Lincoln National Corp (LNC) 2009 Q4 法說會逐字稿

Good morning and thank you for joining Lincoln Financial Group's fourth-quarter 2009 earnings conference call. (Operator Instructions). At this time I would like to turn the conference over to Vice President of Investor Relations, Mr. Jim Sjoreen.

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 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. So with t that, I would now like to turn the call over to Dennis.

Good morning to all of you on the call. 2009 was an eventful and challenging year for our country and for our industry. For Lincoln, in terms of strategic focus and execution, it was certainly one of the most active years in our history. In the face of challenging market we completed a series of actions designed to place the Company firmly on the path to performance and growth, while preserving our financial flexibility and our franchise value.

I never doubted the strength and resilience of our business model, but today looking back on 2009 with a little perspective it is worth noting just how well our operating businesses performed.

Given the severity of the downturn we had expected somewhat reduced production, but we found that the quality of our business model protected our marketshare in key lines and generated increasing levels of activity throughout the year.

For the full year 2009 we reported total positive net flows of $7 billion and total gross deposits of nearly $20 billion, only modestly off 2008 levels. Our retirement asset balances reached $110 billion, up 27% from last year due to net flows and market lift close to the record levels of 2007.

Through the third quarter we steadily increased marketshare for variable and fixed annuities, and maintained our share of life industry sales. In spite of the noise and headwinds, and due to the fact that we remained active in our markets with all of our products and services, and proactively engaged in dialogue with our partners, we in fact grew our franchise in 2009.

At Lincoln Financial Distributors we added or expanded relationships with 26 firms. We increased the number of active advisors recommending Lincoln Solutions by 11% to more than 55,000, and we significantly increased the number of new producers recommending Lincoln Solutions for the first time.

At Lincoln Financial Network we increased net new advisors by more than 300 to approximately 7,700 at year-end. And an industry magazine recently ranked LFN as one of the largest independent broker dealers in the country.

Turning to our employee base, we added to the experience of our work force by attracting talented individuals from inside and outside of the industry. We also benefited in 2009 from our commitment to a broad product portfolio designed to support different financial planning needs. And our distribution organizations proved to be nimble, keeping pace as consumers adjusted their preferences over the course of the year.

For example, in our annuity business we are able to take advantage of the shift from variable annuities to fixed solutions during the year, and then pivoted back to variable solutions with our clients as the markets improved.

Similarly our individual life insurance benefited from the breadth of our solutions set, and again, nimble distribution. Throughout 2009 we saw steady, quarter-over-quarter increases in policies sold for both UL and term. And total policies sold in 2009 were 28% and 98% higher respectively over 2008.

In our Defined Contribution business we saw an increase of more than 20% in both total net flows and ending balances. Group Protection had another very strong year across all measures and a strong fourth quarter. Total sales were up 14% over 2008, and fourth-quarter sales were up 29% over the year-ago period.

We are successfully taking advantage of the growing importance of voluntary sales in these relationships. 38% of sales came from voluntary business, an increase of 7 percentage points over the year-ago period.

The financial services landscape will continue to shift as our competitors change and our distribution partners settle into new structures and regulations. Our approach to distribution and reputation for distribution excellence at Lincoln Financial Distributors, Lincoln Financial Network, and our worksite sales and service organizations will continue to be a catalyst for marketshare gains, as consultants, advisors, employers and consumers seek out providers they trust.

Given this backdrop, we continue to evolve our distribution strategies to maintain our competitive advantage.

At LFD, one of the largest wholesale distribution organizations in the industry, our focus today is on driving productivity, which has already resulted in a 22% increase during the year.

Lincoln Financial Network is leveraging its model to attract seasoned advisors, who want to affiliate with a company with national presence, a recognized brand, and a commitment to support their independence, while helping them grow deeper relationships with their clients.

We also continue to build our worksite-based sales platform, primarily found in our Group Protection and Defined Contribution businesses, with the goal of expanding opportunities to help employers and employees understand how to make the most of company-sponsored retirement benefits and additional voluntary benefits.

Now let me turn to financial strength. As you know, we achieved positive net income from operations in every line of business in every quarter of 2009. We ended the year with an estimated risk-based capital ratio of approximately 450%. And we have roughly $1 billion in cash at the holding company, net of cash set aside to repay a $250 million maturity in March.

Product updates completed last year are adding to our long-term financial strength and profitability. We improved the risk return profile for our income guaranteed variable annuity products, and also redesigned our secondary guaranteed life product, which allows us to meet our ROE expectations on new business without a capital solution.

Our need for additional capital over the past 18 months has been mostly related to asset impairments and downgrades and some maturing debt. We expect some level of investment losses in 2010, but absent any new market disruption, we expect those losses will be significantly lower than in 2009, benefiting from a well-diversified portfolio spread across a broad spectrum of issuers and asset types. In summary, we are on a strong financial footing.

I expect a slow economic recovery in 2010. And as we have seen lately, it is likely that the capital markets will remain volatile for some time. Given these expectations, we will continue to manage expenses carefully and maintain a conservative approach to overall capitalization.

