Lincoln National Corp (LNC) 2008 Q2 法說會逐字稿

Good day and thank you for joining Lincoln Financial Group's second-quarter 2008 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). At this time I would like to turn the conference over to Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Good morning and welcome to Lincoln Financial's second-quarter earnings call. Before I begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including 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 our earnings release issued yesterday and our reports on Forms 8-K, 10-Q and 10-K filed with the SEC.

We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which includes 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 measures. In addition, we have for one more quarter posted a general account supplement to our website that includes additional information and expanded profiles of certain asset classes held in our general account.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Fred Crawford, our Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call. I would now like to turn the call over to Dennis Glass. Dennis?

Thanks, Jim, and good morning to all of you on the call. We posted a solid operating quarter with retirement and insurance product deposits climbing 5% and net flows up 37% year over year. These results reflect ongoing investment to expand our retail and wholesale distribution forces and the introduction of new products and services to the market.

Our overall asset position remains strong. We have excess capital to make business building investments, fund more share repurchases and provide a cushion against additional asset impairments should we see further economic weakening.

It is worth mentioning that, unlike many non-insurance financial companies, our core business model of providing retirement products, investment management and individual life and group protection products remains intact. In other words, we don't have earnings holes to replace because some or all of the business model no longer works.

To further improve our opportunity for profitable growth, we realigned our insurance operating segments into Retirement Solutions and Insurance Solutions. This change was driven by a strategic assessment of how best to serve our customers. We expect the top line in each segment to benefit over time, primarily through coordinated product and services development, and also expect some efficiency improvements to emerge.

External factors continue to tug at top and bottom line earning results. Our reported income from operations per share was $1.32 compared to $1.36 last year. Taking into consideration notable items, merger expenses and adjusting for the swing in alternative investment income, we view quarter-over-quarter growth at about 4%. Weak overall capital market conditions have held back more robust growth. We would, of course, expect this growth rate to be significantly boosted by both the recovery in the equity markets and economy and from internal growth and effectiveness initiatives.

Our operating income ROE remained flat relative to the first quarter at 12%. We still are confident that our business mix will deliver a 15% ROE in a reasonable time frame. The 15% target is based on strong unlevered new business ROEs that we are achieving, combined with a 9% equity market growth rate. A significant recovery in the equity market would be necessary to see this 15% as early as we had expected.

Net income was affected by asset impairments, primarily related to a more conservative view in our models of the severity of defaults on sub-prime and Alt-A investments. We also wrote down our media holdings, largely due to an industry view that the recent substantial drop in industry revenues will not bounce back quickly. We are well positioned in a recovery because our individual radio properties and markets remain some of the strongest in the United States.

Expense management has been excellent. Sequential quarter G&A has been flat and down 7% from the second quarter of last year. We are not compromising investment in our growth initiatives but are certainly taking a prudent approach on those that we fund.

Let me drop down now to a few more headlines by area, starting with individual market annuities. Total individual annuity deposits and net flows in the quarter were up 5% and 40%, respectively, over the prior year. Last quarter's introduction of our new guaranteed withdrawal benefit, Lincoln Lifetime Income Advantage, was well-received and represented almost one-third of the second quarter's deposits. We are very pleased with the momentum achieved in such a short period of time, particularly given the competitive features now available in the marketplace.

Variable annuity deposits in total were flat over prior year, which we attribute in part to market conditions at the client level. Our second-quarter and first-half results will likely outperform the industry, a testament to our strong competitive product portfolio sold through multiple channels by an experienced and motivated sales force.

Fixed and indexed annuities reported sales of almost $500 million, a 54% increase over the prior year as competitive interest rates improved the products' positioning, primarily against CDs in the bank channel, the bank channel where our penetration continues to grow for all annuity products.

Let me turn to life. In our Individual Markets Life segment we reported a decline in total sales of 15% from the year-ago quarter but a 5% sequential increase. As mentioned on our last call, we launched updated versions of our UL and term products in the second quarter and we're currently on track to launch our new VUL product, [Asset Edge], in the third quarter. Consistent with my prior comments, we expect to see a further pickup in sales through the balance of the year.

Sales of MoneyGuard, our universal life product with long-term care benefits, were up 25% from the prior-year quarter, driven by expanded distribution efforts. During the quarter we completed the transition to our customer-centric cross-functional teams in underwriting, and in the third quarter we plan to introduce our next-generation illustration platform. These activities are aimed at enhancing the ease of doing business with Lincoln and making the sales and underwriting process more effective.

