Lincoln National Corp (LNC) 2008 Q4 法說會逐字稿

Good morning, and thank you for joining Lincoln Financial Group's fourth-quarter 2008 earnings conference call. At this time, all lines are in 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 the Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Lincoln Financial's fourth-quarter earnings call.

Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends, and market conditions, including comments about liquidity and capital resources, 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 listen and visit Lincoln's website, www.LincolnFinancial.com, where you can find our press release and statistical supplement, which include 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. A general account supplement is again available on the website as well.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer and Fred Crawford, 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. Capital markets and a weakening economy contributed to disappointing operating and net income results for the quarter and a positive but much lower earnings results for the year. Significant factors contributing to the quarter's operating loss included back charges driven by the equity markets in our annuity, DC, and BUL businesses, as well as a loss on our alternative investment portfolio.

Backing out these and other notable items provide a better picture of the quarter's core operating earning power, estimated in the $250 million range at the fourth quarter's equity market levels. Fred will cover this in more detail.

We achieved positive net flows in retirement and insurance solutions for the quarter and year, reflecting our retail and wholesale distribution strength and comprehensive product lineup. We continued to see negative flows at Delaware, but also saw improved fund performance, which should help boost sales this coming year.

We also strengthened our senior management team with the addition of Will Fuller as President of LFD. Will had been the distribution head of Merrill Lynch's global wealth management business. In addition, we added Lisa Buckingham as Head of HR. Lisa was formerly with Thomson Reuters.

With respect to capital, we ended the year with an estimated RBC in the 380% to 390% range, a decline from the beginning of the fourth quarter, due largely to asset losses and impairments. This represents an RBC well within our historical targets. Our recent capital actions had added to capital. And going forward, the dividend reduction in the third quarter and more recent cost reductions will help to bolster RBC.

We closed on the acquisition of our thrift in mid January and are now a Savings and Loan holding company. This provides us with eligibility for Tarp and other government programs. However, it is difficult to predict if we ultimately will be approved for any of these, or if so, utilize them.

Recognizing in the third quarter that the economic contraction would be more severe than previously thought, we initiated several plans to reduce expenses. The actions we took in the fourth quarter led to a $75 million run rate expense reduction heading into the first quarter. We are now in the process of taking additional action, which will result in $125 million to $150 million total run rate reduction by the end of 2009.

While these actions will be more muted on a GAAP earnings basis due to the timing of reductions, DAC and other offsets, these expense reductions will have a more immediate effect on statutory earnings.

Let me now drop down to a few more headlines by area, starting with distribution. Our distribution companies are working productively and staying focused in what we all know is a very difficult sales environment. Weak consumer sentiment and overarching concerns about the financial services sector have made the sales process more challenging. But, our advice model both at the retail and wholesale levels remain a key success factor.

At Lincoln Financial Network, life insurance sales were up for the quarter, while asset-backed product sales weakened as cash stayed on the sidelines. We had a good recruiting quarter, attracting producers focusing on proven planners with solid client relationships and strong production track records.

Again, I'm pleased to say Will Fuller has joined as President of LFD with a great team in place. We have made some wholesaler reductions to increase overall productivity and lower cost, but LFD's wholesaler headcount is now 754, roughly the level we entered the year at.

We are paying a lot of attention to our distribution partners, particularly in the wire bank channels, where the landscape is changing each day. LFD is very well positioned to be an essential partner to these firms with our multiproduct lineup, quality wholesaling force and strong leadership as the partners work through their own key business themes, including rep retention and generating sales and revenue.

Turning to annuities, total annuity deposits were down 40% from the prior-year quarter and 21% sequentially. Reluctance on the part of consumers to invest and disruption in key channels clearly affected sales. Variable annuity sales cost the industry were down based on November data, a trend we expect to continue for the next several months. However, we were able to retain our number one VA sales ranking in top firms, including Edward Jones, Wachovia, Smith Barney, and UBS through November. Variable Annuity net flows were a positive $590 million, a result of lower sales and lower withdrawals.

In fixed and indexed annuities, we saw little change in deposit trends, while fixed flows benefited from declining surrenders related to the multi-guarantee products, multi-year guarantee products. Although interest rates are at relatively low levels at present, our outlook for fixed deposits is neutral to slightly favorable.

As discussed at our investment conference, our VA business model is solid, but must adapt to current market conditions. In order to maintain momentum and address the realities of the VA marketplace, in late January, we introduced changes to our guaranteed living benefit riders, including increased rider fees and tighter investment restrictions on new sales. Also, we now apply investment restrictions on a majority of our in-force business.

Defined Contribution. In our defined contribution business, deposits were down less than 2% from the prior-year quarter, while aggregate net flows were dramatically improved, evidence that our product, service and distribution efforts have made a difference. In the fourth quarter, we made significant progress in furthering our strong position in the rapidly evolving 403(b) marketplace, winning over 90 plans with the first quarter '09 implementation, doubling '08 activity.

