple of good equity funds that are open and taking in deposits.

So good performance I think over the long-term is going to drive asset growth. And as we reported, and to repeat that, asset performance was very good.

Jeff, one thing I would add to that comment is something I put kind of in the human factor side. And that is if you're a salesperson, whether it's a wholesaler or an institutional person, you're naturally going to gravitate to your -- let's call it hot fund area, hot investment product area. And then, when those things get closed down because of capacity issues, it's going to take a quarter or two for you to reorient yourself because you still want to go out and put food on the table and all that kind of stuff. So I would expect that we're going to see an adjustment coming back around as the sales forces, retailing and institutionally, reorient themselves.

Saul Martinez, Bear Stearns.

Just a couple quick questions. Fred, on capital management, should we still be thinking about 500 million in buybacks in '07? And any color on the timing of the $350 million ASR? Second, can you give us an update on Wes Thompson's efforts to leverage the benefit partner relationships to (indiscernible) small case retirement products? I think Jon mentioned it in his prepared remarks, but kind of where do you stand there now versus your expectations?

I will hit the stock repurchase very quickly, Saul, but yes, we have not changed our views on buying back approximately $500 million worth of stock in 2007. In terms of the execution of the ASR, we would look to get to work very shortly here after exiting the earnings related blackout period. I want to allow myself a little bit of time to gather up the appropriate work necessary to negotiate the transaction, but we would expect to get at it in a short period of time here.

Saul, this is Dennis. In fact, Wes has some pilot programs underway on this very issue, and I think I'll ask him to give some color around that. Wes?

Yes. I think the key message here is that if you look at our business on the group protection side of the business, which is the Benefit Partners business and then our retirement business, we're in very similar markets in terms of where the real growth opportunities are. And that typically is the under 200 life type case, to be more specific, or even under 500.

And what we also see dynamically is that Benefit Partners and Lincoln are both well positioned in the health-care markets across the board. So as we have begun this process of building out a more integrated distribution capability, we're getting a significant amount of activity from the ground up. And it's always exciting to see it coming from the ground up, meaning inside of our distribution organizations, and interest in leveraging those opportunities in those similar markets both in the corporate side and in the health-care markets also. So we're excited about that as we go forward for growth.

Jimmy Bhullar, J.P. Morgan.

Thank you. I just had a couple of questions. First, Fred, on -- can you talk about crediting rate flexibility in your fixed annuity and retirement businesses? On -- if interest rates don't move how much -- what portion of the [blowup] is close to being at minimum rates?

And then second, on life insurance sales, I think even adjusted for IOLI, your sales wouldn't have been that good. And you mentioned competition, and that is a little bit surprising to me because I don't -- I think you have not taken any rate actions. Your competitors, a lot of them have actually been raising rates, so I don't see how competition could have affected -- held back life insurance sales. So would you talk about if there are any other factors affecting sales in the Individual Life business?

First, on the crediting rate flexibility, one, with some recovery in new money rates relative to portfolio rates we have gradually gained back some level of flexibility relative to what we could do with crediting rates. Still, as we sit here today, though, we have a fair amount of our combined fixed portfolios coming near the minimum crediting rates; I would say in and around 50%. I am actually looking at our estimates right now -- should be 50% of the account value roughly in general total. This is across Life and Annuities. It would be within 10 to 20 basis points from the minimums, just to give you an idea.

One of the things I will call your attention to is we're on the heels of filing our 10-Q. And you're going to see, as is typically the case, in the tail end of our 10-Q we do a fairly detailed schedule which is now of course on a combined basis to include the J-P fixed businesses. And Jimmy, I would just call your attention to that for further detail on our flexibility.

On the life sales, we did mention in the Q & A the 10 to 15% rough number, which could be in the 2005 results related to IOLI/BOLI, and sales quarter-over-quarter are down 4%. So there is some effect there. Again, it's hard to quantify exactly what it is.