Distribution -- at Lincoln Financial Distributors, the strategy and story is unchanged in that we're continuing our focus on expanding shelf space and growing our market-leading wholesaler force. An excellent example of this strategy is the very successful launch at Edward Jones of our multi-manager variable annuity, ChoicePlus. The product was added to their system in 2008. LFD dedicated a 24-person wholesaling team, and in just two quarters, sales went from zero to $340 million.

During the second quarter several additional initiatives were completed or launched, including American Legacy and ChoicePlus Variable Annuities in SunTrust Bank, variable annuities and life insurance in Washington Mutual, and Delaware Funds were added in three asset allocation sleeves on Edward Jones' managed account platform.

As part of the realignment I mentioned, distribution for Defined Contribution has been moved to LFD, which now has a combined wholesaler count of approximately 800, up 8% for the year. We plan to grow this number over the balance of the year.

At Lincoln Financial Network, planner recruiting has continued the positive momentum built in 2007, and they are on track to have another record year. Although top-line production is slightly down, it has been helped by better life sales in the LFA and ABGA channels. The bottom-line story remains strong at LFN, as they are tracking ahead of 2007 results for the first six months.

Employer Markets' second quarter continued to build on the favorable trends that began to emerge last quarter, taking into consideration the seasonality that exists in the Defined Contribution business. We saw improvements over the prior-year quarter in Defined Contribution production with aggregate deposits up almost 12%. Sales in both the micro to small and the mid to large case markets were up over second quarter '07, 3% and 27%, respectively. We're seeing the benefits of distribution focus and expansion begin to yield results, and we believe we are well positioned heading into the selling season starting in the fall.

We're also seeing increased proposal activity in the 403(b) market, which we believe is a direct result of regulatory changes that will be effective in '09. Our strong position in the 403(b) market, combined with an enhanced service model, makes us well positioned to capitalize on this opportunity.

Group Protection delivered yet another exceptional quarter with net earned premium up 9% over the prior-year quarter. The expansion of the sales force is expected to be a driver of increased sales in the second half of the year. Our unique business model, highly productive distribution group and solid risk management continue to drive favorable results.

In our asset management business, Delaware continues to feel the effect of weak markets with a $7 billion decline in assets under management this year attributable solely to the markets. Retail sales, while disappointing, were not out of line with what many competitors are reporting.

Lower fixed income sales were the primary driver of the institutional sales decline, as last year we were still capturing fixed income assets prior to the July announcement of the transfer of a portion of the fixed income business. We're seeing some promising signs in the institutional fixed income area. Our relatively new team is generally outperforming our key institutional fixed income competitors, and this team just received its first sizable fixed-income mandate, which will begin funding in the third quarter.

In closing, the quarter again highlighted the continued strength of our product and distribution capabilities and the stability provided by a quality balance sheet and strong capital position. We believe volatile economic conditions can offer up opportunities for strong companies to gain market share while maintaining discipline around risk and expense management. Continued focus on these fundamentals to create opportunities for top-line growth along with prudent expense management is our top priority as we look to maintain and improve our competitive position in key markets.

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

Thanks, Dennis. Our reported income from operations in the quarter of $342 million or $1.32 per diluted share includes a few notable items that combined to reduce the quarter's earnings by about $7 million or $0.03 a share. This includes a positive reserve adjustment in our UK operation offset by negative DAC unlocking in our life business and a few expense items running through other operations. Our reported earnings also include merger expenses of $16 million pre-tax and in line with our previous guidance.

Alternative investment income in the quarter, while below our long-term expected returns of 10% to 12%, was essentially in line with our revised outlook for 2008, contributing $13 million pre-tax in DAC. It's worth noting that last year's quarter was exceptional, generating pre-tax and DAC earnings of $70 million.

In terms of market impact, the daily average level of the S&P was actually up a little over 1%, helping out sequential results, but down fully 8% as compared to the last year's quarter. It's worth noting as we look forward to the third quarter that poor market performance in the month of June drove period ending assets under management and account values down below the averages for the quarter.

Reported net income of $125 million or $0.48 a share was impacted by realized losses and impairments on general account assets as well as impairment to goodwill and intangible assets associated with our radio properties. I'll discuss both these items in a moment.