Life Insurance. Fourth-quarter Life Insurance sales of $211 million hit a quarterly high for the year in a very difficult environment. The fourth quarter is consistently the strongest of the year, but we attribute some of this success to clients coming off the sidelines to address fundamental estate planning needs. As we look ahead into 2009, we do expect life sales to follow historical seasonal patterns, with first-quarter sales coming down from fourth-quarter highs. Expectations for growth are difficult to pin down given the economic conditions, but we continue to be well-positioned in core markets of estate planning and protection needs with our broad product portfolio.

We would expect evolving tax policy to continue to serve as a catalyst for permanent Life Insurance sales, and a refresh of our term products in the first quarter should further strengthen our position in the fundamental protection market.

Group Protection. The Group Protection business continues to turn in very solid performance. Fourth-quarter sales of $129 million posted the second-highest fourth quarter in our history, driven by our strongest December on record. We are well positioned with our group businesses and expect continued good results, driven by our strong sales force of 140 plus reps.

In Investment Management, results at Delaware continued to reflect the difficulties asset managers are experiencing. Assets under management ended the year at $120 billion, down $33 billion from year end, with approximately 68% of the decline due to market depreciation.

Retail fund performance was up in the quarter, however, with all measurement timeframes reporting an improvement over third-quarter results. Nine of the ten largest Delaware funds beat their Lipper peer group average for the 2008 year. In the fourth quarter, we reopened the International ADR product for managed accounts and our diversified income funds drove positive retail fixed income net flows of $1 billion for the year. It is, of course, a tough market, but I expect Delaware to hold its own in '09.

I have commented on several actions we're taking, aimed at improving our insurance company capitalization. Our business model, the products we manufacture, and advice we deliver remain even more relevant in today's market. Recognizing the uncertainty in the market and that events are difficult to control, we believe our manufacturing excellence combined with our distribution strength, will help drive the earnings needed to weather the current storm. And with that, let me now turn it over to Fred. Thank you.

Thanks, Dennis. This was clearly a very difficult quarter, driven almost entirely by capital market conditions.

Focusing first on income from operations, we recorded a loss of $122 million or $0.48 per share. Operating results included the following significant items which impacted the quarter negatively.

First, DAC unlocking of $320 million in the quarter. This included $263 million for unlocking the equity market assumption associated with our DAC corridor process, effectively resetting our estimate of gross profits on our variable businesses to account for the market's decline. This includes our equity market assumptions on variable universal life.

Alternative investment income impacted earnings in the quarter negatively by $35 million. These investments can be volatile. For example, the quarter's pretax and DAC loss of $70 million compares to a $27 million pretax gain in the third quarter. We expect continued weak performance throughout 2009.

Finally, there were a number of other offsetting items in the quarter, notably, favorable tax items, more than offset by poor mortality in the life segment, GMDB reserve increases, and various expense items. All told, these offsetting items serve to reduce income from operations by another $20 million in the quarter. If you normalize for these items and pull out merger expenses, we estimate income from operations in the quarter in the range of $250 million.

Turning to the items that impacted net income, our reported net income in the quarter of -- net loss in the quarter of $506 million or $1.98 per share, include the following items that fall outside our definition of income from operations. Net realized losses and impairments related to general account assets were approximately $283 million after tax and DAC. Gross losses were $568 million pretax and pre-DAC, and included roughly $223 million of impairments on RMBS, followed by financials at around $150 million, then a mix of various corporate names thereafter. The impairments in RMBS were primarily focused in later vintages of Alt-A-backed securities and reflect deterioration in the fundamentals.

We elected to impair our Bank of America common stock position held at the holding company, which resulted in a charge of $85 million to net income. This charge is in addition to the general account impairments I just covered, but does not impact statutory capital.

Gross unrealized losses of $7.5 billion increased by about $2.5 billion in the quarter. Drivers included CMBS, nonagency-backed RMBS, credit link notes and bank preferred securities.

Also impacting realized gains and losses are the results of our VA hedge program. In the fourth quarter, we recorded a gain of $147 million net of DAC and tax in our hedge program. This was driven by being modestly over-hedged, primarily in our income benefit or i4LIFE book of business. Lincoln estimates GAAP reserves on our income benefits using a hybrid FAS 133 and SOP insurance approach. In past periods, this hybrid approach produced a result that was entirely 133 based.

As a result of the market declines and change in risk profile of the product, the insurance component of the income benefits has become more important, resulting in a greater weight placed on the SOP element in the calculation.

We also refined our estimate of nonperformance risk factor, or NPR, embedded in FAS 157 calculation. The NPR has served to reduce the liability in recent quarters, as it is tied to our credit spreads. The NPR refinement lessens the impact and reduces volatility in this measure.

Finally, we took an after-tax non-cash write-off on goodwill and other intangibles of $166 million in the quarter, made up of $157 million impairment on our media investment and a small impairment to goodwill in our UK subsidiary.

In summary, of the reported loss in the quarter, roughly $570 million was non-cash in nature and did not have an impact on statutory capital conditions, namely DAC, Bank of America stock and goodwill.

Turning to capital, we estimate our year end RBC in the range of 380% to 390%, after giving effect for impairments in the quarter and adjusting for regulatory-permitted practices. Recognize also that we utilize a captive for our variable annuity business. Looking through that structure would add roughly 20 to 25 percentage points of RBC to our reported estimate.

