Lincoln National Corp (LNC) 2007 Q1 法說會逐字稿

Good morning, and thank you for joining us for the Lincoln Financial Group's first-quarter 2007 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 [during] future expectations, trends and market conditions, including such comments about premiums, deposits, expenses 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 reports filed with the SEC, including the Form 8-K filed yesterday.

Now, at this time, I'd like to turn the conference over to the Vice President of Investor Relations, Mr. Jim Sjoreen. Please go ahead, sir.

Thank you. Good morning and welcome to Lincoln's first-quarter earnings call. You just heard the Safe Harbor cautions, so I won't repeat them.

We appreciate your participation today, and invite you to visit Lincoln's website, www.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 the website. Of note, all sales and related production numbers referenced in today's call related to the first quarter of 2006 will refer to the combined results of Lincoln Financial and Jefferson-Pilot.

Presenting on today's call are Jon Boscia, Lincoln's Chairman and CEO, and Fred Crawford, Lincoln's Chief Financial Officer. Dennis Glass, Chief Operating Officer, and other members of our senior management team are participating in a producer conference this week, and will not be on the call today.

Now, I would like to turn the call over to Jon Boscia, Lincoln's Chairman and CEO.

Thanks, Jim, and thanks to all of you for joining us this morning. As we begin the reporting cycle for 2007 and wrap up year one of the merger, I am very pleased to report on another quarter of strong sales, earnings and merger results across the enterprise. First-quarter results of 2007 are evidence once again that execution remains the focal point for our employees and that our commitment to delivering both new business growth and integration milestones remains (inaudible).

One of the major milestones we reached early last month was the launch of our unified product portfolio for individual fixed products. This is a significant step in aligning our distribution efforts with a single product portfolio and, in turn, simplifying how the Company operates. We are now in a better position to respond quickly and effectively to the constant changes we see in the marketplace.

With that, let me turn to the quarter and share some brief highlights on our results and some observations on how 2007 is developing, starting with individual annuities. Our individual annuity business continued the trend of delivering strong results for both deposits and net flows. First-quarter total annuity deposits of $2.8 billion were up almost 18% over the prior-year quarter, driven by a 20% quarter-over-quarter increase in variable annuity deposits of $2.5 billion.

Deposits from fixed and indexed annuity products were flat with the prior year, hampered by low interest rates. Our two flagship variable annuity products, American Legacy and Choice Plus, both posted double-digit increases in the 20% range. So we continue to see strong interest in both our single and multi-manager product offerings. Combined with the comprehensive offering of writer options designed to provide retirement security, we remain well-positioned for growth within our key accounts and distribution channels.

Variable annuity net flows of $1.2 billion were up more than 20% from the prior-year quarter, while lapses on multi-year guaranteed fixed annuities resulted in net fixed annuity outflows of just under $0.5 billion. Outflows from multi-year guaranteed fixed annuities were in line with our guidance, and are expected to remain at first-quarter levels until the fourth quarter, when account values exiting the guaranteed period begin to decline.

Turning to our Individual Life Insurance business, we had a very good quarter. Universal Life, Variable Universal Life and Survivorship Universal Life all posted double-digit gains, while term sales declined ahead of the launch of the new portfolio. Sales in the first quarter of $204 million were up 70% over the prior-year quarter, and down only slightly from record levels in the fourth quarter of last year. We saw the strongest growth coming from Universal Life sales in the MGA channel, where we are focusing wholesaling resources and enhancing service levels for key firms.

Looking ahead, this quarter's results benefited from a large base. Taking into consideration the recent rollout of the unified product portfolio, we could see sales trend down a bit in the second and third quarters before hitting the seasonally high fourth quarter.

We routinely review the profile of the business we put on our books relative to pricing assumptions as part of our risk management practices. Overall, we're comfortable with the filters we put in place to screen for investor-owned life insurance. But given the evolution we have seen in how life insurance can be used, we know that a portion of the business sold at older ages is potentially at risk to including some of this business. However, we have been actively investigating sales practices and producers that may be aligned with IOLI type businesses and have taken actions, including the cancellation of appointments.

The launch of our new unified product portfolio also incorporated a number of changes affecting new business, including revisions to the application and underwriting guidelines and, in some cases, pricing. We have and will continue to modify our processes as needed to minimize the potential for accepting business that does not meet our risk and returns requirements.

In our employer markets business, the quarter was characterized by strong sales and defined contribution and solid results overall. Deposits in our defined contribution segment of approximately $1.5 billion were up 20% over the prior year, with deposits in our Alliance program sold in the mid to large-case market posting a 64% increase over the prior-year quarter.

Sales of group variable annuities in the micro to small-case markets were slightly down from the prior-year quarter, due to the residual impact of terminating a third-party distribution relationship last fall. However, increases in wholesaling talent will mitigate this impact through the balance of the year, with 27 wholesalers in place at the end of the quarter, up from only 12 at year end.