Overall, we're pleased with the fundamentals supporting our results despite continued volatility in the capital markets and soft overall economic conditions.

Turning to our business segments and starting with annuities, let me comment first on the reporting changes in the quarter. Simply put, we have removed hedge performance on our variable annuity guaranteed death benefits and living benefits from our income from operations along with the mark-to-market on indexed annuity forward starting options. As it turns out this quarter, the change had little impact on the segments' reported income from operations.

Hedge effectiveness over the extended life of our products is important and the quarterly marks, after adjusting for aspects of FAS 157, provide a window into that long-term performance. Our new reporting in the statistical supplement provides greater transparency around the hedge results. Hedge performance was strong in the quarter, delivering an overall gain of just under $1 million. Before the impact of FAS 157, namely, the Company nonperformance adjustment, pre-tax and DAC breakage was a negative $14 million, resulting in an after-tax and DAC loss of only $4 million.

Turning to the earnings drivers, despite market declines year over year, average VA account values increased 8% with expense assessment revenue increasing 7% as compared to the 2007 period. Weak market performance was offset by over $6 billion of cumulative VA flows over the last 12 months.

Normalized spreads improved to 214 basis points, and we have modestly increased our outlook as a result. As compared to the second quarter of 2007, fixed margins were down 17%. This attributed to a combination of items including a modest reduction in average fixed account values as outflows have largely subsided, and the 2007 period was a particularly strong quarter for alternative investment income and prepayment income.

We would expect our fixed margins to stabilize after experiencing sequential improvement over the first quarter's results.

Turning to individual life, the fundamentals for this business continue to be solid. Net notable items in the quarter combined to reduce earnings by about $7 million and were primarily related to negative DAC unlocking due to a number of small items. Average universal life in force was up 5% and account values up 3%, respectively, over the comparable quarter in 2007. The more muted account value growth is a result of reduced variable balances due to the equity markets, offset by continued mid single-digit growth in fixed balances.

Adjusting for certain items, both mortality margins and expense assessment income followed the steady increase in our book of business.

Fixed margins are especially impacted by the alternative investment income returns in the life segment. I noted earlier that the second quarter of 2007 was a particularly strong quarter and accounted for a swing in life earnings of a little over $15 million. Also impacting fixed margins is last year's reserve securitization.

We have modestly increased our outlook on spreads up to the 180 to 190 basis point range as crediting rate action taken in the second quarter begins to take hold.

Our Defined Contribution business showed sequential improvement in earnings with very little in the way of noise in the comparable quarters. We think our strategic investments are starting to have an impact on the bottom line. For the quarter, positive net flows of approximately $240 million and $520 million for the first half of the year helped to soften the blow from weak year-to-date equity markets. Flows are responding not only to investments in product development and distribution but also actions we have taken around retention, particularly in the small-case and mature multi-fund blocks of business. Overall expense assessment income was down 6% from the comparable quarter in 2007, due largely to the markets, and are flat sequentially.

Reported spreads of 210 basis points in fixed margins have now stabilized when looking at sequential results, this after a year of declining fixed margin contribution as higher yielding securities rolled off the books. Contributing to 2007 fixed margins was the favorable impact, again, of excess investment income.

Our Group Protection business continued its record of strong quarterly performance. The quality of earnings is not simply a segment point of view but particularly powerful when considering the diversity benefits within our broader portfolio of businesses. Loss ratios performed better than our long-term expectations in both life and disability lines with overall nonmedical ratios coming in just under 70% as compared to an expected range of 71% to 74%. Solid revenue growth continued with net earned premium increasing 9% over the comparable 2007 quarter.

Delaware's earnings came in a little better than expected, the result of effective cost control in the face of weak equity markets and negative net flows in the first half of the year. As noted earlier, the June market decline had limited impact on the second quarter results, but absent a sharp rebound will be a headwind to third-quarter advisory revenues. As a result, we would expect pre-tax operating margins of 16% to 18%. We expect Delaware's earnings to be in the range of $50 million for the full year, once again somewhat dependent on the markets.

In terms of overall expenses, we have achieved our merger savings goals and are focused on continuous improvement across the Company. Expense initiatives launched in the face of weak revenue conditions are expected to yield results for the remainder of the year. Our goal is to support investment back into strategic initiatives while continuing to lower our consolidated expense ratios. We expect merger expenses to be in the range of $10 million to $15 million in the third quarter. These expenses are starting to wind down, as you might expect.