We are balancing prudence, however, with targeted strategic investments to grow topline sales and further spur productivity, particularly in Defined Contribution and Group Protection with technology upgrades, and in new products for the voluntary market, and an expanded distribution focus for Group Protection. We are also increasing the visibility of our brand in the market, for example, by returning to network TV with the CBS Sports Desk.

With respect to CPP, as I discussed at our annual investor conference in November, we expect to repay the funds in the second half of 2010 or first half of 2011, as market conditions dictate, again, without diluting earnings per share. Importantly, we have not to date seen any evidence that our participation in the program has adversely impacted our businesses in any meaningful way.

As we move into 2010, everyone at Lincoln is focused on capitalizing on the tailwinds provided by today's landscape, including consumer demographics, the need for Americans to rebuild their portfolios, and the expected higher tax environment, and on executing our plans to grow our revenues and earnings.

Now let me turn the call over to Fred to discuss our fourth-quarter and full-year results in more detail.

We reported income from operations of $297 million or $0.90 per share for the fourth quarter. Our release points out notable earnings items impacting the business segments, but a few of the more meaningful items worth noting include the following. CPP preferred stock dividends and related accretion of the discount totaled $18 million in the quarter. This cost to our shareholders does not run through income from operations, but does impact the calculation of earnings per share.

We completed our review of the individual disability income business taken back from Swiss Re earlier this year. The review resulted in a charge to operating earnings of about $33 million in the quarter. The loss was somewhat offset by the combination of favorable unlocking in our Annuity segment of $12 million, and a favorable state income tax liability release of $13 million taken through other operations.

We experienced a strong recovery in all of our alternative investment portfolio, contributing about $22 million to earnings. While returns can be volatile at times, we would expect normalized returns in the 5% to 10% range pretax on this $700 million portfolio as we move through 2010.

We recorded net income of $102 million or $0.27 per share, impacted by net realized investment losses and an impairment taken on our media holdings. Continued weakness in our radio broadcasting properties resulted in impairments to goodwill and intangibles totaling $109 million in the quarter.

Net losses on invested assets were $91 million after-tax. Gross realized losses and impairments on general account invested assets were $212 million pretax. Concentrations include RMBS totaling $52 million, impairment taken on the Royal Bank of Scotland and LLoyds hybrid securities totaling $60 million, and commercial real estate equity of $49 million. While elevated from recent quarters, we view the banking impairment as isolated, and took a prudent approach to marking down the value of our real estate equity exposures.

As we focus on our overall mortgage lending business, core metrics remain strong with only 8 delinquencies on a very granular portfolio of 1,300 loans, this equating to a delinquency rate of roughly 0.5%. As a matter of practice we have not been active in restructuring loans, which artificially lowers delinquency rates.

Finally, our variable annuity hedge program performance had very little net impact on the quarter's results. Our strategic position on interest rate coverage as we prepared for the adoption of VACARVM contributed to positive results in the period. This offset by refinements to our existing hybrid approach to estimating the liabilities on our income and lifetime benefits to a mix of FAS 133 and traditional SOP insurance reserving, which increased GAAP reserves. Our VA hedge program finished the quarter with assets comfortably in excess of the actuarial liability.

Annuity results benefited from unlocking, which contributed about $12 million to the quarter's results. Our DAC model uses a corridor process in estimating account values. Having reset our assumptions when the S&P was at roughly 900, the market recovery in the quarter produced a significant cushion against the negative DAC unlocking under stressed markets.

Results in this segment also benefited from positive tax items contributing $7 million to earnings and favorable alternative investment results.

Annuity earnings continued to benefit from increased average account values and improved trends in DAC amortization. Average account values in our variable annuity business increased approximately $5 billion in the quarter, driving expense assessment revenue up 10% sequentially.

We ended the fourth quarter with total average annuity account values of $73 billion, an increase of roughly $16 billion over a year ago, and amazingly, only $3 billion short of our all-time highs reported in 2007.

Turning to our Defined Contribution business, ending average account values were up about $1.8 billion sequentially, driving a 5% increase in overall expense assessment revenue. We ended the fourth quarter with total DC account values of $35 billion, up $1 billion over the third quarter's ending values.

Net asset flows were negative in the quarter, but can be seasonal and lumpy when focused on a quarter. For the year we recorded positive flows of $1 billion, up roughly 27% over the previous year.

We experienced margin compression on the fixed portion of our DC business, weighed down in part by a few unusual items impacting yields. While under pressure we would expect some recovery heading into 2010.

The changing mix of business also impacts earnings, with lower ROA and higher long-term ROE business becoming more prevalent in our sales mix. These items, together with current and planned infrastructure and product investments, will hold back on earnings growth rates throughout 2010.

In our life insurance fundamentals remain stable. Average account values and in-force were up 2% and 1%, respectively, from the third quarter, returning to more normalized growth rates annualized in the mid-single-digit area. Our Life segment absorbs most of the results of our alternative investment portfolio, contributing about $7 million to the period's results.

A few comments on this segment with respect to 2010. It is important to factor into your forecast the impact of our $550 million term life financing, and the cost of the long-term letter of credit. The cost of the LOC, together with investment shifting from reserves to surplus, will result in lowering our quarterly Life segment earnings by about $7 million, $4 million of which will simply shift to other operations where we house our unallocated capital.

