Lincoln National Corp (LNC) 2007 Q2 法說會逐字稿

Good morning, everyone. Thank you for joining us for the Lincoln Financial Group's second-quarter 2007 earnings conference call.

At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. (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, 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 results and uncertainties are described in the cautionary statement disclosures in Lincoln's most recent reports filed with the SEC, including the Form 8-K filed yesterday.

At this time, I'd like to turn the call over to the Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Thank you, Melissa. Good morning and welcome to Lincoln's second-quarter earnings call.

You just heard the Safe Harbor caution, so I won't repeat them.

We appreciate your participation today and invite you to visit Lincoln's Web site, www.LFG.com, where our statistical supplement and other pertinent information can be found.

Before 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 Company's Web site.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer, and Fred Crawford, Chief Financial Officer.

In the interest of alerting call participants upfront, we may go over the scheduled 60 minutes for the call in order to accommodate additional questions. I also want to provide the date and location of our 2007 investor and banker meetings, which will be held on Tuesday, November 13, in Philadelphia. Additional details regarding the meeting will be provided in the coming weeks.

I would now like to turn the call over to Dennis Glass. Dennis?

Thanks, Jim, and good morning to everyone on the call.

Before we get started on the quarter, I would like to acknowledge Jon Boscia's retirement and to thank him on behalf of all of us at Lincoln Financial for his past leadership. It is clear to me, having worked with Jon during the last 20 months as we mapped out the strategic vision and operating model, that he has left his mark on this great company. Jon's many accomplishments include transforming Lincoln from a multi-line insurer to a focused financial-services firm, centralizing wholesale distribution within Lincoln Financial distributors, and fostering an A-player culture across the organization. We thank Jon for all that he has accomplished and wish him and his wife Donna a healthy and prosperous future.

Turning to the quarter, our results reflect the many initiatives we've undertaken since and before the merger. First, distribution expansion has been and remains a key focus. Activities here include a 10% increase in the wholesale force at Lincoln Financial Distributors, LFD, since the beginning of the year, well on the way to our goal of a 17% increase for the full year. Expansion has been directed across product lines and channels. Specifically, since the VA business is well-positioned for long-term, sustainable growth for both accumulation and income solutions, we continue to aggressively invest in our variable annuity distribution course, which is up 13% for the year. We are accelerating our VA wholesaler expansion in the independent planner and bank channels to supplement our strong presence in the wire houses.

Life insurance wholesaling support, including MoneyGuard, is up (technical difficulty) percent for the year, increasing visibility of our UL products in the MGA and retail channels and gaining wider recognition for MoneyGuard in the independent planner, wire regional and financial institutions channels.

Our own retail distribution, Lincoln Financial Network, has emerged from its restructuring a more effective and efficient planning firm. We're doing a better job of wholesaling to LFN and as well. Sales of proprietary products at LFN all showed significant improvement with Life posting a 24% increase, variable annuities up 22%, and Delaware Mutual Fund sales up 52%, very encouraging results. Employer Markets continues to make significant progress in building out its distribution capabilities to effectively capture the growth opportunities in the defined contribution market.

As we communicated previously, we terminated our third-party wholesaling arrangement for our Director 401(k) product in the fourth quarter of 2006, thus bringing distribution management a key skill set at Lincoln inside. In the first half of 2000, we added 29 wholesalers for Director and Lincoln American Legacy retirement products. Combined with the 7 wholesalers dedicated to our alliance program, we now have 61 external and internal wholesalers supporting our DC business, and our goal is to add 30 more by year-end. This is a significant investment. However, it is a key success factor for driving growth in the DC business.

Now, let me turn to product initiatives. New product development has been in full swing as we transition to our Universal Life unified product portfolio over the course of the quarter. With pending approvals from the SEC for our variable life products, combined with New York's approval of our MoneyGuard product, we are well-positioned in the Life space. In mid May, we announced the availability of the i4LIFE advantage rider as an additional income distribution option for employer-sponsored defined contribution plans. Our ability to leverage the expertise behind our hedge program and risk management discipline is a good example of leveraging skill sets across the enterprise.

At Delaware Investments, we offered our first close-end fund in 13 years. The fund's primary and secondary investment objectives of income and capital appreciation aligned very well with our retirement income security strategy. This fund also highlights the diversity and strength of Delaware's investment expertise.

Our expense initiatives associated with the merger saves remain on track and on schedule. The largest remaining integration effort is combining administrative platforms, which is a complex and time-consuming effort. This consolidation was identified early on as a key merger initiative and encompasses much more than the obvious expense saves it will generate. It will reshape how we interact with and serve our customers, a platform and capability to drive topline growth in the future.