The market does remain competitive. I wouldn't say that the competitive pressures have shifted dramatically over the last couple of quarters. We did introduce in the first quarter one product that was priced less aggressively than it had been as we adjusted for some of the reserving issues. So, again, I think the remarks I made about the opportunities, the combination of the organization, and the wholesaling investment that we're making will help us with the growth rate.

Joan Zief, Goldman Sachs.

Thank you. I was wondering if you changed any -- or if you have done anything, changed any approach to your investment posture given where interest rates may be, potential -- well, we have the inverted yield curve -- the potential that interest rates may be going back down next year. And what sort of impact to the businesses should we be anticipating?

We have not made any dramatic changes to our portfolio policies and the way in which we manager our general account assets, Joan. We tend to be very tightly matched on the duration side, as you know. If anything, we are looking at our alternative investments. We're now blessed with a much larger general account upwards of $65 billion, and in that regard, we have very low allocation to so-called scheduled VA assets.

There are also some areas were we can take gradually more sizable positions, again, afforded by the larger capital base and the larger general account. So there are some of those modifications we're looking at, but we're not placing any large strategic directional bets on our view or outlook for interest rates.

Well if interest rates -- if we did have a drop in interest rates and say, the ten-year treasury is at 4.5% a year from now, if that's the direction we go, would that have any major implications to your spread expectations and your growth expectations?

Sure. If you have that a big a drop in interest rates, you would gradually find the circumstances we have found ourselves in as an industry over the last few years where you gradually face some level of spread compression, as you -- it relates somewhat Jimmy's previous question. You start to bump gradually up closer to your minimum crediting rate provisions and you'll see some spread compression. Fortunately, that is not the position we're in right now. We're seeing interest rates gradually cooperate with the industry. But that certainly would be the outcome.

The attractive part about that, with a $65 billion general account portfolio is even a fairly dramatic current period shock in interest rates doesn't really change with your existing portfolio [is growing] off.

Tamara Kravec, Banc of America Securities.

Good afternoon. My question is really broader in nature and both for Jon and maybe Dennis too. In terms of the merger overall in the return that we're going to be seeing. I know you commented before that 13% ROE is achievable based on the numbers, but maybe you can help me with my math. Because as I am running the numbers that you provided and piecing together the core run rate in your base operations, factoring in J-P which is running about 145 million, you got your various adjustments in the debt and merger costs and saves, the share buyback, and the impact of purchase accounting, I'm just really getting sort of high single digit growth in earnings if that. And in ROE that is -- I'm kind of struggling to get anything close to 12%. So if you can broadly comment on -- what's really going to drive that ROE from your perspective? Thanks.

Well I think -- I will just make a few comments. This is Fred. In general, when we announced the transaction, we talked about at the time, we thought we would come on out at around 11.5% ROE when we close the deal and gradually climbing towards the 12% range while we -- as we entered or exited, rather, the first year of operations, and then 13% as you got near the end of 2007 from a run rate perspective. And it was largely going to be driven off the combination of things which included, of course, traction from the expense saves that are feathered in over that period of time. And we think we're off to a very good start on that front.

And also, capital management, recognizing that we came out of the gate with a relatively conservative capital structure on the low end of the range of the leverage area and with a reasonable amount of capital to get redeployed over time when looking at cash flow and so forth. And so it's the combination of expense saves and capital management that we're going to drive you towards that 13% in and around the end of -- to the 2007 time period, and we think we're on a trajectory to do that. We actually think the quarter's results really support that.

That doesn't factor in what we would characterize as synergies, if you will, related to the merger. If you recall when we announced the deal, we tried to back away from any of the additive components of that. And being in the early stages of our integration, the early stages of piecing together our distribution platform, the early stages of our retail platform coming together, the early stages of product harmonization, we would hope and you should expect that we see some organic synergies coming out, driving topline improvement, that it's not simply an expense save initiative.