The permitted practice centers around the treatment of deferred tax assets. There was no material relief given on either life or annuity reserving. The overall impact we estimate to be about 20 percentage points of RBC.

We have been building up liquidity in our insurance company given market conditions. We estimate insurance company cash and liquidity of roughly $3 billion together with roughly $1 billion in contingent liquidity in the form of lending capacity from the Federal Home Loan Bank of Minneapolis. We are not an aggressive user of securities lending with less than $400 million out on loan and collateral invested in liquid, high-quality assets.

As we discussed at our November conference, we have a $500 million debt maturity in April and absent reasonable refinancing solutions, we plan to retire the debt with cash and securities on hand together with other internal resources.

In addition, we have an active commercial paper program with capacity and maintain a little over $1 billion in unused bank lines maturing in 2011.

Recognizing the focus is on capital and asset quality, I do want to make a few brief comments on some of the earnings drivers in our segment results, starting with annuities. Average VA account values decreased roughly $14 billion as compared to the third quarter, driving expense assessment revenue down by 22% sequentially. The operating loss in the quarter included negative DAC unlocking totaling $250 million and related almost entirely to the significant drop in the equity markets.

We experienced an increase in VA death benefit mortality expense, which impacted the quarter's earnings by roughly $11 million. We are essentially setting aside more of our VA revenues to fund reserves for potential future death benefit claims.

Fixed margin contribution was down modestly in the quarter. The decrease attributed to building more liquidity in the portfolios and remaining cautious with our new money investments while market disruption continues. After adjusting for DAC unlocking, alternative investment income and other items, we would estimate normalized earnings in the quarter of approximately $85 million.

Our defined contribution results suffered many of the same themes as our annuity business. The operating loss in the quarter included negative DAC unlocking of $30 million related to the markets. Average variable account values were down by roughly $5.5 billion with overall expense assessment income down 22% sequentially. After adjusting for DAC, alternative investment income and other items, we would estimate normalized earnings in this segment of approximately $30 million.

In our Life segment, we unlocked our long-term equity market DAC assumption associated with variable UL. This unlocking charge to earnings was $34 million. Roughly two-thirds of our alternative investment holdings backed the Life segment. This impacted earnings negatively by $22 million.

Fundamentals remain stable with average UL in-force up 4% over the prior year. Expense assessment income followed the steady increase in our book business, while mortality margins were negatively impacted by high net death claims. We would estimate normalized earnings in this segment, excluding alternative investment losses, of approximately $150 million.

Our Group Protection business earnings came in weaker this quarter attributed to a tick-up in group life loss ratios. Overall loss ratios still within our expected range at roughly 73%. The quarter also included about $3 million of negative impact related to miscellaneous expense items. Solid revenue growth continued with net earned premium increasing 10% over the comparable 2007 quarter, fueled by organic growth and continued strong persistency.

Delaware's reported loss was driven primarily by the sharp decline in the equity markets and included [seed] capital returns, which negatively impacted earnings by $8 million. This offset to some degree by favorable expense items.

Third-quarter market decline together with negative flows in the period drove assets under management down $12 billion sequentially, which served to reduce revenue in the quarter by roughly $27 million. We expect quarterly earnings to remain in the very low single digits, recognizing seed capital can be more volatile.

So overall, a disappointing and complicated quarter, but we remain focused on managing our capital, liquidity, and feel good about our variable annuity risk management practices in the face of unprecedented market conditions.

Now, let me turn it over to the operator to start with Q&A.

(Operator Instructions). Andrew Kligerman, UBS.

Two quick questions then. The excess capital position, where does that stand at the end of the year?

And the second one, I think, Fred, you were just saying with regard to Investment Management, you would expect earnings in the very low single digits and it tied in with seed money. You lost $4.3 million in the quarter. So, what happens going forward with that business if you don't get growth in AUM, this thing could be kind of low single digit to negative as a run rate?

I'll answer both of them, Andrew. In terms of excess capital, probably the best definition of that right now is that we're starting to see a little bit more transparency among the agencies and what their expectation is for RBC. And what I read from the agencies, more recently Moody's, for example, is an RBC expectation around 350%. And if you bounce that off the RBC we ended the year at, that would suggest something in the neighborhood of $400 million to $500 million of excess capital.

What I would suggest to you, though, in terms of using the terminology "excess capital" is that that needs to the bounced off your expectations for primarily the general account and what expected losses are. And that's really where the agencies are focused in on, on capital quality. And so while we are in an excess position, we believe it's an excess capital position that is going to be necessary as we go forward through 2009, and we're going to have to be very careful about that and stay close to monitoring it. But that's how I would answer that question.

In terms of Delaware, I think you have sized it up right at this point, and that is absent organic growth and assets under management, either driven by more positive markets or flows starting to turn more neutral or positive, then they're going to remain in a very low kind of zero to $2 million, $3 million type of quarter earnings profile, and that's without noise related to seed capital, which can move around from time to time due to the marked-to-market.