Let me now cover a few production highlights in the quarter, and then I will turn it over to Fred to review the financial results. In the second quarter, Lincoln reported consolidated domestic deposits of $10.8 billion, which were up almost 9% over prior-year quarter and which generated net flows of $1.8 billion. Sales were strong in most of our businesses and in many instances tied to the distribution expansion I noted earlier.

Our individual annuity business continued the trend of delivering very strong results for both deposits and flows. Second-quarter total annuity deposits of almost $3.3 billion were up 20% over the prior-year quarter, driven by record variable annuity deposits of $3 billion, a 25% quarter-over-quarter increase.

As you know, we preannounced that we have achieved $1 billion in VA deposits in May. In fact, we had back-to-back milestone months in the quarter with June also breaking through the $1 billion mark. I'm pleased to report July sales just in, and we posted record sales in the month again. A combination of factors contributed to the success. We are marketing attractive and relevant products through great distribution and distribution partners, and all supported by sound product development and service platforms. Evidence of our VA business benefiting from the growing demand for retirement solutions is the quarter's i4LIFE elections, which posted another record amount of almost $600 million, an 18% increase over the previous record set at the end of last year.

Deposits from fixed and indexed annuity products were down slightly from the prior-year quarter. The trend line continues to be flat, in part due to low interest rates and the relative attractiveness of competing products. Record variable annuity net flows of $1.6 billion were up 31% from the prior-year quarter, while fixed annuity negative net flows of $0.5 billion were consistent with the expectations we shared with you last quarter.

Our individual life insurance business had a very good quarter and a quarter consistent with our expectations. We transitioned to a new unified product portfolio starting in April, and saw a drop in sequential sales, as expected, as a result of a combination of process and product changes. However, quarter-over-quarter results were very strong with individual Life sales of $180 million, up 36% over the prior quarter.

In our employer markets businesses, the story remains unchanged, investing in distribution and technology to grow the topline over time. The employer markets team continues to take a deliberate and disciplined approach to building this business with distribution expansion a key focus. Deposits in our defined contribution segment of approximately $1.3 billion were up 10% over the prior year with mutual fund deposits in our alliance program sold in the mid to large-case market more than doubling the prior-year quarter's results. The growth in alliance deposits is a direct result of a significant increase in the productivity of the new wholesaling force now supporting the program.

Sales in the Micro small case markets were down from the prior-year quarter in a seasonally high first quarter. This decline in sales year-over-year is due in large part to the change in distribution models and bringing out wholesaling capabilities in-house.

Similar to our experience with LFD, the time line associated with return on investments in wholesaling is delayed. We expect to report similar success as productivity increases each year as the model matures.

What is different is the sales process in the employer-sponsored space. With a longer sales cycle and more involved decision-making [than] transactions on the individual market side of the business, the impact of adding wholesalers will take somewhat longer time to emerge. We are confident that our investments in wholesaling, coupled with strong, strategic partner relationships and a solid business plan, will drive success in the employer markets business.

In the group protection business, all product lines posted strong double-digit sales increases over the prior-year quarter. On an annualized basis, sales of $62 million were very solid and up 37% from the prior-year quarter. Earned premiums were up 10%, which is very encouraging in terms of driving future profits in this business.

In our Investment Management segment, we had solid results from most products, although our Managed Account products continued to feel the effects of capacity constraints. Total investment management deposits in the quarter were $6.2 billion, a 2% increase over the prior-year quarter. Net flows were a -425 million, with both institutional and retail contributing to the decline.

Retail inflows of $3.3 billion benefited from strong mutual fund sales of $1.9 billion, which were up 38% over the prior year quarter and 8% ahead of the first quarter. Included in the results was the closed-end fund that I mentioned earlier that raised $235 million.

In our institutional business, inflows of $2.9 billion were up 4% over the prior-year quarter. Equity mandates improved over prior-year and prior-quarter levels. Net negative flows of $150 million were down from the prior year due in part to the natural variability we see in this business and softness in our fixed income business we attribute to our announcement of the deal with Logan Circle Partners.

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

Thanks, Dennis. I will focus my comments today on providing some color around key earnings drivers, refresh our outlook for 2007, and take a little time to detail our subprime mortgage exposure.

Overall, the quarter benefited from continued steady performance in our key earnings drivers of asset growth, investment discipline, steady Life margins, and capital management. Our reported operating earnings of $387 million, or $1.41 a share, included approximately $16 million of net positive items, or about $0.06 per diluted share. Not included in these items are the pension-curtailment gain and merger-related expenses, both coming in as previously guided.