Our strategy, implemented last year and continuing throughout 2007, is to first identify the markets in which we want to compete and then align our distribution channels and products to support those markets. We are currently building distribution to support the channels, focusing on growing the top line, with an eye to expanding earnings once we've established momentum.

We started in the mid to large-case market with Alliance and are beginning to see the results of our strategy emerge. We are building our micro to small-case strategy with our group annuity products, the Director and Lincoln American Legacy Retirement programs, to seize the opportunity we see in that market expansion.

Given the upcoming regulatory changes in the 403(b) market, we're developing a strategy which enables us to capitalize on our current market share, particularly in the education and healthcare segments of that market. Wes Thompson and his team are taking deliberate, major steps to build out the employer markets business, in order to capitalize on the favorable trends in this business.

Turning to our Group Protection business, annualized sales of $61 million were down 5% from the prior-year quarter. The drop was primarily in the large-case market, where we declined to meet extraordinary rate demands. We continue to look for opportunities in the large-case market, focusing on multi-line cases that fit our business models and meet our profitability targets.

Sales in are voluntary lines, an area of focus for us, were 6% above the prior-year quarter. In addition, in our core market, which is under 200 lives, we saw an increase in case count in the high single digits.

Turning to our investment management segment, results from the retail business were strong, particularly in mutual funds and annuity placements, while year-over-year comparisons overall were still impacted by the closings of key products in the second quarter of last year. Total investment management deposits in the quarter were $6 billion, and net flows were a negative $100 million, with institutional outflows offsetting the positive momentum in retail. Retail deposits of $3.6 billion benefited from strong mutual fund sales of just under $1.8 billion, which were up 32% over the prior-year quarter and level with the fourth quarter.

Strong performance rankings from both Lipper and Barron's, improvements in both the number and productivity of wholesalers and a downtick in redemption rates helped our mutual fund business post a very solid quarter. Simplifying our Delaware fund story and focusing on large-bucket funds in order to leverage the market's interest in these popular styles improved our positioning, and we saw proof of that in our own retail distribution, Lincoln Financial Network.

In our institutional business, deposits of $2.4 billion and net negative flows of $300 million were down from the prior year, in large part due to the natural variability we see in this business, along with the product closings I referenced earlier.

Before I turn the call over to Fred, let me share the progress we're making on our integration efforts, as it relates to merger-related expense saves. We projected to achieve annualized savings of 50% of our overall target of $180 million or $90 million by the end of year one of the merger. As a result of careful planning and strong execution, we are running ahead of schedule, having achieved annualized savings of $125 million in the first year of the merger. We are obviously very pleased that we have been able to meet and exceed our target, but at this time, we remain committed to our original projection of $180 million.

Looking back, the most complex and risky parts of the integration are behind us, including the extremely important decisions affecting our employees and distribution partners. All of this has been accomplished without losing new business momentum. In fact, we have been able to gain market share at various points during the last 12 months.

Year two of the merger has us turning our attention to a number of administrative elements of the integration, including systems consolidation and in some cases systems replacement. It is a formidable undertaking, but one that is supported by both exceptional talent and a clearly defined plan. It is also one of the most exciting phases of the integration, in terms of what it means to our ability to provide superior retirement income products and services to our clients.

With that, let me turn it over to Fred to discuss the financial highlights of the period.

Thanks, Jon. I'll focus my comments today on providing some color around our key earnings drivers and refresh our outlook for 2007. Overall, the quarter benefited from continued asset growth and margin expansion, as cost savings took hold across the Company. Jon commented on our merger savings. We are seeing the results in improved expense ratios across the Company when adjusted for volume, strategic initiatives and unusual items.

Our reported operating earnings of $379 million or $1.36 per diluted share included approximately $15 million of net positive items or $0.05 per share. Notable items included favorable investment returns in life and hedge program outperformance in our annuities. A solid quarter with very little noise.

Before I jump into the segment results, a brief comment on both the installation of SOP 05-1 and the change to our employee pension and defined contribution (inaudible). As you are all well aware, the SOP deals with the treatment of internal replacements for the purposes of amortizing DAC and effects our results in two ways -- a one-time cumulative effect adjustment to retained earnings and booked value and the ongoing DAC amortization impact to operating earnings.

For Lincoln, the measurable impact emerges primarily in our Individual Annuity line and our Group Protection business. In the first quarter, we recorded a cumulative effect adjustment of roughly $63 million pretax, slightly below our guidance range of $75 million to $100 million. For the full year 2007, the ongoing increase in DAC amortization expense is estimated at roughly $21 million pretax, consistent with our guidance.

Importantly, the 2007 expense is split evenly between our Variable Annuity business and our Group Protection business, the Annuity impact estimated at $9.5 million pretax and Group Protection closer to $11 million pretax. This is an adjustment to our earlier view that the change in amortization would largely be felt in the Variable Annuity business alone. For the quarter, the SOP resulted in a $4 million decrease to overall earnings, split $2.5 million to annuities and $1.5 million to Group Protection.