Now, as Dennis had mentioned in his comments, we're undergoing expense management initiatives across the Company and Delaware is certainly included in t. And so we're going to make every effort to try to improve the earnings profile. But clearly, you're going to need to have what you would expect in an asset manager, and that is growth in AUM to drive your earnings back up.

And Fred, just real quickly on that RBC response, do you have any flexibility around some of your businesses, maybe a divestiture here or there, maybe some reinsurance? I mean are there things that you could do reasonably quickly to bolster that excess capital? And do you have a game plan for initiatives like that?

There are. There are those mechanisms available. I put it in kind of two camps. One is the sale of noncore assets that are unrelated to the insurance businesses. And the only caveat I would give there is it's fairly difficult markets right now to attract fair value on assets these days. And so it's a process where you have to be patient and conservative in what you believe you can get done and when you can get it done.

The reinsurance markets and that kind of a strategy from a pure insurance standpoint, that does remain available and is something that can be executed on to help bolster risk-based capital and/or cash flows to the holding company if necessary.

The only caveat I would have there is we feel very strongly about the businesses we are in and those business fundamentals when looking at the in-force and the quality of the in-force that we have as a company. And so one of the things I would suggest to you is that while that's available, it tends not to be high on our list or more immediate, because you are effectively selling away core earnings in a quality block of business. But it is available.

Got it. Thanks a lot.

Bob Glasspiegel, Langen McAlenney.

Good morning. Dennis, at the investor day, you said that TARP was sort of a luxury that you were pursuing for defensive purposes rather than a need. I wonder if that is still the case. B, you think that it is still worth pursuing in light of the potentially tighter strings that are coming associated with it, like can you run recruitment conferences, etc. Where do you stand on TARP?

And unfortunately, Geithner is talking now and I'm not sure if he's addressing whether it is even an eventuality, but that's the question.

Bob, when the first $350 million came out of the terms, were fairly reasonable and the restrictions, fairly limited. You see in Congress, some suggestion that the fundamental terms will change or you hear rumors of that. And certainly in Congress, you see much tighter restrictions. So, with any piece of capital, if it were available to us, we would take a look at the overall cost, not only in terms of the specific costs of the instrument, but what other restrictions, such as very wide limits on cash compensation that, if we had that money and those limits, would put us in a very difficult competitive position. All of those things would have to be taken into consideration.

Are you still of the camp that it is a luxury as opposed to a need?

I'm still in the camp that it is an option.

Okay, so you are pursuing it if it's at attractive terms. And you have no read at all how it's going to break at this point?

I'm not sure anyone has a read, but I certainly don't.

Okay. Thank you very much.

Steven Schwartz, Raymond James.

Fred, could you answer a couple of questions for me, please? First, could you detail the tax benefits and how they affected the two segments?

Sure. Do you want to ask your second question too, or --?

No, let's just do that one. The second question gets slightly more detailed.

Sure. The tax benefits came through in the -- in our retirement lines of businesses, Defined Contribution and Annuities. And I would estimate the earnings impact of those tax benefits to be about $8 million in Defined Contribution and about $13 million for Annuities.

Okay, thank you. And then, I guess it's an accounting question. I'm a little confused. For some reason I thought you didn't hedge your guaranteed minimum death benefits, but in your operating realized gain line in the Variable Annuities, you have this 133.4 million GDB hedge cost, and yet you also state that the benefit reserves had to go up for GMDB. Are you hedging something different?

We, on the death benefits, we have a delta-only hedge program, and it attempts to hedge to effectively the SOP built in the reserve. And so, what you will tend to find quarter to quarter is a separation or noise related to the difference or the change in the death benefit unlocking and reserve pattern and the actual hedge assets themselves. So what I've typically said about death benefits is that we have what I would characterize as a partial hedge on our death benefits.

Could you -- if it's possible, could you quickly explain what is -- I understand the SOP 03-1, you're hedging that, right? What is it above that that's not getting hedged? Is it some true economic number?

No. What I mean by partial hedge is just that we have not attempted to -- or we're really hedging to the SOP. And so it becomes a matter of what you view -- how you view the SOP buildup of the reserve relative to the markets.

As you know, the SOP will build a little slower than say a FAS 133 or even a statutory approach to the reserving of the death benefits. We've been reserving to the SOP. So when I say partial, what I mean is that what we don't have coverage for is what I would characterize as more the statutory reserve needs on death benefits. We have a partial hedge that builds assets for the death benefit, but tends not to keep pace with the statutory.

Okay, I got it. Thank you.

Darin Arita, Deutsche Bank.

I had the question on Variable Annuities. In the press release, it talks about reducing the risk profile Variable Annuity products. Was wondering if you could expand on that and what you are doing. And also what your thoughts are on the risk profile of all of your other life insurance products and the pricing?

Darin, what we've done on the VA product was to increase our basis points charge for the income rider by 15 basis points, taking it up to 90 basis points. And we've imposed tighter fixed income restrictions, taking it up to 30%.

We are also beginning to employ tighter restrictions on our in-force business. And as I said in my -- if I didn't say in my remarks, that's up to 70% of the in-force would have some type of investment restriction. So those are the things that we've done so far.