Notable items in the quarter were concentrated in our Life segment included strong returns in our alternative investment portfolio, these gains partially offset by adjustments made to our Universal Life blocks. Delaware's earnings were impacted by the expensing of issuance costs related to the launch of a new closed-end fund and an increase in litigation expenses.

Expenses were up in the quarter, largely due to incentive compensation accruals, given our strong performance, together with natural volume-related increases. These expenses largely offset by various smaller items when focusing on the segment's results.

Turning now to our segments, Annuities posted a very strong quarter, taking advantage of the leverage that comes with positive markets, positive flows, and the building demand for retirement protection guarantees. Earnings were impacted by excess investment income on our alternative investments and the FAS 133 mark-to-market for forward-starting options, these used to hedge indexed annuities. Together, these items contributed roughly $8 million to the quarter's earnings and drove gains in our investment margins. Average variable annuity account values were up over $12 billion, or 30%, driving a 37% increase in expense assessment revenue.

Living benefit rider income provided an extra boost to revenue beyond simple account value growth alone.

From a risk management standpoint, our hedge program performed as expected in the quarter.

Adjusting for the FAS 133 impact, spreads of 212 basis points came in roughly in line with the past few quarters. We expect normalized spreads to remain in this range, excluding the impact of forward-starting option valuation.

Turning to our individual Life business, we reported strong results driven off continued growth in core underlying earnings. However, this was a somewhat noisy quarter with excess investment income and favorable DAC unlocking contributing roughly $30 million to the quarter's earnings. This gain in the quarter was offset by approximately $14 million of negative items, primarily adjustments made to correct account values on certain Life policies, and we modified the accounting on one of our legacy Universal Life policies -- products.

We produced steady growth in average permanent in-force and account values, up 6% and 7%, respectively, over the comparable quarter in 2006. Adjusting for negative items, mortality assessments grew by 7% with expense assessments up 16% over the prior year's quarter.

Investment margins were up considerably, fueled by gains in our alternative investment portfolio, primarily from venture capital and energy partnerships. Reported spreads included roughly 70 basis points of excess investment income. We are modestly increasing our guidance on spreads to the 180 basis points range, fueled by an increase in expected returns off alternative investments.

Turning to employer markets, earnings included about $2 million of expenses related to investment back into our business model. As Dennis highlighted, we are investing in defined contribution businesses. While these investments are yielding results, in terms of production metrics, we expect earnings to be slow to respond in the intermediate term. Bolstered by improved variable account net flows of roughly 200 million, together with market appreciation, account values in the quarter increased $4 [billion] as compared to the 2006 quarter, driving a 15% increase in expense assessment revenue. These gains have been offset by reduced fixed-spread margins due in part to negative fixed flows, which have also applied pressure to portfolio yields. We reported spreads of 231 basis points this quarter and expect spreads to stabilize around that range throughout the rest of the year.

In Group Protection, favorable nonmedical loss ratios of roughly 71% contributed about $3 million to the quarter's earnings when compared to the midpoint of our expected range. Loss ratios benefited from favorable results in our disability line attributed to better-than-anticipated terminations. Nonmedical premium increased an impressive 12% over the previous year's quarter and 4% sequentially. We expect year-over-year increases of 10% and net premium for the remainder of 2007.

Turning to Investment Management, adjusting for roughly $7 million of after-tax expense items noted earlier in my comments, Delaware continues to make steady progress on improving its pretax operating margin. Growth in third-party assets under management drove a 14% increase in advisory revenues when compared to the second quarter of 2006. Adjusting for $10 million of pretax expense items in the quarter, expenses were up around 6% against total revenue growth of 12%, driving margin improvement.

Our guidance for this segment remains unchanged, this taking into account both the negative items in the quarter, as well as an estimate of the financial impact to our fixed-income business related to the Logan Circle transaction.

Results in Lincoln UK continued to benefit from favorable exchange rates, together with growth in equity markets and improved persistency. We are adjusting our guidance up to the low $40 million range. This forecast includes our continued investment in UK retirement products.

Media earnings were up 14% over the prior-year quarter. However, that quarter was impacted negatively by merger-related amortization expense. Like much of the industry, we have experienced continued softness in our radio business, offset by steady TV performance and expense management discipline across all businesses and markets. We're holding to our 2007 guidance for operating income in the mid $50 million range for media.

Merger expenses of $30 million, pretax, came in at the high end of our $25 million to $30 million guidance. We expect third-quarter merger-related expenses to be in the range of $35 million to $40 million and will likely come in at the high end of our guidance of $90 million to $110 million for the full year.