As noted in our press release, we have announced a plan to freeze the former Jefferson-Pilot and Lincoln defined benefit pension plans and replace them with an enhanced defined contribution plan. The financial implications are fairly modest. We will take a one-time curtailment gain of approximately $9 million pretax in the second quarter, and expect very little ongoing impact to earnings. Essentially, the reduction in pension expense is largely offset by an additional employer-funded contribution to the 401(k) plan, along with transition credits granted to employees based on age and years of employment.

Turning, then, to the segment results and recognizing the detail and our earnings release, I'll make only a few comments on earnings drivers before taking your questions. For Individual Annuities, growth in period-over-period earnings were driven by average Variable Annuity account values, up $9.3 billion or 23%, driving a 35% increase in expense assessment revenue. Living benefit writer income, namely GMWB and i4LIFE, provided an extra boost beyond simple account value growth alone. Fixed annuity spreads of 212 basis points benefited from a purchase accounting adjustment on our payout annuity block, reducing interest credited and improving recorded spreads in the period by roughly 9 basis points. We also collected excess investment income on debt restructuring, which increased spreads by 3 to 4 basis points.

Fixed margins remain pressured by fixed annuity outflows. We expect spreads to remain in the 200 basis point territory, recognizing they are supported somewhat by the lapsing of high crediting rate product.

Turning to our individual life business, operating earnings benefited from steady growth in average in-force and account values, which were up 5% and 6%, respectively, over their comparable and combined quarter in 2006. Mortality and expense assessments benefited in part due to strong sales results, somewhat offset by poor mortality in the period, which we expect will return to normal levels.

Interest margins on fixed UL benefited from excess investment income and an increase in reserves and capital allocation. Spreads came in at reported 202 basis points. Normalizing for roughly 25 basis points of excess prepayment and alternative investment income, spreads were more in line with our guidance of 170 basis point territory.

Looking forward, while production will remain ahead of last year's levels, we do not expect to sustain the high sales results experienced in the first quarter. Similar to our seasonality comments in the fourth quarter, we suspect earnings benefited $3 million to $5 million in the quarter from a continuation of strong year-end production levels.

In employer markets, earnings in our defined contribution business came in as expected. We reported spreads of 239 basis points on a fixed portion of the business, and expect to stabilize in that territory throughout 2007. Bolstered by improved net flows and a modest market appreciation, average variable account values in the quarter increased a little over $400 million, as compared to the fourth-quarter levels, driving a modest increase in expense assessment income.

As Jon noted in his comments, we are seeing the early results of Wes Thompson's rebuilding efforts in the way of improved production. Earnings will build more gradually, given our investment back into this business.

After several quarters of projecting a return to more traditional loss ratios in our Group Protection business, we reported operating earnings of $23 million in the quarter and a loss ratio of just under 73%. Performance was reasonably consistent across all major product lines. Of note, we did experience elevated mortality claims in our Group Life business, and Dental experienced modest seasonality. We expect that both ratios will revert back to their low 70% range as we proceed through the year.

Net premium increased 5%, both sequentially and as compared to the first quarter of 2006. We are seeing some of the sales strength in the fourth quarter, yielding growth in net premium to start off the year.

Turning to investment management, for the quarter, Delaware reported record revenues, operating income and assets under management. Pretax operating margin in the quarter came in at 17%, the result of a 4% increase in advisory fee revenue over the fourth quarter, while total expenses were actually down 1%. Our guidance for 2007 remains unchanged -- that is, earnings in the low $60 million range.

Results in Lincoln UK benefited from the weakness in the dollar, with exchange rates contributing a little over $1 million to earnings when compared to the first quarter of 2006. Recognizing our investments in a new retirement product line in the UK, we continue to expect earnings in this segment to come in at the upper $30 million range for 2007.

As guided, Media earnings dropped from their seasonally high fourth quarter. Earnings of $12.4 million were up 10% over the prior-year quarter. This is particularly impressive, given the effects of purchase accounting, which adds intangible amortization expense of just under $2 million pretax per quarter. The positive results are attributed to a strong quarter for our Sports division and ongoing expense management. We're holding to our 2007 guidance for operating income in the mid-$50 million range for Media.

Turning to other operations, merger expenses of $14 million pretax came in roughly $3 million higher than we guided during our year-end call. Our 2007 guidance remains in the $90 million to $110 million range for the year, with the second quarter estimated to be in the $25 million to $30 million range, both figures on a pretax basis.

With respect to capital management, we repurchased $512 million worth of our common stock in the quarter, or 7.2 million shares. We have no plans to increase our repurchase activity beyond the planned $500 million, as we simply accelerated the full year's repurchase into the fourth quarter. We will monitor capital conditions and make adjustments as we proceed throughout the year, updating our outlook each quarter. I would note that the accelerated stock repurchase accounted for roughly 4.8 million shares in the quarter and was executed mid-March, having only a modest impact on the quarter's average share count.