Okay. When you look at that, I guess is there -- are there plans to do more to the Variable Annuity product? Feels like these are changes in the right direction, but given the magnitude of what's happened with the equity market, and what could happen going forward --?

Yes, we're going to be taking another look at the product. It's underway as we speak. The idea of maintaining a competitive product in the marketplace is important. But our expectation is, and it's a common term being used in the VA space and with our competitors, we're going to try to de-risk the product. So I think you can see some more -- we can expect some more changes, again, with the expectation that we will remain competitive in the marketplace. And, of course, a lot of our competitors are making pretty dramatic changes. So we will remain competitive, but it's our expectation that we will reduce the risk in that product for the benefit of the shareholders.

And can you just address how you are thinking about the other products that you're offering and changing the risk profile and the pricing there?

There's not any other products that we are particularly concerned about. I think they are all well priced and the risk is manageable. We do a tremendous amount of stochastic testing in all of our product development, which is becoming more prevalent in the marketplace as opposed to just deterministic testing as you do your product development. But, we have employed that for years. So we are comfortable with the risk profile of the other products that we have in the marketplace.

Now, of course, if things change, if the markets -- if there's something in our assumptions that doesn't test against an involving market trend that we don't know of right now, we're able to respond quickly and with expertise.

Thank you.

Eric Berg, Barclays Capital.

Thanks very much. Good morning to everyone. I actually had just one question. Fred, you indicated that Lincoln uses -- I think you talked about this in your investor day -- Lincoln uses offshore reinsurance. I'm thinking this is to either dampen or move entirely the impact of some statutory requirements, whether they be C-3 Phase II or some of the actuarial guidelines. And that somehow if all this were brought on -- or if we look through all this, somehow your risk-based capital would be higher than you reported. My question, could you just explain why that is that your risk-based capital would be higher than you reported if we look through this reinsurance?

Sure. You've got it right. Essentially, we use the captive and we move over to the captive both our death benefits and our living benefits. As you know, the death benefits are accounted for under AGI 34 and tend to be a more severe impact to stat capital. They've got sort of a stress test element to it that has popped the reserves on death benefits up pretty conservatively for most in the industry.

And then AG 39 for living benefits, that is really quite the opposite where it's been a more muted impact and is really going to be somewhat modernized under VA [carvum].

If you bring those statutory liabilities back onto our Lincoln Life Insurance balance sheet, under AG 34 and AG 39, and you bring the associated derivative assets back onshore, together with the capital carry under C-3 Phase II, all of that nets out to a positive impact to our RBC at the end of the year of about 20 to 25 percentage points.

And, really the way I look at it, instead of attempting to place a fore-handle on our RBC, the way I tend to look at it is that our VA business is well capitalized and our captive is well capitalized to support the potential for future claims. And the main reason for that is because we've been fairly active in a 133 orientation, and particularly on our income benefits, which has served to build substantial assets in that captive. And then we have had a partial hedge on the death benefit. The assets haven't grown quite as dramatically as AG 34, but there has been some level of hedge put on it. We didn't go naked. So you pull all that together and we feel as if the asset adequacy is very strong and that's what you see reflected in the notion of a look-through RBC, if you pulled it back onshore.

I guess my second and final question would be, if the establishment of the captive reinsurer offshore is being done in part or in good measure to help you with your regulatory results, but in fact it has the exact opposite effect of making the RBC lower than would have been the case had everything been onshore, why do you go offshore in the first place?

Volatility. It's really your first point, Eric. You had mentioned that the captive is used as park for volatility, and that's really it. It's just that you have a marked-to-market on the derivative assets. You have an entirely different regime when it comes to AG 34 and 39 and then soon-to-be VA carvum. And what the captive allows us to do is settle down the RBC for planning purposes and cash flow purposes, and that's why we use it. I think that's essentially why you see others in the industry use the captive.

Thank you. I'm all set.

Tom Gallagher, Credit Suisse.

First question is on something I'm reading in a Moody's release here. It talks about I guess putting Lincoln on review for downgrade this morning. But it talks about upcoming debt maturity of $500 million and some concerns about liquidity sources at the holding company. Can you just review for us how you plan to pay that debt off? Will you actually need to borrow from the subsidiaries? Or you actually have cash committed at the holding company to meet that debt maturity? That's my first question.

The second question is, Fred, as it relates to this 20 to 25 points of RBC cushion you had in the captive offshore reinsure, what happens -- can you give us a little bit of sensitivity? What happens to that cushion in the event of an S&P 800 or S&P 700? How sensitive and volatile is that to changes in the equity markets? Thanks.

In terms of the first question, as we mentioned at our conference, we've got a $500 million maturity coming up in April, and what we have done is starting to accumulate assets at the holding company to meet that maturity. And so it's really a combination of what you are saying. It's a combination of accumulated assets at the holding company and the ability to borrow on our intermediate-term basis under intercompany borrowing arrangements to meet that maturity.