A few comments on our general account and capital conditions -- to assist in your analysis, we've provided a supplementary schedule, along with our statistical supplement, breaking down our residential mortgage exposure. Of our roughly $8.7 billion in mortgage-backed holdings, we have about $860 million of exposure to subprime and $1.4 billion of exposure to ALT-A loans, subprime specifically representing just over 1% of our $68 billion general account. Of our combined subprime and Alt-A holdings, 90% are rated A or better and 75% are rated AAA. Our exposure to CDOs backed by subprime and hedge funds or partnership interest that investment subprime mortgages is minimal.

Overall, our general account quality and capital position remains strong with an estimated RBC in the 375% to 400% range and reported leverage down to around 20%. We are entering back into the stock-repurchase mode and expect to repurchase approximately $100 million worth of stock throughout the third quarter. We will monitor capital conditions and make adjustments as we proceed throughout the rest of the year.

Overall, we posted another solid quarter. Since recording our first quarter as a merged company, we've seen book value per share increase by 6%, reported ROE increase by roughly 100 basis points, and have returned over $1.4 billion of capital back to our shareholders in the form of increased dividends and share repurchase.

With that, I'm going to turn it back over to Dennis for some closing comments.

Thanks, Fred.

Before moving into the Q&A, let me make a few remarks about my vision of Lincoln's future, which I am confident is very bright. Jon and I combined the companies based on a shared vision of the environment and what it would take for a company to be successful over the long term. By merging, we would make a significant leap forward, building a company better positioned to achieve more sustainable revenue and earnings growth and a company that would be even more attractive to top talent. The near-term benefits of the merger, as you know, were seen as a more balanced business mix, expanded distribution, importantly providing the scale economics to support further profitable distribution expansion, and a larger balance sheet to have both the capacity to absorb the increasing guaranties demanded by customers as well as having the capacity to do larger acquisitions, where appropriate, to fill in the gaps.

We have had a very successful integration, defined by maintaining topline growth momentum, achieving the savings targets, and making significant investments in the businesses for future growth. The integration success is attributable to the view from Day One that Lincoln is a single company and that we're focused on the future.

From a functional-capacity perspective, we have market-leading capabilities in retail and wholesale distribution, risk management, product and customer solution development, acquisition pricing and integration, and operational effectiveness, which means focusing on high-impact activities in cost-effective ways and rigor around product pricing and new investment activity to ensure high ROEs manifest themselves and we translate topline growth to bottom-line growth. My view is that people and organizations prosper when building off their strengths, and so as an organization, we will continue to build off these market-leading capabilities.

Lincoln's business mix is solid. We will continue to emphasize investment opportunities where higher earnings growth and ROEs are obtainable. In the insurance space, the VA and DC businesses have these characteristics. Our Life business is very strong and provides earnings and cash flow stability. We are striving for above-industry growth and ROE development in this business.

We also need to focus on strategic scale, which I believe we have in our major businesses with the exception of defined contribution and retail investment management. We will continue to explore ways to increase scale in these businesses, including acquisitions.

We are also continuing the review of strategic options on Lincoln Media. With the talent and resources we have, I expect to see steady progress towards producing a 15% ROE in the next three years, this recognizing we require a supportive capital market environment, among other things, to realize that goal.

Over the next few months, I intend to visit with analysts and shareholders and spend time sharing the Lincoln story and my views. I have run Lincoln's principal manufacturing and distribution businesses for the last 18 months and led the integration. This experience gives me a well-crowded feel for the Company and a great deal of confidence in the employees and management team. As I just said, I'm very optimistic about Lincoln's future and am energized about shaping and overseeing the next chapter for Lincoln.

Now, let me turn it over to our operator, Melissa, for Q&A.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Steven Schwartz, Raymond James.

Good morning, everybody. One question, one follow-up -- Fred, on the investment portfolio, I find it interesting the amount of Alt-A that was purchased in 2007. Alt-A of course isn't the same situation and hopefully will not get that way as subprime. But there has been some stress. I'm kind of interested in the thought pattern there in buying that piece. Maybe it's different from a typical piece.

Then, if you can give -- maybe, Dennis, maybe you could give a little bit more insight on what you are thinking the effect of Logan Circle might be on assets and other assumptions that you've made in coming to the $60 million conclusion.

Thanks, Steven. This is Fred, and we've also got with us today [C.N. Quecko], who manages our general account and of course Pat Coyne, who manages Delaware Investments. But let me lead off with a few overarching comments. That is that, when we looked at Alt-A, first and foremost, we concentrated our investment activity in the very highest-rated categories of those securities, recognizing that there could be storm clouds ahead for that asset class as we were moving our way through 2006. So the vast majority of our purchases, in terms of that vintage, were done in the very highest of quality assets, most concentrated in the AAA category.