Turning to asset quality and capital conditions, the impairment to intangibles related to our media holdings is the result of poor overall economic conditions in the radio industry and a more significant fall-off in our particular markets since the beginning of the year. There has been a fairly significant drop in industry advertising revenue along with broadcast cash flows in 2008. Further, most industry observers believe any future recovery will take a number of years and may not recover to the levels experienced in 2006 and 2007.

While we are taking actions to improve cash flows and believe we are well positioned for when conditions improve, we felt it prudent to take impairment at this time.

The media properties are held at the corporate level. This non-cash impairment does not impact our overall capital management plans.

In the quarter we recorded gross realized losses and impairments on available-for-sale securities of $144 million. Of this amount, roughly $13 million is attributed to securities where we may no longer have the intent to hold the recovery. The majority of true credit impairments in the quarter were concentrated in more recent-vintage Alt A-supported residential mortgage-backed securities, totaling about $73 million pretax.

We periodically run stress scenarios on our general account assets, focused on those assets trading in an unrealized loss position. We then bounce the high/medium/low loss results off our GAAP and statutory balance sheet ratios. We remain comfortable that even under more elevated loss scenarios, our capital cushion properly defends the Company's AA ratings and allows for investment back into our business.

With respect to stock buyback, we repurchased $140 million of stock in the second quarter. Having carried a strong capital position into these markets, I would size our current excess capital position to be around $700 million. During the first half of the year we have absorbed some of our excess position, given impairment activity and weak overall equity markets. However, our overall capital position remains very solid, and we expect to adhere to our original repurchase plans targeting $100 million to $125 million worth of shares over the next two quarters.

Before we go to Q&A, just a quick note on our announced organizational change. From a financial reporting perspective, we will be organizing our results according to Retirement and Insurance Solutions, but that will have little impact on the reported results for Annuities, Defined Contribution, Life and Group Protection, which all remain separately reported segments of our Company with one minor exception. We will be folding the Executive Benefits or COLI/BOLI business into our Life segment, given the now common management structure and very similar core earnings drivers.

Finally, a reminder that the third quarter is typically where we review all of our prospective DAC assumptions and any model refinements required. It's simply too early at this point to provide any insight into what, if any, impact this will have on our results.

So now let me turn it over to the operator for questions. Operator?

(OPERATOR INSTRUCTIONS). Darin Arita, Deutsche Bank.

I was looking at the Defined Contribution business and the trends there actually seem quite favorable. I was wondering if you can just talk about how the segment is positioned differently for this fall's selling season versus a year ago.

Generally speaking, the big difference is that we have a strengthened distribution force and a more tenured distribution force. So we think that's the biggest opportunity for continued growth in sales. At the same time, we've made improvements in our overall service capabilities, some product refreshments. So it's just a general expectation that the business fundamentals are moving forward and we have the opportunity to create more share.

Dennis, I would just add that we have also increased our shelf space and access to shelf space since the fourth or second quarter of '07.

So would you still expect the earnings to increase in this business in 2009?

From an earnings perspective, obviously it's somewhat dependent upon your view of markets going forward, because there is some sensitivity there. But what we have seen is really a stabilization of many of the earnings drivers in this business, most notably fixed margins, which have finally, I think, bottomed out and started to build with a little bit of sequential improvement since the last quarter.

You have to keep in mind that we do run a little bit of alternative investment income through the fixed margins, so they will move around a little bit. But some of the bleed that we were seeing in fixed margins over the past 12 months has really slowed down and started to rebuild. That bleed was related to higher yielding securities rolling off the books.

Now we are investing a little above portfolio, average portfolio yields, and think we can do better in that regard. And then, of course, positive flows -- having about $500 million year to date of positive flows, certainly helps fight the headwind of any sort of market decline, and we would expect that to cooperate with earnings going forward as well.

Great. Thanks very much.

(OPERATOR INSTRUCTIONS) Eric Berg, Lehman Brothers.

First, Fred, you mentioned that -- you distinguish in your prepared remarks between realized gains and impairments. Is the second one, the impairments, sort of a subset of the larger category of realized capital gains, where realized gains would also include loss on securities that have been disposed?