Okay. So it's fair to say that your integration costs are running in 2007, at probably about 50 million. Your expense savings as they are coming through as you have mapped them out are maybe 65 million, so the remainder -- you lowered your debt costs to 90 million annualized. So the remainder is really coming from other types of synergies because you are buying back roughly -- maybe 10 million of your stock with a $500 billion buyback. So --

Yes, absent walking through your model with you. And basically what you're describing hangs somewhat together with one exception. Remember that all of our commentary is, of course, excluding integration related costs because we would expect that over time to not be part of our underlying run rate of earnings. We haven't currently incorporated an operating earnings for all the reasons we discussed, that needs to be factored into your thinking over the near-term, but obviously eventually those things [milk] away.

Ed Spehar, Merrill Lynch.

Two quick questions. First, I think if I look at the Life business, it looks like Jefferson-Pilot, the Jefferson-Pilot contribution to Life earnings was at a lower rate than what we have been -- than what we had been running at prior to the merger. I guess what I'm doing is just taking the delta here and multiplying it by 0.8 and coming up with something like 68 million of earnings. I think it had been running closer to 79 or 80 million. So I'm wondering if you could sort of comment on what was going there and is it PGAAP or something else.

And my follow up is on the Employer Markets business. Is there any desire or renewed focus on growing the assets under management in that business? Is any of that related to concern about or comfort with what percentage of your total Annuity business has living benefits associated with it? Thank you.

I'll take the second one while Fred is still looking at your first question there. We are not pursuing the Employer Markets business as a defensive opportunity or a defensive position relative to what's taken place in the individual markets. Employer Markets is a very attractive -- the [fours] -- the pension business is a very attractive business, has nice growth characteristics. We believe that we have good opportunities there as we described, the different products and market segments we operate in, so that when we add increased distribution, we'll perform well.

Again, it's not defensive. We believe that the individual annuity business continues to be attractive. The riders and benefits that are out there in the marketplace, if they are first prize properly and secondly, sold properly, the earnings patterns and expectations and risks associated with it should be very acceptable to us. So we want to go forward on both of those. Fred, you?

Yes. I think what you're seeing, and certainly we can follow up if we don't offer up enough of a detailed answer, but I think what you're seeing is just expense allocation issues as it relates to combining the higher expense platform of Lincoln with the lower expense platform of J-P. And so when looking at that earnings contribution that I quoted when I was using approximate numbers, and part of the reason I am using the approximate numbers is because you got so much of that expense allocation involved in there. So it's not as easy just to look at the last quarter J-P results and say I think I see a drop. We have got a lot of allocation issues going on there.

Bob Glasspiegel, Langen McAlenney.

Good afternoon. One math question and more substantive question. Fred, I think in response to my question last quarter, you suggested that pro forma book value would be around $39 if I did my math right. And in a quarter where you bought back a decent amount of stock above book and the bottom market wasn't your friend, book value went up $1.50. Was there more that went into goodwill or some other classifications than you might have thought or am I overanalyzing?

Well, what I probably did with you last quarter, but you can certainly correct me, Bob, is I probably didn't quote a book value estimate. I probably just --

You gave me earnings and shares. If I divide it [up] (multiple speakers)

Right. Those are -- walk you through all that stuff. And so I don't really know how I would about reconciling kind of the 39 to 40 other than to say no, nothing really unusual went on. It's more likely the case of perhaps just the timing of shares in and shares out relative to what you were remodeling and perhaps just me needing to see what you are assuming or not assuming in your book value estimate.

I just gave -- took the numbers you gave me and divided them out, so maybe there was some adjustments, but I guess the question was, there was no major surprise in -- at the goal line on what got classified into goodwill and --

No, not material.

Jon, this question is for you. Are you happy with where Delaware's margins are relative to sort of where you thought they would be two years ago in light of what's been a significant growth in assets? And -- we're not getting to sort of the EBITDA margins that you had said you were going to get to a couple of years ago, despite some pretty strong gusts in the wind. And I don't know whether this is a partial answer to Eric's question, but is there a lot more leverage on the margins at Delaware than where you are today?

Yes, that's a good question, Bob. When we had given our Delaware EBITDA margins, I think we have pretty consistently been -- given those as a 2007 type of a goal that's out there. The growth in assets by itself at Delaware doesn't all lend itself to the same impact on EBITDA margins, just as a basic example of that. Assets come in retail form of a lot different profit characteristic as assets that come in inside of an institutional form.