I would also say that we've got fairly sophisticated research capabilities and have done quite a bit of underwriting and due diligence on the underlying collateral and the quality of that collateral, and where we see comfort in the securities and where we don't. And so that certainly contributes to it.

I think it also recognized that, when it comes to pure subprime exposures, our exposures were relatively modest and we had throttled back somewhat on those securities, siding towards Alt-A, feeling as if, with good research, we could eke out oversized returns in that category through selection.

I would also note that we have been bringing down our high-yield portfolio as well, and so when looking at the overall quality of the general account, we keep that in mind as well. We run pretty sophisticated portfolio wide credit VAR analysis that takes into account, among other things, credit risk, interest rate risk, prepayment speed risk, etc. When doing that, we feel comfortable with the purchases we made.

That was a fairly lengthy lead in, Steve, so to the degree you have anything you wanted help, Steven, out with on this.

Yes, I would add that not Alt-As are the same. You know, what we go through the terms of looking at investments. Like any other investment, we have a thorough research process that we go through in evaluating the specific investments. Our investment folks go through a thorough review of the collateral, looking at what you call the experience on the collateral pool that's there, the credit ratings on the collateral, the FICO score is what we call it in the industry. We also evaluate the underwriting stance of the issuer. We have a lot of issuers that are not up to our investment criteria but they are (inaudible) (technical difficulty) meets our criteria as well.

Then to add to that, like you said earlier, really the situation now is really a subprime story, not an Alt-A situation, but we are aware that there are some Alt-As that might be affected down the road. But you know, we have been very conscious of how we went about investing our subprime as well. To date, I tell you that none of our holdings have been downgraded by the rating agencies or any of the rating agencies this far. So I think we will manage to stay or at least avoid some of the problem issues. We have not invested in any of the Alt subprimes that are backed by a second lien, so I think we've done our work there.

Okay, thank you. Then on the outlook for Delaware and Logan Circle?

Let me take that one, Steven. I have Pat on the phone. He may want to add to my remarks.

The first thing I want to do is congratulate Pat on how he has handled the Logan Circle issue. First and foremost on his mind was what the impact would be on our customers and what we could do to make sure that was minimized. He went about it professionally. We had to be nimble and agile to deal with it as it came along, which we've done. Importantly, Pat's back-filled fixed income came in anticipation of the deal, and we are now, for the most part, fully staffed.

The assets that are subject to the agreement total about 14 billion. That is the maximum amount they can be transferred to Logan Circle Partners. Ultimately, the institutional clients will make a decision on which firm will manage their assets. The consideration payable to Delaware for the assets will depend on, A, assets under management transferred at the date of the close, which is expected sometime in the early part of the fourth quarter.

Pat, do you want to add to that?

I think, Dennis, yes, just a couple of comments in terms of our fixed-income expertise and assets under management, which I don't foresee happening. But if every dollar of the $14 billion that Dennis referred to does transfer to Logan Circle Partners, we would still have a substantial presence in the fixed-income market. With that (inaudible) exceeding $82 billion. That's obviously a tremendous platform for continued growth.

In a very short time frame, we've hired some very experienced professionals to join those professionals who are staying with us. As of this date, we've had a number of very positive responses from current clients as well as from consultants on how we've handled the situation.

Again, as Dennis mentioned, the one thing I wanted to make sure was that we protected Lincoln shareholders and made sure we had top-quality investment professionals to manage the general account. Second was to make sure that we were able to continue in this investment business and continue on the institutional side of the business by treating our clients and consultants in an efficient and effective and fair manner and, from that perspective, making sure it didn't impact any of our other investment teams, whether it be equity or municipal bond teams, etc. So the responses that we've received so far have been overwhelmingly positive.

I can assure you that we will have institutional clients in every one of our composites. We've got a number of clients said that they will stay with us. I would prefer to wait and see until the end of October when the deal closes and we will have certainly more details about that situation at that time.

Eric Berg, Lehman Brothers.

Just one question this morning regarding the employer markets -- you've been very clear in your presentation regarding Wes' business, than this is going to be an extended buildout, let's call it. Can we get some timetable, in the sense that when would it be realistic to begin expecting this business to increase its earnings and to show positive net flows, just some sort of timetable? Thank you.

Eric, it's Fred we've got Wes Thompson here as well. I think, in my comments, embedded in my comments, are that you should see production-related metrics come before earnings-related metrics. So for example, you're starting to see the lift in the Alliance program. That is contributing to an overall positive flow environment when looking at all of the products, albeit somewhat a low amount of positive flows.

I think the work we're doing with regards to the Director product in building out that wholesaling force, together with the progress on Alliance, will start to build those metrics out more bullishly and in the more near-term.