Yes, that's correct. Just to give you the breakdown real quickly while I grab it, my memory is that we did about $144 million of total realized losses and impairments. About $120 million of that was related to impairments. The rest was actually realized losses on sold securities.

And then, within that $120 million of impairments, I particularly spiked out that we had taken impairment on several Alt-A-backed residential mortgage securities. These would tend to be the more recent vintage Alt-A securities, and in some cases lower rated, but not necessarily. So that's the way I would break it down, Eric, if that helps.

Yes, it does, that answers the question precisely. My second and final question relates to your alternative investment portfolio. It looks like, and you referenced this, that the biggest impact by far is in the life insurance business. Why is that? Or, to put my question differently, why doesn't the general account of the annuity business also contain a heavy participation in alternative investments?

The difference there is, we hold our roughly $833 million at the end of the second quarter of total alternative investment income -- we hold it both in portfolios backing product as well as in the surplus account. In fact, a rough split of that would be roughly $500 million or so, $450 million to $500 million held in portfolios backing Life product and the remaining in the surplus account.

So, as you go across our various segments, you will see positive alternative investment income impacting the other segments, Annuities and Defined Contribution most notably, as it relates to their participation, if you will, in surplus earnings, excess earnings. But, because of the long-duration nature of the Life portfolios, we felt as if those portfolios could take on, from an asset liability management perspective, some of these more exotic, if you will, alternative investments. These would be hedge funds, for example; oil and gas partnerships; some venture capital and mezzanine.

And so that's why you see a disproportionate amount to the Life. In other words, the amount of alternative investment income backing portfolios is backing portfolios in the Life segment, specifically.

That's also, by the way, why you will see it move spreads around. So you'll notice that I don't really talk about the impact, necessarily, to spreads in our other fixed businesses. Only when it comes to Life would it move around the spreads.

Bottom line, it seems to have to do, it sounds like, with the duration of the liabilities.

That's right. It's a decision we made several years back. I think we have been doing this now for about five, six years.

(OPERATOR INSTRUCTIONS). Mark Finkelstein, FPK.

Three quick questions. Just looking at where equity markets are today, hearing some commentary from other companies, can you just, Fred, update us on where you stand in terms of DAC and how we should think about it unlocking going forward?

Sure. In our particular case, our long-term equity market assumption used for the purposes of amortizing DAC and the corridor process we used to test that long-term assumption -- we currently are, safely have some cushion relative to the potential risk of any negative DAC unlocking related to equity markets.

Part of the reason for this is really when we reset our long-term assumption for our separate account products. You would have to go back in history to remember this, but when we reset or initially put in place our corridor, it was in late 2004. At the time we put it in place, it had the effect of an equity market assumption of roughly 5% or so for the next four years or so, then rising to a 9% equity market.

That relatively low setting of our long-term expectations really helped build out a cushion over the preceding years because, as you know, the equity markets rose quite significantly as you moved into 2005-2006 and some of 2007.

So, as a result, up until the last three quarters we were actually dangerously close to coming near a positive prospective unlocking related to our overall DAC on separate accounts. Now, the last three quarters have brought that down more to the medium. But it would take a fairly significant short-term drop in the equity markets from here for us to run the risk of having to unlock on a prospective basis.

Now, something to keep in mind is, some of this is because, leading up to that 2004 period, we were in fact taking negative DAC unlocking, as you might remember. So keep that in mind as you think about our future trajectory.

Okay, that's great. Then just, I guess, as well, I believe you had slated for this year a second round of an A-XXX solution, probably more of a kind of a debt solution, obviously, than a securitization solution. But can you just give us an update on where you stand with that?

Sure. We have, in fact, slated another round of what internally we call Project Relief. We did about a $300 million one, as you recall, last year in our Life securitization project. We have teed up another one for the end of this year of roughly the same size, although that's currently being sized as we speak. Right now we do think the nature in which we structure the transaction, we could continue to execute on that. In other words, the capital markets, while volatile, still allow us to move forward on that securitization.

What I would say, Mark, though, from my perspective is, our capital position affords us the patience to really time that kind of a transaction for more cooperative capital markets. So what I am going to be on the watch for as we proceed into the fourth quarter, which is the approximate timing we would look to do this, is, if I see capital market conditions in what I believe to be a short-term disruptive period of time, I may pause and wait for that right timing. But I would tell you, we certainly have one teed up. It would be our intention to do it. It's in our plans to do it. But I'm going to be watching the capital markets carefully.