So in all, a very solid quarter in terms of integration activities, production results and earnings. With that, I will turn the call over to the operator for Q&A. We have attempted to allow sufficient time for all callers, but would ask that you limit yourself to two questions. Operator?

(OPERATOR INSTRUCTIONS). Ed Spehar, Merrill Lynch.

I had a question on Individual Life. You had big growth in sales prior to the introduction of a new product portfolio, talking about the sales maybe trending down now with the new product portfolio. It sounded to me like maybe there's an admission that you're trying to catch as much of the IOLI as you can, but some of it is going to get through. I'm just wondering -- you put all that together and it sounds like maybe you have re-thought about what the right price is, or underwriting is, for the older age UL business. I'm wondering if you can just expand a little bit on what is going on, in terms of how the new product portfolio compares to the old.

First, let me just say that as it relates to IOLI, we have been, we are and we will be firm in our resolution and commitment to not participate in the IOLI market. A big part of why we're cautioning that we will experience a dip in sales in the second and third quarters is not because of changes in the product pricing associated with older age groups as much as it is your distributors have their spreadsheets that are already established. As they look at who they want to place business with, everything is modeled. Then, when you overlay a new product portfolio on top of it, they have to redo all of their work and just get familiar with the product features. It just takes time, what we refer to as the friction expense of any new product modification. That is why we believe the products or the sales are likely to dip during the first couple of quarters after its introduction.

Fred, do you have something else you'd add to that?

I'd just add a little bit. Some of your question relates to your views on pricing and how it relates to the business you're taking in. I would say this, that we certainly did, as part of the unified product portfolio launch, take a very strong effort in looking at the overall pricing of our products. Actually, also, as the first time as a combined company, when harmonizing assumptions and views of the world and where we see things headed, clearly, when it comes to the older age product, a few things we did was pay particularly close attention to our old age mortality assumptions, and in fact, even enlisted the help of third parties to look at the adequacy of those assumptions. We also, not surprisingly, took lapse assumptions down considerably on older age policies, recognizing the reality of lapse rates grinding down on some of our products, realizing that despite the best of screening practices, it's becoming more and more complicated these days to judge what may be the end game with certain large face amount older age policies.

So we've taken into the game a certain level of conservatism. That indeed gets reflected in both our underwriting standards, as part of the unified product portfolio, as well as pricing considerations on older age policies in particular.

Is there any way to just try to quantify at all, in terms of how that -- I'm assuming you are saying pricing is up and underwriting standards are stricter. But is there any way to put any kind of quantified approach?

Yes. I think one of the things I would say is that each quarter, we reflect back on the sales in the quarter, and we do diagnostics on it. We bust it down into a number of different cohorts, to see how those sales are matching up to our expectations, particularly around volumes of business and relative returns in the various cohorts.

We did, in fact, do that for the first quarter. After giving effect for those sales, we don't expect there to be a material issue relative to the overall returns on the business we're doing. Part of the actions that we have taken on the unified product portfolio heading into the second quarter is a recognition that in certain cohorts, we took on more business than we would normally expect to see.

As a result, what we do is sensitivity-test that business -- for lapsation, for example -- to see what impact that may have on our returns. After taking that kind of an analysis, we're comfortable with the nature of the business that was brought on, but recognize we needed to make some moves. That's what Jon is referencing in terms of our outlook.

Darin Arita, Deutsche Bank.

In the Retirement Products business, it seems that Lincoln is putting a lot of work into growing this. Given some of the favorable macro trends, at what point would you expect to see earnings growth more in line with asset growth?

That is going to take a while to emerge here. I think a parallel that I would draw to this is when we were building out Lincoln Financial Distributors in the early years. We were bringing in a lot of new business, but you may remember that the operating losses that we were reporting inside of Lincoln Financial Distributors were increasing during that period of time, because of the expense-intensive nature of doing it.

So if we look at the retirement businesses, the defined contribution business, remember -- this is a series of businesses that were spread across multiple Lincoln larger business lines, and we're bringing them together. We want to take a very disciplined and controlled approach to this business. We started in the larger case size of it, the Lincoln Alliance, largely because it's mutual fund-based, which is attractive in the marketplace. It allows plan sponsors to select from a couple thousand of their favorite mutual funds to put into it, and we built distribution around that and we're seeing the results.

But as we've said now, we just terminated at the end of last year a third-party distributor that really did our micro to small case distribution for us, and we're in the process of building our own wholesale distribution around that micro to small-case. Then, we created a whole new product area that was just launched during that same period of time, the Lincoln American Legacy retirement that had no distribution with it. So we are having to build that out, too.

You put it all together, and we're going to have a period probably for, as we said here, the balance of 2007 and likely extending beyond that, where we're not going to see the full benefit of the revenue increase come through to the bottom line, because we still have the expense buildouts associated with it. After that, the nature of this business is such that it's very persistent and very attractive margins. So as you look in that intermediate time period, I think you'll see very attractive profit growth.