Earnings are slower to respond because of a couple of different issues. One, we are investing back in the business, as you pointed out. Plus also, we are facing a few headwinds. The most notable headwind right now is related to fixed margins, where we've had some spread compression related to fixed outflows and a related drop in portfolio yields. So, our account value growth, which we expect to start to take hold here over the course of the next several quarters, is fighting against spread compression. That's going to need to cooperate with us to get some real lift on the earnings side.

I think it's safe to say that, at our investor conference in November, we will be more specific in terms of our guidance on production and earnings expectations in this business.

Wes, I don't know if there's anything you wanted to add there?

I think the only other thing I would add, Fred, is that the component to our buildout that had been most challenging is bringing inside our wholesaling capabilities in the smaller market segment, which is really where we are seeing our heaviest investment at this point. We are very encouraged by what we are seeing in the early stages of it, and I think consistent with what you just said (multiple speakers).

I mean, the formula we want to deliver to the earnings picture in employer markets is not unlike the formula we delivered to the individual annuity marketplace. That's precisely what Wes is working on. It's building out the wholesaling platform, which you'll first see in production metrics, turning flows positive and building from there. It's attaching guarantees to some of the retirement products, and developing, as part of that, a good rollover strategy. That increases the margin per average dollar invested. The combination of flows and attaching those features is really the formula we're trying to deliver to it.

If I could just ask one quick follow-up to Wes? You know, in the -- as you went about your work in building out Lincoln Financial Distributors, what we found and what you talked about is that it's very competitive to attract top wholesalers. Lots of people want to employ them; costs are high. How would you describe the employment market for wholesalers in the 401(k) area?

I would actually describe it as probably less competitive from the standpoint of the number of companies who really are and have significant wholesaling forces inside of their organizations. One of the advantages that we have found very quickly, as we got into this business, is the tailwind, quite frankly, that we get from LFD. So we have been able to attract some of the top people from the same firms that were attracting the top people that go to LFD -- to our employer business. That shouldn't be discounted. By the way, the same result that we are seeing in gaining early shelf space is a result of Lincoln's significant relationships with wires, independent planning firms and regional [BDs]. So we are very encouraged in early stages, really in terms of the alignment of and the leverage opportunities that we have really on the back of LFD.

(OPERATOR INSTRUCTIONS). Jimmy Bhullar, JPMorgan.

I just have a question on neutral (inaudible) and then just one on subprime.

In the individual Life business, you had very good sales growth for awhile now. If you can comment on these market conditions, IOLI and (inaudible) picked up, has it declined? What is it that is allowing you to grow so fast, given that competitors have been saying that the market is very competitive?

Then secondly, on subprime, I just want to make sure the sheet that you put out last night -- the ABS exposure, I just want to make sure that that's all home equity loans. If you could give us an idea? I think that's what it is but if you could just let us know?

Jimmy, this is Dennis. I will take the individual Life question.

With respect to market conditions and IOLI and SOLI, we did see, in the first quarter, a little more aggressiveness on the part of distribution in trying to move that type of product through. We continued to put up filters, both on the distribution side and the manufacturing side. I think it has backed off quite substantially in the last quarter.

I think our success is a combination of factors -- great products, great distribution, great underwriting. We continue to price our business to be able to achieve the leverage 15% returns that we are expecting at the holding company level. Subject to good relief on the reserves strain, we expect to achieve that.

It's always a competitive marketplace but we have a very good position in the marketplace, and we expect continued good success.

Jimmy, the ABS is home equity.

Okay. Do you have any idea or could you give us some idea on what the decline in value of these securities has been since the end of the quarter, directionally, magnitude-wise and just like any indication?

Yes, very little, as of really producing on the report that we put out yesterday -- I think we are trading maybe 1.5% to 2% off, something to that effect.

Yes, that was off the June 30 pricing. We haven't completed our July 31 pricing. There is some spread widening there, but I don't expect it to have any kind of large decline there.

Suneet Kamath, Sanford Bernstein.

Thanks, just two quick ones. First, I guess, Dennis, in your prepared comments, you mentioned that you're not quite at scale yet in terms of defined contribution in retail mutual funds. If I look at a supplement, I think DC is around $36 billion; retail mutual fund is around $51 billion. Can you just kind of give us an idea of where you think what sort of asset level you would hit (inaudible) scale in those two businesses?

Then second, on the IOLI and the Life settlements, I guess the NAIC and the NCOIL are kind of going back and forth in terms of a model (inaudible) and what the right restriction should be around the ability to sell life insurance after issuance. Realizing that you guys are probably plugged into that discussion as well, can you just kind of give us your thoughts on where that's likely to come out?