Okay. Then just finally, on your investment schedules that you provided last night, I think one of the more interesting ones, and this was, again, interesting in the first quarter as well, is just the credit-linked notes. Obviously, the mark to market on that is pretty significant. Can you just maybe talk about the underlying collateral in there and if there's been defaults, et cetera, that are affecting that? Or, is it really liquidity-driven other factors?

Sure. What Mark is referring to is about $850 million worth of investments in what we call credit-linked notes. They're wrapped up in three different transactions. These notes invest in essentially a replicated security with investment-grade companies. By replicated, I mean it takes a cash component, a highly rated cash component and couples it with a credit default swap to mimic, effectively, a bond investment -- again, typically in investment-grade corporate and financial type companies.

So that's what the underlying collateral is. To date, we have not experienced any defaults in the underlying collateral and therefore don't deem it appropriate to take any form of impairment.

But these securities are in fact trading relatively weak. I think the unrealized loss position as of the end of the quarter was in and around $390 million, to give you an example. What's weighing down on that is certainly some spread widening, if you will, in the underlying collateral, even though there have not been any defaults; but also, as you point out, liquidity and other forms of haircuts being applied to these securities because of their structured nature.

Now, they tend to be in the AA-rated and maintain in the low to high AA-rated -- low to mid, I should say -- AA-rated classes. They've got a subordinated tranche which helps protect the investment that we've made.

But, in the case of the cash component of these securities, one of the securities is, for example, a secured GIC, if you will, from MBIA. This is in one of the $250 million credit-linked notes. That one has been particularly discounted in the valuation. That's because of a haircut, a fairly significant haircut, being applied to the [MBA] downgrade.

Something to keep in note -- it's a secured GIC, meaning that they have got a top-up collateral, if you will, backing that GIC per a schedule that we receive regularly. So we feel reasonably comfortable with that, but it is weighing down on the pricing.

So overall, we obviously are monitoring these securities carefully. They are being impacted by overall poor liquidity and other issues. But, we have not seen any defaults in the underlying collateral, and therefore remain positive in terms of what we view as the potential for near-term defaults in the security.

(OPERATOR INSTRUCTIONS) Suneet Kamath, Sanford Bernstein.

Just two questions. First, just for Fred, to circle back on the variable annuity DAC. Can you just tell us, then, what the required market performance is that's built into your DAC model today versus what I would call the top of the corridor, in terms of how you approach it?

Second, maybe for Dennis, just curious about the variable annuity business in terms of how the production came in, in the quarter. Obviously, the equity markets took a dive towards the end of June. Just wondering if there was a significant shift in sales production as we move through Q2. Then, is there anything that you can mention in terms of early signs with respect to Q3?

I'll answer your first question, this is Fred, and just apologize up front for what may be technical talk. But I think many of you are familiar with the way in which a corridor works. The answer to your question is, it would take a 25% drop in the equity markets for us to breach what we would call the inner corridor of our DAC corridor process. It would take, again, another 30, a little more than 30% drop in the market to pierce the outer level of that corridor.

The significance of the inner and outer corridor, if you will, and the breaching of that is that when and if we breach the inner corridor, we don't necessarily unlock. It's really more after there is maybe a prolonged period of having breached that, that we would give consideration to unlocking, whereas the outer corridor it would be more the case that we'd go ahead and unlock, believing it to be a more persistent drop in the equity markets, causing a more permanent, if you will, correction to our expected gross profit assumption.

So quite a bit of an equity market drop is required in the short-term to be hitting that inner corridor and causing conversations to start taking place inside the Company relative to the risk for unlocking.

Suneet, on the VA business, as I've already mentioned, the strength that we continue to see versus the market comes from additional shelf space, distribution growth, and again, as I've mentioned, the introduction of this new product. We've seen some shift toward the bank channel where we've got more shelf space.

For the year it's hard to predict where we are going to be. But generally I would say we would expect to end the year with sales ahead of where we were last year, with the VA. But Terry is with us, and he has a very close grip on this. Terry, do you want to add anything?

Dennis, you are correct. The bank channel continues to be very strong, and the Edward Jones launch of ChoicePlus has added significantly. But in the two other major channels, the wire and the independent, we're holding our own and seeing market share gains.