I would just add a couple comments to it, and that is that our investments in that business revolve around distribution expansion. Granted, while much of that expense is deferable, there's certainly an element of expense that you take on through each period as you're in the building mode -- that is, the early years of building up wholesaler productivity levels and so forth. We're making sizable investments in systems and platform initiatives. Again, there are elements that are capitalized, but there are also other forms of softer investments surrounding consulting arrangements, as we start to position ourselves to take better advantage of the marketplace. Then, finally, the various model changes that Jon has talked about -- we expect to yield better flows as we go forward.

Keep in mind, on a comparable basis, we have been bringing down some of the -- we have been suffering somewhat from a little bit of spread compression -- that is, listing some of the crediting rates coming out of 2006 into 2007. So you're seeing a little bit of spread compression that we have been fighting in the business on about $10 billion or so of fixed spread product in that business. So we are fighting a little bit of that headwind.

That was a very thorough answer. Just turning towards capital, I guess assuming that the corporate transaction increased Lincoln's liquid assets at the holding company by $1 billion or more, what would be your approach to deploying that capital?

Well, we don't really -- that's another way of asking if any of the rumors in the marketplace are true out there. We don't comment on those.

We have said many times in the past that our first priority for any excess capital is to reinvest back into the businesses. That's where you have the highest return. Whether that reinvestment would be bold-on acquisitions or just regular standard accelerated reinvestment would be point-in-time specific. If we do not have attractive reinvestment opportunities available for the business, that's where you look at share repurchase and other ways of returning capital back to the shareholders.

Andrew Kligerman, UBS.

I'm hoping to get a little color around the pricing in that larger-case group benefit market that's making it tougher for you to get the sales.

Second question -- a little bit more in detail on Investment Management. Going to total net flows or net outflows of $90 million from total net inflows in the year-ago quarter of $4.9 billion -- I think both numbers are extreme. Maybe I'm wrong.

But now, maybe you could give a little clarity -- and I know you've talked about the capacity issues in retail that probably were behind the net negative $230 million in retail equity. But when does that trend change, and when does sort of -- then you had a negative net $1.4 billion on institutional equity. When does that change? Maybe a timeline for when we kind of see you turning the corner and getting positive flows on retail equity and institutional equity.

Well, if you look at the retail side of the business first, we're very happy with the way that is progressing. I think, for a long period of time, we had difficulty on the retail side of our business, because we didn't have track records that were long enough to really warrant the Morningstar stars or other agency services out there that really call attention to it. With Barron's, with Morningstar this year coming out with those types of reports, it really positions us very well.

We have continued to build out wholesaling to help us take adventure of it. That's one of the areas unlike, as you know, on the insurance side with the Investment Management, you don't get to defer your acquisition expenses in that side of the business. So you really have to time your expansion of distribution more closely than you do on the insurance side.

So we watch all of that, and we're very happy with what has been happening in our mutual fund business. The institutional business, by its nature, as we have said regularly, is very lumpy. We have indicated in the past when we have had large positive amounts come in, don't annualize this kind of stuff because it's lumpy.

Mandates oftentimes are in the works for two years from first RFP to final selection. Some of them could be as quick as six months, others 24 months. So you just can't annualize that. This last quarter was the opposite of that, where we see the cash flows go negative and we would tell you, don't annualize that, either; it's lumpy.

Separate managed accounts are very institutional-like in many regards, in the way that they operate, and in particular, when a large part of your [SMA] business is in closed accounts right now, which is what we're experiencing. If I looked beyond the closed account areas, as we have been able to get on platforms with other types of investment mandates out, I'm very happy with what I see there -- small numbers, but it really is indicating the strength that we have.

So last thing that I would call attention to is just a reminder that in the first quarter of last year, the world knew we were going to be closing those investment styles, and everybody wanted to get into them before they were closed, because the track record was so attractive. I don't want to say it's akin to a fire sale, because we weren't giving anything away. But, boy, there was a stampede to get into it. So it makes for a very hard year-over-year.

Going forward, we would expect to see normal, let's say, three, four, five quarters of institutional business type flow, with volatility in any given quarter. But our investment results remain solid, and I would expect we're going to continue to grow deposits and net flows in both retail and institutional. But I can't give you dollar amounts by quarter, because it just doesn't work that way.

And you are building up the capacity and retail again to take in more?

We are. We really have been -- it goes back to the comments that I had in my earlier remarks that we are really focusing on the large-bucket styles of Investment Management like large cap value, so that we can in fact be fully open when people want to be putting monies into it.

We have created our own, now, emerging markets that are receiving a lot of good attention and some nice cash flows. The percentage improvements would be shocking, but that's mostly because of the small amounts in the prior period. But we're talking multiples, not percentage increase but multiple increases over where we were before. I just feel very good about the job that Pat Coyne and his management team are doing in that area.