Suneet, let me hit the first ones first. In the DC business, I think Assets Under Management need to get up into the $80 billion range to get the kind of scale where we can be a significant competitor in the marketplace.

On the investment management side, it's a little more difficult answer because it depends what type of invested assets you have under management, what the margins are, and so forth. I think we will continue to build around increasing the size of Delaware, again in a number of different ways and try to get to the right combination of asset size and margins.

Mark, would you take that second question, please?

Sure, Suneet. This is Mark Konen. On the IOLI and what is happening related on the regulatory front in that regard, as you point out, there is a lot going on in the model law recently adopted by the NAIC related to those practices and the five-year wait, etc., related to settlements. It continues to be a balance between trying to limit the speculative nature of some of these transactions, versus the legitimate uses of that as an option for policyholders. Where that, frankly, will end up, I'm not sure. I think there's good momentum behind the model law. I think the ACLI, as an example, has just started a new task force, which I am on, to deal with and continue to debate this issue with regulators and push a fair agenda related to that.

Maybe just to follow up on that, I guess the NAIC is going for the five-year ban and the NCOIL is going for the two-year ban. Just so I understand which organization has more power, can you just talk about which one -- sort how the process would work if NCOIL decides to go with a two-year ban? Does that mean that that's the standard or just how would that work?

I really am not going to speculate on which of those organizations has more power over the other one. I would say that is the debate, and I cannot say which way it will go at this point.

Okay, thanks.

Melissa, the next call, please?

Colin Devine, Citigroup.

A couple of questions, one just to clarify, with the mortgage-backed schedule that you put out, it gave a total of 8696 and of course the balance sheet Page 10 lists 9946. Is the difference just CMBS, or perhaps you can illuminate what that is?

It's CMBS.

Okay. Then second, just to confirm that the Company will finally go ahead with its investor day in November. Obviously, Jefferson-Pilot never did that. So it would help just to make sure we are clarified there.

Then, lastly, for Dennis, I think probably the biggest issue on what the stock is down so much -- you know you mentioned in your comments that you and Jon were very much an agreement on a strategy. But clearly, something changed quite significantly. Perhaps you can give us a bit of color as to what happened at the Board that caused such a dramatic change in the two departures that we've seen.

Did we clarify the mortgage-backed question?

CMBS, yes.

Okay. What was the second one?

The investor conference.

(multiple speakers)

Yes, we are going forward with that. That's just a regular part of our routine and it's going to be in November. I think Jim mentioned the date but we will be getting, either via press release, I think via press release, we will get out to you the details behind it. But yes, we absolutely plan to make that a regular part of our communication drill.

Colin, on the last point, Jon's retirement is a big change. Jon's decision to retire was a personal and professional one, and not in any way reflective of any issue related to the Company's financial prospects, position or strategy. At the time of the announcement and subsequent media interviews, he provided color around his decision. He said that he and the Board had discussed succession planning at the time of the merger; he commented that he was leaving the Company in good shape, (inaudible) good company performance across many measures. He acknowledged a close working relationship with me and other members of management, indicated that we've driven strategy and execution together, and was confident the strategy was clear and execution was in good hands. So I think Jon's retirement was his own decision. The Company has continued to move forward with the strategies that we have in place.

You are saying that the departure of Jon of course Barbara are retirement, if you'd prefer to categorize it as that. We should in no way interpret that as any material change to Lincoln's strategy going forward?

Right.

Okay, no further questions.

Eric Berg, Lehman Brothers.

I wanted to clarify this idea of second lien versus first lien. The great bulk of your subprime exposure is in straight-out ABS as opposed to CDO. I think, at one point, you said that -- I think you said that there is very little, minimal second lien exposure and at another point, I think in response to Jimmy, you said this is home equity exposure. If I understand your responses correctly, I'm a little bit still unclear because I tend to think of home equity loans as second liens.

The marketplace has changed today. A lot of the home equity loans that are issued today are really first-lien mortgages. So to summarize, I said our asset-backed holdings are really home equity loans; they are really first lien on the mortgage. Second lien tends to be, obviously as its name implies, could be [more than] 100% LTV, and we generally have avoided that.

Okay, I guess it's just -- we are so used to receiving, from commercial banks for example, solicitations for home equity lines of credit, you know, we all receive them in the mail and so forth -- applications to apply. These tend to be second liens that would be subordinate to the first mortgage on the house. But we're talking about something different here?

Yes. I mean the dynamics of the market has changed. At times, there are home equity loans that are second liens, like home improvement loans as well, but the market has recently changed where there are a lot of home equity loans that are first lien mortgages.

Thank you.

Colin Devine, Citigroup.

One quick one on the investment portfolio -- within the trading securities, the $2.8 billion, is there any subprime asset-backed collateral that we need to be aware of? What's in those?