And lastly, as we went through the quarter, Suneet, to your question, our June month was our highest month of the year. We saw a progressive increase in the second quarter each month, building off of the prior month. I would expect that we'll continue to see that type of momentum through the rest of the year.

Okay, thanks. Maybe just one quick follow-up. Any changes in terms of customer utilization of the benefits? We've been in sort of a down equity market now for quite a while. Just wondering if you have any good data in terms of are folks using the withdrawal benefit. Are they asking about it?

There's nothing that we've observed, Suneet, that's dramatically different. Maybe things will change as things settle in a little bit more, but so far nothing significantly different.

And just keep in mind that our withdrawal benefit is truly a protection, the way that they were designed, and our income is the Income 4LIFE, our patented income rider, which is traditionally used when people want to take income. So I think you'll see that our elections in utilization are a little bit different than what our competitors are, because of the fact that we have Income 4LIFE, and that's about 20% of our sales.

(OPERATOR INSTRUCTIONS) Colin Devine, Citigroup.

Two questions. First, with respect to noncore assets, and obviously, with the goodwill write-down on the broadcast properties -- they are clearly not worth what you thought they were -- are we getting any closer to just calling it a day and selling these outright? I'd also throw the B of A stock into that, looking where your shares are trading now.

And then, Dennis, can you give us an upgrade -- or, sorry -- I should say an update, on where we stand with respect to the Defined Contribution business? As you laid out at the analyst meeting last year, it's really sort of three businesses where Lincoln is really trying to build scale. Where are you in getting this thing turned around? Are you on track, and what should we expect over the next year?

Let me talk about the noncore assets first, Colin. I think we've described why, in our earlier comments, that we think the impairment was appropriate at this time. I'll point out again, it was predominantly driven by an industry sense that you won't see it bounce back the way you have in past periods. I would qualify that a little bit by saying, again, as we've already said, we have excellent properties.

As to our intentions with respect to the sale of these properties, we did get out of the TV and one radio property, sold them at what we thought were appropriate prices. I guess it was last year. And at that time we made the point that we intended to sell the remainder of the properties when we think we can get value out of them.

I'm certainly not, to use your words, throwing in the towel in the sense that these are strong properties in strong markets. And we're going to wait to find the time to get value out of them. This would not be the time.

With your stock where it is right now, Dennis, down about 35% over the past year?

Excuse me?

Even with your shares down about 35% over the past year?

I think that we always look at -- I shouldn't say I think. I know we always look at the relative use of capital for share buybacks, reinvestment in the other businesses and what we can get out of the products. So we've done the analytical work around your question.

With respect to the Bank of America, the answer is the same. We sold off, effectively, half of that last year. We thought that was appropriate. It's down in value. I think all financials are down in value. It's anybody's guess as to whether or not they'll come back and at what speed. Bank of America has a very good franchise. They don't seem to have some of the specific problems that other, say, for example, money center banks have. So we'll continue to watch that asset.

Again, doing the analytics as to whether or not we think we can do better by investing it elsewhere.

With respect to the Defined Contribution business, we continue to make great progress there, as we've outlined this quarter and last quarter. We have significant developments in terms of additional shelf space that will kick in mostly in the fourth quarter and the beginning of next year. So, the general development of the business is going in the direction that we thought it would. I think that the markets have held back some of the sales that we had earlier anticipated, just as it has in a couple of our other businesses.

So I would say, on track and expect good results over the coming periods.

(inaudible) you need some M&A in there.

We've been very clear that we, in terms of what's upon our M&A screen, we'd like to see D.C. as our primary focus. We are not at scale in that business, although it's developing that I think scale would help. But our organic plan by itself should produce very good results.

And the secondary that we're looking at, of course, is building some scale in Delaware, which I think would help quite a bit through an acquisition. So D.C. acquisitions and M&A acquisitions are at the top of our list for use of excess capital, reinvesting in the businesses.

(OPERATOR INSTRUCTIONS). And there are no other questions at this time. I would like to turn the conference back to Mr. Sjoreen for any closing remarks.

Thank you all for joining us this morning. As always, we'll take your questions on our investor relations line at 1-800-237-2920, or via e-mail at www.investorrelations@LFG.com. Again, thank you for joining the call and have a good day.

Thank you, everyone. That does conclude today's conference. You may now disconnect.