Your first question that you asked, I think, was related to Group Protection and some color around the large-case market (multiple speakers).

Yes.

Let me just make a couple comments. One is that buried somewhat in our results were pretty decent period-over-period -- that is, year-over-year -- results from sales in our core smaller-case market, which we would define as under 200 lives. That was up, actually, 3% period over period, as well as our voluntary lines of business were up 6% period over period. I say that only by way of pointing to the fact that that's really where we tend to concentrate our efforts or concentrate our desire to be particularly competitive in those markets.

When we get into large-case markets, which we do participate in, we get much more particular on the pricing side. We will participate and sit out pricing from period to period if we don't think it's going to meet our return expectations.

So when looking at period-over-period results, you may find times where we were particularly successful on the large-case side in a quarter and/or unsuccessful. In fact, I think our large-case, which we define as over 1,000 lives, was down some 50% period over period, just to give you an idea of the variability in that.

We may have [Sandy Callaghan] on the line, and if she wants to add any color to that, feel free to do that, Sandy. Otherwise, that's the way I'd address the question.

The only thing I would add is that we also pay particular attention to finding multi-line cases in that larger-case segment that fit our business model and then, as you said, hit the profitability hurdles.

So there really wasn't necessarily any pricing issue industry-wise; it's just sort of that lumpiness, Fred, that you were referring to?

Lumpiness, but again, given our focus is on the smaller-case side, we may be more particular than others who command larger market share in the large-case side.

At any given point in time, somebody who has that larger case as our primary focus may be defending market share. They may be doing something to chase market share in a particular segment or a particular case. Since it's not our main area of focus, we will let them have it.

Colin Devine, Citigroup.

I had a couple just minor ones. If you can give us some update on your thinking re: the UK, if that has changed?

Secondly, with respect to Delaware, where do you stand in the negotiations with (inaudible) with respect to the fixed-income team? That press release is up on the website, and I guess it's my understanding, from what I read in the media, that the whole fixed income team that came over from [Gazebo] Capital Management may be leaving, and sort of what that would do to Delaware and what that may do to your thinking in terms of need for M&A?

Let me answer the UK one. No changes to our commitment to building our the initial retirement income. In fact, in the second quarter, we will be formally launching our product offerings over in the UK. Michael Tallett-Williams and his team over there have been working with distributors and other parties, and I can tell you they are very, very enthusiastic with what they have accomplished and what their expectations are. So we remain excited about that opportunity.

I have Pat Coyne here, and what I would like to do is just refer the second question to Pat.

Just before we do that, just to make sure that what I'm hearing here -- we have gone from you're reconsidering staying in the UK to definitively you are back in the UK. Is that correct?

Well, what I said previously, I believe, and what I tried to underscore now is that we think that the UK -- we initially thought the UK that attractive retirement income security opportunities, largely as a result of legislative changes that are over there. So we had been exploring those. We announced that we would be doing a pilot program to see just how far of a commitment -- and how far we want to go and the commitment we'd want to make.

I think on the last quarter call, somewhat had asked if we would be looking for acquisitions as an example in the UK. And I said no, that's getting too far ahead; we still want to see and test whether our premises and theses are correct. That's what this now next part of the program was going to do, which was the actual launching of some products to see is the UK market ready for it, and does it have receptivity to Lincoln?

So that's where we are. Don't take it to mean we're making a major type of commitment to the UK and we're going to be significantly increasing staff or anything. It still is pilot type stuff.

So a toe in the water, rather than you're jumping back in with both feet?

Yes, that's a better way of saying it.

Just a couple points on the Logan Circle Partners announcement. I guess, a clarification -- I think it's very fair to say that not everyone who came over from Conseco Capital Management will be leaving or thinking of leaving to join another firm -- just a point of clarification there.

The thought process, essentially -- and I think it has played out and worked well [factually] -- is that over the last eight years in running the fixed-income department and then running the equity department, I obviously spent a tremendous amount of time with clients and what consultants. What I learned over that timeframe is trust is a big part of that business from an institutional standpoint as well as from a retail standpoint. Giving clients as much information, as much time to make their decisions from a fiduciary standpoint is really key to building up that trust. I can assure you that that announcement really went a long way in terms of building up that trust and continuing with that trust.

I don't see the asset management business as being a sprint; it's a marathon. I really wanted to make sure that we kept in good stead with those consultants and with those clients.

The last point I'd like to make is I think I mentioned in October that I had some inkling or thought, knowing this team pretty well and knowing Jude, that there could potentially be some departures still. From the timeframe of the investment banker and analyst meeting to where we stand today, I've spent a lot of time interviewing and hiring people. I can assure you, from a fiduciary standpoint, we're prepared to manage all the assets that are currently in place today, and I feel very comfortable that we will be fine going forward.

Just so I am clear, then, where are we on the timeframe of this? Given you have put the press release out there, is this something we should see resolved this quarter?

I would -- this quarter, yes. I would hope so, yes. That would be my wish.