I think we disclosed all holdings within our (multiple speakers).

Yes, but I think what Colin is asking is -- you are asking relative to mark-to-market implications of two earnings because of it being in a trading account?

I want to know what's in there. If we look at -- you talked about the mortgage-backed holdings, a total of 9946, but unless I am misreading Page 10, that does not include the $2.8 billion of trading securities. That's actually listed below that total AFS. So it would seem to me that has not been picked up in the numbers you've provided, unless I'm misreading this, correct?

I tell you what. Why don't we get back to you with the details on that, Colin? At my fingertips, I don't have the answer for you. If I get it before the end of the call, I will pipe up and give you an answer.

Okay, but it's possible, then, we could have additional ABS or subprime exposure in that? That's not specifically been included in what you disclosed last night?

We are talking amongst ourselves, and don't think there's much exposure in there(multiple speakers).

2.8 is a pretty big number, Fred, so it's important to be precise.

No, I understand that.

When we invest in a trading account, we take a similar strategy with respect to how we invest in those portfolios so they are very consistent with the rest.

So it would be proportional to the $68 billion general account?

That's correct. So when we disclosed our U.S. residential mortgage holdings last night, that includes all holdings. This is different than what is disclosed in the financials (multiple speakers).

Okay, that's -- hold on for a second! That's not what I was just told, okay? What I was just told was the difference between the 9946 -- we can run back the tape -- in the 8696 is CMBS. This is another $2.8 billion. Right? If you are telling me this is MBS, we've just popped the portfolio -- what? Almost a third. So I think it's very helpful right now and I appreciate the extra disclosure, but maybe you can get back and update that to include these trading securities, because it would appear, based on what you are saying, see, that in fact they may well include an additional subprime or Alt-A exposure.

Yes, I think what [C.N.] is saying is that what we've disclosed in our subprime and Alt-A is all of our exposure, whether it's in a trading account or not. I think unless -- what you're is what's the breakdown within that trading account? We could try to break it down that way for you; we just don't have it at our fingertips. But what you see in the way of our exposure is all of our exposure.

Fred, what you said was the difference between the 9946 listed as asset in mortgage-backed securities, right, and what is in that schedule was CMBS. Now, you're saying that was incorrect. I will leave it to you to clarify.

Colin, we will get back to you on that and clarify it.

Thank you.

Steven Schwartz, Raymond James.

(technical difficulty) seems to be four of us! (LAUGHTER). I will head back towards Delaware. I'm wondering about the investment advisory fees coming from Lincoln itself to Delaware, down at 19.5 -- quite a drop sequentially on where that has been. I was wondering about that. As well, maybe you can talk about -- I think there was some 3 billion outflow associated with a 529 plan, if maybe Pat could touch on that.

Yes, actually, Steven, what that is is we moved about $3 billion -- Delaware investments was acting in the capacity of a sub advisory role or an investment advisory role on about $3 billion of assets that actually is affiliated with our employer markets business. What that transfer is is simply transferring the role of investment advisor on those assets out of Delaware and over to Employer Markets. So, we then removed those assets from the schedules, as it relates to Delaware, for that purpose, because that schedule really just details those assets where Delaware is generating fees.

The implications of that move, though, Steven, reduced insurance-related advisory fees by in and around the number you are quoting. But it also reduced expenses, sub-advisory expenses related to those assets. The point being is that the margin on that business was very minimal, in fact a rounding error for all practical purposes, both for Delaware an then also for Employer Markets when shifting it over there -- investments behind that move.

A similar situation on the 529 as well in terms of margin improvements. Both these moves are margin improvement but obviously doing what's best by investors as well.

Okay, wait a minute. There were two things going on. There was some inter-company move and then there was the 529. Am I getting -- are these getting confused or --?

Yes, what we're going to do is better footnote that, because the 529 assets were really minimal. I mean, it's not even worth mentioning. I think it struggled to be north of 100 million; I can't remember what exactly they were, maybe a bit north of that.

We have the Pennsylvania plan, Fred, and the Hawaiian plan. The Pennsylvania plan has transitioned over, which I think is in the footnotes. I think that was around 400 million and the Hawaiian plan is about 100 million (multiple speakers).

(inaudible) Hawaiian plan, so not a big part of the assets you're talking about there.

Okay, great. Thanks.

It appears we have no further questions at this time. I'd like to turn the call over to Mr. Sjoreen for any additional or closing remarks.

We would just like to thank all of you for joining us this morning. As always, we can take your questions on our Investor Relations line at 1-800-237-2920, or via e-mail at investorrelations@lnc.com. Thank you again.

Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.