This is something that we have done historically. In fact, these arrangements have been in place for several years. And from time to time, when there is capital market disruption or simple bridging needs, we will utilize this in lieu of commercial paper depending on the pricing or in lieu of having to tap other liquidity sources. So at this point in time, that is our plan of attack with it, absent some other more permanent source of capital financing available in the marketplace.

So Fred, just a quick follow-up on that. There's no impediment to you getting that access to liquidity?

No, we are -- we've actively used it throughout the years in size from time to time, and it is something that's fully vetted and documented with the subsidiaries to the degree there's any regulatory requirement. So as we sit here today, we would expect no disruption in using those facilities and have so actively over the last several years.

In terms of the sensitivity of RBC to S&P's 700 and 800, right now, in terms of the use of the captive, it helps to mute, if you will, the impact from the markets related to an S&P 700, 800. So for example, so just assuming the captive is in place, which it is, and a market down to 800, we would expect RBC impact, for example, of roughly 5 to 10 percentage points. If that were down to 700, that would lift up to maybe 15 to 20 percentage points.

If you look through to the captive, that's a much more difficult exercise. You would clearly have heightened sensitivity, more sensitivity to the markets up and down. I don't have great figures on that. But it would clearly be more sensitive to the volatility point that I made earlier.

And so Fred, the direct hit to you for S&P 700 on the US subsidiary would be 15 points to 20 points. So should we think about that -- the 20 to 25 point cushion would be wiped out plus another 15 to 20?

Well, what I'm saying when I say 15 to 20 points is on our current RBC with the markets going down to 700, the issue of the captives impact really depends significantly on the value of those derivative assets and, frankly, more than just the equity markets, what's taking place with vol and the interest rates and several other issues.

So, Tom, it's a bit difficult to estimate on that. In fact, one of the benefits of having a captive is it allows you to do some level of estimation on the markets because of the stability of it, so I am more comfortable talking about the impact with the use of the captive, less so in trying to look through it.

Understood. Thanks.

Mark Finkelstein, Fox-Pitt Kelton.

Tom actually addressed a couple of my questions. But I guess just going back to that point, in the overfunding in the captive, how sensitive is that also to material changes in volatility? I mean, are those vega hedges what's creating that 20 to 25 points higher RBC and if volatility were to come in, I guess what would that look like?

You know, I don't have in front of me, Mark, the data on the relative sensitivity of the assets to a given change in vega and interest rates and delta or market. What we have been experiencing more recently is heightened sensitivity to interest rates, frankly, more than anything else.

So, as I think about the fluctuation in the derivatives values, I tend to think more about interest rates of late. But I don't have a great estimate for you but it's a combination of all three.

Okay. And I guess just a clarification on the comments regarding the hedging effectiveness. I guess what I'm asking is, you talked about historically, the valuation being on a FAS 133 basis with, because of where markets have gone, moving somewhat to a 03-01, at least on the i4LIFE product. Does this represent a change in how that liability has been valued? Or is it purely the way the numbers came out? Essentially, is there anything that you have changed in how you value that that has actually given rise to the hedging effectiveness? Or is it purely the way the numbers have come out? It if so, how much has that change benefited the hedging effectiveness number?

What it is really is a change in our estimation process. We have had a hybrid approach blending the SOP and the 133, but when the market went through the magnitude of the disruption that it went through in the fourth quarter, it really exposed the nature of the liabilities more to our estimation process. And so we adjusted to weight more heavily the SOP component when calculating the liability. And we consider that really a change -- a modification or a refinement in our estimation process. But again, reflecting not only on the market disruption, but also on the nature of the product, it being an income benefit.

Mark, as I think you and maybe others on the phone know, the vast majority of the industry reports on their GAAP liabilities on income benefits, using really a pure SOP approach. We didn't feel comfortable with that. We thought having a 133 element to it was important, and that's why we've kept with the current platform, which is a hybrid approach.

In terms of the second question, one of the things that may help you on this is that if you were to just keep the same 133 basis or almost entirely 133 basis on the income benefit, the hedge program in the quarter actually performed very well. It was better than 90% effective. While there was negative breakage going through the early part of the quarter, we gained much of that back in the latter part of the quarter by remaining somewhat short volatility relative to our estimate.

So I think if you normalize, for example, for all the changes we made, there would have been maybe an after-tax after DAC roughly breakage of in and around $75 million or so, to give you an idea. Which if you think about what the quarter was and what we went through, with in and around a $3 billion jump in the liability, that's pretty strong effectiveness.

So we feel very good about the hedge program. This was really an overall review of our risk management practices and really a deeper dive in the nature of the risk profile of our products and what is the best way of estimating and weighting the insurance and mortality component versus the 133 component. And that's the alter -- that's how we altered the measurement.

Okay, that's great. Thank you.

Colin Devine, Citigroup.

I have two questions. One around the VA withdrawal benefit block and the second one on your reserve development. First, on the withdrawal benefits block, Fred, you've got one of the biggest or the second biggest block in the industry. Can you give us a sense of what was the size of the WB block, not including i4LIFE, but this variable draw benefit block at the end of the year? What was the guaranteed amount on that block? The value of the hedge against it, so we can get a sense for just how much of that gap is hedged. And then also, perhaps, if you could give us some idea of how many of the policyowners are over age 60 and so are in a position to start utilizing the benefit? That's the first one.