Was there a line added, the transfer of assets to an intercompany manager within institutional fixed?

Yes, there was about $700 million or so.

$780 million, I think, actually.

Yes, that was transferred to what we would call our short-term desk or cash management desk in treasury. That's really just a shift of AUM, if you will; it did not have any material impact on the earnings-based results of the (multiple speakers).

Our team continues to support that (inaudible).

Suneet Kamath, Sanford Bernstein.

I'm not sure if it's just my phone, but sometimes when you're answering questions you're dropping out a little bit. But again, it might just be my phone.

In terms of the IOLI business, the NAIC is considering this Model Act, and I think one of the provisions would limit the sale of life insurance in the first five years following purchase. Any thoughts as to how significant an impact that could have on these IOLI transactions? Would it result in a significant decline, which presumably would be favorable to you guys?

Second, in the defined contribution business, I guess we're seeing a mix shift in terms of the assets towards the alliance funds and away from the fixed and variable annuities. Can you give a sense as to how the asset margins compare across those three categories? Should we expect margins to basically be flat there? Or as that mix shift occurs, should we expect some margin improvement? Just any thoughts on that.

With regard to the first part of your question, the five-year time period was selected because we believe that a lot of the third-party financiers and investors in this type of business would view five years as an unreasonably long period of time for them to be able to get the type of returns and moneys that they would want to have in it. Generally speaking, when you look at the hedge funds and the private equity firms that are doing these things, their timeframe is going to be shorter than that. So the expectation inside the Model Act behind the five-year is, in fact, that it would significantly discourage the third parties and the investors from seeking that type of business.

In terms of the defined-contribution assets and relative returns, I'll give you a little bit of color on it. But note that we have not talked in any detail on a per-product-by-product return standpoint. So I don't want to go that direction quite yet or that deeply. But let me give you some color on what's taking place.

We are seeing -- first of all, to size it up a little bit, we have got about $7 billion of assets under management in the Director product, which is a small-case 401(k) annuity-based product. We have got about just shy of $6 billion of assets under Alliance. These are the variable components of the product. Then I think around $10 billion or so under multi-fund, which is another annuity-based product sold in the 403(b) market.

There are differences between the relative returns on the product. The most notable would be the difference between the variable-based products such as Director and multi-fund, and that of Alliance. Alliance, being more of a mutual funds-based product, does not carry the same relative fees -- that is, fee per assets under management, that you would find in the variable products. But it also doesn't carry the same capital allocation as those variable products do. So it tends to be, relative to the other products, lower ROA and relatively neutral to higher ROE product. So as you're shifting out of -- as you are shifting out of variable product, or as a proportion of your sales growing more of the alliance product relative to other products, you'll see a dampening on ROA but a maintenance, if you will, if not expansion of ROE.

So that's a little bit of color behind it, without getting into the precise basis point ROAs.

Jon, just one quick follow-up. Can you handicap the potential for that Model Act passing and then ultimately being implemented at the state level? Any thoughts on that?

It's one of the highest priorities that the ACLI and the NAIC are looking and right now. So I think the Model Act has a pretty good chance of passage. I would also note that our President and Chief Operating Officer, Dennis Glass, is the Chairman of ACLI, so he helps to set their agenda and prioritization.

Notwithstanding that, as recently as yesterday, I took a look at a 45-page PowerPoint presentation from people out there that are largely on the distributor side in the life settlement business that were advocating against the Model Act. But I think that regulators perhaps are looking through their "it's good for the consumer" argument into "it's a whole lot better for me as the distributor" argument, and won't be too swayed by it.

Steven Schwartz, Raymond James.

Colin got to both of mine, but just a quickie -- Jon, it was kind of a throwaway line, but you mentioned some regulatory changes in 403(b) which got your attention. Can you talk to that, what's going on there?

Yes. What's happening with 403(b) is the employers in 403(b) plans are going to be required to take a significantly more proactive role in the administration of the plan. As such, over the coming months and years, these employers are going to have to provide much more aggregate services to the plans in terms of 5500 reporting, communications to their employees. So they are going to be looking for common remitter programs or possibly going all the way to instead of having 15 different payroll slots in their 403(b), they may cut it down to one, just a common aggregator of plan assets, so that they have the accurate plan reporting, the federal reporting that's in there.

It is a very, very significant change, because right now, in a lot of 403(b) plans, the sponsoring organization views it as more of an accommodation to their employees without much involvement on the part of the employer. That's what's going to change dramatically. As that happens, companies that are in the 403(b) business on kind of a happenstancial basis, or we sold these cases 10, 20, 30 years ago, are going to have to put significant moneys and investments into their technology and into their communication programs. We think that it's more likely, rather than not, that they are going to make decisions to exit those businesses or that marketplace.

So, with us being so large and having so much scale, we see this as a real opportunity for us in the area of [close] -- what other companies might call less important blocks of business, for us to step up and redeploy some of that excess capital we talked about earlier.