Within retail and institutional, something that comes in as we've seen a lot of growth, as an example in International ADR, has much different profit characteristics than something that comes in, in let's say fixed income or maybe international or -- I'm sorry; domestic large cap value. So we can't look at just assets by itself and draw a disappointment or satisfaction type of discussion. I think at this point in time, we are still in everything that we see on track to get to industry average or more typical EBITDA margins as we work our way through the 2007 period. So still good with them.

Suneet Kamath, Sanford Bernstein.

Thanks, Rufus. I guess two questions. I wanted to start with maybe going back to Ed's question on the life insurance business but maybe ask it on a consolidated basis. I think in your press release you talk about J-P earning about $145 million. If I back out the 11 million from the Benefit Partners loss ratio, I get to 134 million.

If I compare that to what J-P reported in the year ago quarter, it's about flat. And I know you talked about some purchase accounting adjustments, but I didn't get the sense that they were all that dramatic; a couple of million dollars. I'm just wondering, this business that you acquired now, I know one quarter does not a trend make, but it just does not seem to be growing. And I'm just wondering how you respond to this issue that perhaps in making that deal you diluted the growth prospects of Lincoln's original business, which seems to be performing pretty well. And I have a follow-up.

Well, if you do take Jefferson-Pilot's last quarter and reconcile that quarter for unusual items, and then you take this quarter and make some adjustments, you'll see that yes, indeed, it's not -- it's a little more growth than flat, but it's not very high growth. I would say in the low single digits is what I come up with. And I think that's probably largely attributable to some of what we've talked about today, which is a little bit of weakness as we left last year and into this year on the life side, a little bit of weakness on the fixed and equity index annuity side.

But sequentially in '06, we're starting to see those things really improve pretty dramatically, particularly on the annuity side. So I think it would go to your statement of one quarter, if you will, comparison does not a story make. I can tell you that that's not something we're concerned about right now. But your original premise on trying to work to those numbers is roughly correct, albeit the numbers we have are that it's slightly up, but again, in the low single digits.

Okay. And just a follow-up --

One other comment I'll make also that is worth noting before I let you go. And that is keep in mind also last year this time that Jefferson-Pilot was not doing option expensing. And so in the number that I quoted of 145 million, we also have option expensing going on. There are some differences, is the point I am making, and so I would not use the term flat. I would say that earnings are up, but also earnings are impacted by some of the things we talked about today.

So that single digit number that you're talking about -- does that deal with the options issue or --

Roughly. Roughly.

Okay. And then my follow-up question is on the variable annuity business. With Lincoln being the one of the last companies to report, I think the results have been at least my opinion much stronger than I thought given the volatility in the market and the increasing competition. If I think about how the equity market performed during the quarter, I think April was pretty good. It starting to sell off in May and June was pretty weak.

I'm just wondering how VA sales tracked through the quarter. Was April much better than May which was much better than June, or was it kind of continued strength throughout the quarter? And than any comment that you can give in terms of how trends held up in July. Thanks.

Yes, actually the way it ended up working, May and June were our two biggest months of the quarter. April was our lowest month. And I don't have July information at my fingertips. But I -- so I don't have that. I don't know if, Dennis, do you have anything on July, or Warren do you have anything on July?

Yes, July was our fourth best month of the year. It was down less than 10% from June, which I think the industry was down double digits. So we saw a little bit of weakness in July, but still better than April.

And relative to July of '05, maybe to put it in that perspective, [Terry]?

Up double-digits. I don't have the specific July number -- actually I might. It's up significantly. I don't have the actual numbers, but I can get it to them.

Okay. So it's not in early front end load then. It's [built] through the quarter and continues to look good.

Rufus, I think that's about the amount of time that we have allotted for the call. I'd like to thank all of the analysts and investors who have listened in for this extra half-hour. I'm pleased we don't have anyone left in the queue and I think we got most of your questions. As always, we will take your questions on our investor line at 800-237-2920 or email us at investorrelations@LFG.com. Thank you and have a great day.

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