And then the second one, if you could give us some idea of how much strain will be incurred this year from your XXX and AXXX reserves, since they start to build fairly rapidly obviously?

The first one, Colin, we're going to have to -- I'm kind of looking at our annuities team. We would have to put some information together on that to try to get you some answers, because we're just not prepared with all that data right now as we speak. And so we will talk and get that information. I'm sure these are the kinds of things that will be spelled out in our K. But we can work to try to get that information together.

On the second one, there will be a level of strain related to AXXX going forward if we are unable to do reserve securitization going forward. Typically, we would expect or plan for something in and around a couple hundred million dollars of reserve relief need as part of supporting the business and statutory results in any given year. That would be roughly the build you are talking about. And with markets the way they are currently, that availability of securitization is not very robust. You have had to rely more heavily on just letters of credit or other mechanisms or simply just take it into your surplus.

For example, right now, we have a level of redundancy on our balance sheet that we simply have to absorb within the RBC I quoted you and that may be the case in 2009 as well. So we'll have to monitor that. It's a fair observation, certainly, as you look at the securitization markets going forward and the availability of letters of credit.

Okay. Is that a run rate for the next couple of years? Or does that really (technical difficulty) until we start to build?

About the run rate. I think it's about the run rate, yes.

Okay, thank you.

Yes, and I apologize on the first question. These are good -- I think the question you're asking is somewhat similar to slides we have produced before to try to break it all down. It's a fair question. We'll try to get that information out. And I will point it out in the K and make sure we get the question answered for you.

Thank you.

Suneet Kamath, Sanford Bernstein.

Thank you. Good morning. I guess two questions. First, maybe for Dennis. At the end of January, I see NAIC's executive committee had a number of things on the table in terms of providing the industry some sort of capital/reserve relief. And they were all voted down I think in a relatively quick manner. Just wanted to get your thoughts on where we go from here with respect to that. I think some of these things were voted down but are probably going to be implemented anyway. Perhaps that's the VA carvum. Other things are done on a maybe permitting practice basis. Just wanted to get a sense of where you think the industry shakes out with respect to these issues.

Yes, Suneet, it was kind of curious because on the 27th, they voted for it; on the 29th, they voted against it. And I think there was a certain -- ultimately the vote was just a little bit of concern about publicity of weakening the reserves of insurance companies in a period of time that is obviously volatile and worrisome.

At the same time, the actuaries, [Mahetive], approved quite a few of the recommendations that had been put forward by the ACLI and the rest of the industry. So my characterization is, and the characterization that we've gotten from the NAIC is they just need more time to work through those things that they have already approved, do more work on them. So my expectation is that through the course of the year, we will see some of the individual items that were nine altogether, approved, or at least the ones that already have been approved. So I think it's more timing than it is no, this will never happen.

And have you tried to quantify what's the impact of say the nine things would be? I don't need specifics. Just sort of ballpark what it would do for Lincoln?

I think the number that Fred has already given you is pretty close to what the benefits would be overall from what was approved.

In terms of out of the working group?

Yes.

Yes, I quoted earlier about 20 percentage points of RBC benefit, which is predominantly the deferred tax asset, which is in and around $300 million, give or take, right in that range. Now, there were some other provisions that were weighed on and looked at in the working group, but they were somewhat minor impact on us if any impact at all.

Sorry I missed that. It seems like there's a lot of things that have a 20 percentage point impact.

Just wanted to follow with a second question if I could. Just on third-party distribution, particularly with respect to the variable annuity business, what is your sense in terms of this distribution channel in terms of how they view ratings and ratings strength? I know you've said things, relative ratings are important and all that, but how sensitive is this channel to negative outlooks, ratings downgrades? You've made a lot of progress here. If you did get downgraded, is it possible that we may see sort of a pullback from that channel in terms of selling Lincoln product?

Yes, the answer to that question is ratings are part of the overall picture. And it's a matter of relative ratings more than absolute ratings. So there were dramatic differences in our ratings versus our top competitors, which there are not now, nor do we expect there to be. There could be some impact on our positions. And I guess that would be more so in the wires than it would be perhaps in some of the other channels. Certainly in the Life channel, it's not quite as rating sensitive. So ratings are important, but they are not the only issue. the quality of our wholesaler force, the quality of the products in general, all add up to the market position that you have.

So we're quite comfortable with our ratings. You have seen -- of course someone has already mentioned the work that came out of Moody's this morning, hopefully will defend our current rating that we have. We'll have to get with them and see what's more on their mind, and continue to work with the other rating agencies.

But I come back to fundamentally that the franchise that we have with Lincoln Financial Distributors, Lincoln Financial Networks, the low-cost structure that we have and our manufacturing capabilities and the quality of the product development that we do, and our ability to maintain liquidity and strengthen capital, which we think we can do with some of the actions that we are taking and other options that are available to us, I think the outlook is pretty positive.

Okay. Thanks.