Bob Glasspiegel, Langen McAlenney.

I didn't really follow your corporate guidance. I was wondering if you could refresh that. What are the restructuring charges -- have you updated that for the year -- that are going to flow through?

In terms of merger-related charges -- which combines the technical definition of restructuring charges and then charges we have assigned to working on the merger integration -- the updated guidance is for the second quarter, $25 million to $30 million of those charges pretax. Then, for the remainder of the year or full year, we're holding to the guidance that we gave last quarter, which is a range between $90 million and $110 million pretax.

It's a little bit more tilted to the first half, if I remember correctly?

Yes. So just isolating 2007, coming off $14 million of merger-related expenses in the first quarter, you're seeing a little more backloaded, if you will, of the merger expenses as we proceed through 2007.

So there was no impact -- you have no other guidance for corporate, other than that?

No. Guidance -- the other category is one then I think is, candidly, frustrating to many of you as analysts, and in part because it's somewhat of a grab-bag of a number of different items, not the least of which is some residual expenses that move up and down, namely branding and then, more recently, our retirement income security ventures initiative, which will be running through that line item. So I realize that's a more difficult line item for you all to peg.

I think what I would suggest you do is take a look at this quarter, back off the quarter's merger-related expenses, load on the forecast for second-quarter merger expenses and recognize that there will be some elements of seasonality to it, in terms of branding expense -- very little, though. So I wouldn't get caught up in it.

We do guide on interest expense, which runs through that line item, and we expect interest expense to be in the $65 million to $70 million pretax per quarter as we go through the year. You will see reported interest expense was a bit lighter than that this quarter, but don't be deceived by that. It was primarily the result of using onboard liquidity, if you will, to assist in some of our repurchase activity and investments. So what you see in the reduced interest expense is offset somewhat by reduced interest income. So you need to understand that as you go forward.

So that's the best approach I can give you right now, realizing it's a frustrating line item for you all.

On the Investment Management, you seem to be saying that the outflows in Institutional was not related to the prior departures, and they have not gone after any of their old customers. Is that a correct read?

Yes.

Is that a concern just looking forward, or I guess maybe your negotiations are meant to mitigate potential down the road?

Bob, we don't really want to negotiate on this call with Logan Circle Partners.

Operator, we have time for one more question.

Thomas Gallagher, Credit Suisse.

I just wanted clarification. I just wanted to understand -- I know, I guess an update on your amount of excess capital, maybe split between levels in the life subsidiaries and debt capacity.

Then the second question is, Jon, if I understood you correctly in your prepared comments, I thought one of the things you mentioned was you expect moderation in sales, in part because of terminated relationships with some brokers that you suspect may be doing IOLI business. I just wanted to make sure I was right on that. Are we talking about a fairly immaterial amount of discontinued relationships, or is the number fairly large?

No. In fact, thanks for asking that, so I could clarify it. I made two comments that should not be linked. One comment was we continue to do everything we can to reduce the possibility of IOLI coming through our filters, up to and including terminating contracts and appointments with a company if we have to go that far.

A second comment was we would expect to see a slowing of sales in life insurance in the second and third quarter, but primarily because of the introduction of the unified product portfolio, not because of the elimination of some appointments with the Company. The number of appointments with the Company that we had eliminated over the quarter was a very, very small number of appointments, not anything that is likely to have an impact on sales. It just really reinforces -- it serves to reinforce our commitment to everyone out there that if this is what you're doing, we don't even want you coming in with business.

So please don't link those two, and thanks for asking the clarifying question.

In terms of excess capital, first and foremost, we tend to size that true excess in our share repurchase estimates. So that's somewhat embedded in the $500 million of repurchase that we did and largely accelerated in the first quarter. What I have talked about from time to time is this notion of the capital margin or what are we holding in the way of cushion, if you will, whether it be in leverage capacity, RBC capacity, et cetera. That number tends to hover in and around $500 million, these days, that I would roughly split $300 million or so in access leverage capacity and a couple hundred million dollars down in the insurance companies.

Now, that excess capital or that capital cushion, let's call that, does not include thoughts surrounding Banc of America stock, which some would suggest is excess capital, nor does it contemplate what may or may not be released in the form of securitization of redundant reserves, which is a project that we're currently working on internally and are not yet prepared to size.

One thing I do want to come back on, since I have you all here, and that is when discussing the curtailment gain in the second quarter related to the shift out of the defined benefit plans to the retirement defined contribution plans, just note that we're going to take that gain through other operations.

So Bob had earlier asked the question on a little bit of guidance in understanding about other operations. You should expect that gain to come through other operations. Again, that $9 million is a pretax number.

Okay. Well, with that, we would like to thank you for joining us this morning. To the extent we weren't able to get to your questions, we will be available for follow-up calls on the investor relations line at 1-800-237-2920 or via e-mail at investorrelations@lnc.com. We want to thank you again for taking the time this morning and joining us on the call. Have a good day.