Jimmy Bhullar, JPMorgan.

I just have a question maybe Fred or Dennis can answer that. You mentioned that you would take a look at TARP if offered. Now your stock in January was above $25 for a little bit. It's declined recently, obviously, because of capital concerns. And I realize you can't manage the business based on what the market thinks, but the reason the stock is weak is obviously because of capital concerns. So if you are willing to accept TARP and obviously it's not free, why is it that you haven't considered raising equity or didn't consider raising equity when the stock was at a much higher level?

Because a lot of companies are saying that they've got excess capital but at the same time the rating agencies are downgrading them or putting negative outlooks on them.

So is that something that you've considered? And if the stock was trading higher, would you consider raising equity or do you not see that as a need at least in the foreseeable future?

The events are fast changing. The stock was up at $25 for a very short period of time. Of course, if things worsen, we'll have to review what options are available to us to maintain our ratings. And so, again, it depends on the future what actions that we can take.

We do have, again, several options available to us right now to add the capital, which we'd probably take first before any equity offering. There's still issue surrounds around the dividend if we wanted to make a different dividend decision. So everything that we're trying to do is protect the capital position and use the capital that is the least cost and most effective.

Okay, thank you.

John Nadel, Sterne, Agee.

Hi, I guess we are officially afternoon, so good afternoon, everybody. Two quick ones if I could. I just wanted to -- I wanted to think about the goodwill on the balance sheet related to the merger a couple of years back between Lincoln and Jefferson-Pilot; and just get a sense from, as you guys are going through the year-end process, you've obviously already taken the hard look on the media assets. Is there anything that we should be expecting or any sensitivity you can give us with respect to the goodwill related to Jefferson-Pilot?

John, it's Fred. As you pointed out, we do have a significant amount of goodwill related to the merger, that goodwill is concentrated in our Life Insurance business at about $2 billion. About $1 billion of it is in annuities and then the rest is spread out at various other entities.

As you point out, and you are absolutely correct, the goodwill process for all companies in our industry as well as for Lincoln was very intense here at year end. Involved step one processes, which really try to draw out whether or not there is the risk of impairment and then the degree to which you need to go further. Step two, which typically involves a full appraisal.

And in fact, for Lincoln, we actually proceeded on to step two in those areas that either had considerable goodwill or that were at risk of goodwill impairment. That's what drew out the impairment on media and a small one on UK. And we also went about a full step two process on our Life business for the mere fact that it contains most of the goodwill.

We ended up settling in on being comfortable with the fair market values and carrying values of those business, attributed largely to the quality of the franchises that are associated there and the fact that we have been able to get the merger put together and performing well and according to expectations, baked into the original estimates when the merger took place.

In terms of going forward, we're going to have I think the same level of goodwill risk that you would find anybody in our sector having. Meaning, if markets remain the way they are and we have got some fast-changing issues in front of us, particularly I think the annuity business, which is changing potentially significantly, it could hang in there and it could do well, but we are going to have to watch that, monitor that carefully.

The good news there is, as you know, we have built substantial market share in recent years in that annuity business. We have had significant, in fact I would argue industry-leading positive flows, which has led to a great organic growth story in that annuity business. It's those kinds of results that have supported the goodwill level and the fair market value calculations on that business. But with markets down low and obviously a lot of change taking place in the distribution platform, we're going to have to watch that carefully.

Okay, thank you. That's helpful. The last one, I guess is for you, Dennis. And it's just to think about the value of a AA versus a single-A rating. I mean, I guess I just struggle with the idea of a potential equity raise, that's dilutive with a risk-based capital ratio that's bordering on 400%, understanding the idea that there's general account asset risk here in this credit environment. But I guess I'd just like to hear from you, your sense or your perspective on the value of your AA3, just using Moody's as the most current example versus a single-A1.

That's a pretty tight range, just one notch down. And it would have to be connected with the -- excuse me, the other three ratings. And we have good ratings at Standard & Poor's; good ratings at Fitch; good ratings with AM Best. And I have looked at each one of our product lines, and I have looked at the competitors and their ratings in each one of those product lines. And where we sit today overall, I feel very comfortable. Now, an A1 would subtract a little bit away from that comfort. But still, that in, of itself I don't think would affect significantly any of our distribution channels, if the other ratings remained where they were.

Okay. If I could just sneak one more in, could you give us a sense just an estimate on the numerator or denominator or both that goes with the 380% to 390% range?

Sure. Total adjusted capital in our principal life insurance subsidiary, Lincoln National Life Insurance Company, is a bit above $5 billion, about $5.1 billion. And the risk-based capital associated with the business is about $1.3 billion. And as you will find many in our industry doing, and I will do the same, just caution that these are estimates as we go about the business of finalizing our blue books and settling in on the final number. But nevertheless, it will be very close to those numbers.

Understood, thanks.

This concludes today's question-and-answer session. At this time, I would like to turn the call back over to John Sjoreen for any additional comments.

Thank you, operator. And again, thank you for all of you joining us this morning. As always, we will 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 participating and have a good day.

This concludes today's conference call. Thank you for joining us and have a wonderful day.