The transaction served to contribute roughly $400 million to our statutory capital position.

We are also working through converting our Life and Annuity evaluation systems to a single platform. As part of this process we review methodologies across various blocks of business. This is more important in our Life segment, given we run on two different systems dating back to the merger.

Not unlike our annual prospective unlocking exercise, this may result in one-time gains or losses, adjustments we would expect to have little impact on net earnings trends in this segment. We should complete this work in the first half of the year.

Turning to our Group business, another strong earnings performance with favorable loss ratios coming in at roughly 69%. We experienced strong loss ratios in both our Life and long-term disability lines, with favorable mortality and solid overall fundamentals.

Net earned premium increased 5% sequentially, and up about 4% over last year's quarter. As we move into 2010, we would expect loss ratios at the low end of our range, closer to 70%, and a modest recovery in premium growth rates to the high single-digit area, recognizing we ended the year with strong production results.

Turning to capital, there were a number of moving parts as we closed out the year, including our year-end reserve financing, the NAIC's new approach to rating RMBS, impairments and statutory earnings. As Dennis highlighted, we estimate our year-end RBC ratio will approach 450%.

We successfully installed AG 43, or the new variable annuity reserving guidelines. The adoption resulted in very little impact to our life subsidiary capital ratios; however, we did make a capital contribution into our reinsurance captive of $250 million at year-end.

The contribution consisted of approximately $100 million in support of reserve credit taken by Lincoln Life, and an additional $150 million in support of the captives' future capital needs.

Overall we believe the capital position of our insurance subsidiaries is very strong. Our insurance subsidiaries are positioned to absorb stressed economic conditions, fund core insurance new business growth. We are afforded both flexibility and patience as we work on efficient life capital solutions, which include refinancing letters of credit over the next few years.

Turning then to the holding company capital and liquidity position, we currently have approximately $1.3 billion in short-term investments, after giving effect for the closing of Delaware Investments, a $300 million debt offering during the quarter, and the $250 million capital contribution to our reinsurance captive. We ended the year with roughly $100 million of commercial paper outstanding.

Looking forward we have a debt maturity in March of $250 million pre-funded by the debt offering in the fourth quarter, and set to be paid off with cash on hand. All told, we would expect to settle into roughly $1 billion in holding company capital liquidity as we proceed through the first quarter.

Before closing, a few additional comments on expense trends as we enter 2010. When looking at our enterprisewide expenses we accomplished our savings goals for the year with only modest spring back to support better than expected strength in our core business model. We were as much playing good defense as offense, meaning we have seen some expenses naturally elevate during a year of financial market stress.

The sale of the UK and Delaware results in a level of unabsorbed overhead. While we have worked to reduce the strain, we expected an EPS impact of roughly $0.05 for the year.

Dennis highlighted various investments back into our business model. We expect these investments to impact earnings per share by roughly $0.10 for the year. We fully expect returns on these investments in the form of increased production, improved marketshare, and efficiencies in time.

So in closing, we end the year on a solid financial footing, having taken significant actions in the face of economic and market challenges, and are now turning our attention to earnings growth and building risk-adjusted returns. We have seen most of our core earnings drivers return back to normal patterns, not fully recovered, but healthy when considering the significance of last year's events.

We have important capital strategies yet to execute on. Namely our approach to exiting CPP and structuring cost effective life insurance capital solutions. Now let me turn it back to Dennis for closing comments.

In conclusion, Lincoln today is a stronger Company, a tougher competitor and a smarter organization. We have the financial strength to support our growth. Our model is intact and stronger than ever. We are market leaders in products and services that consumers want and need, especially today. We are making targeted investments in critical growth businesses. And as our solid progress in the fourth quarter demonstrates, given decent external factors, we have the ability to continue to deliver strong results in 2010 and beyond.

Now let me turn the call over to the operator for questions.

(Operator Instructions). Andrew Kligerman, UBS.

Just regarding your capital position, so a 450% RBC ratio, and yet you downstreamed some money to the insurance [post] in the quarter. Is there a chance that you can upstream any capital? And if so, how much?

Then also with regard to capital, the media companies, where you took a write-down this quarter of $109 million, how much goodwill remains associated with those operations, and what is the likelihood of a sale of that business?

It is Fred. In terms of the 450% RBC, to give some boundaries around that, that is rough justice around $6.7 billion to $6.8 billion of capital above $1.5 billion of RBC, and that is how you get to that number, just to provide that information.

In terms of the upstreaming of capital, we are just now settling into this RBC, having a number of moving parts at year-end, and assessing overall capital conditions as we speak. A couple of things I would point out, and that is while we do have a significant capital margin, roughly $1.5 billion above a 350% RBC, for example, we do think it is important to maintain a level of margin related to turbulence or economic conditions in the marketplace, if they were to become choppy again.

It is also important to maintain a level of excess capital to support the business growth that we have been experiencing across the Company, and that we expect to continue. And then obviously we want to be cautious about our ability to execute on, and our ability to be patient in putting in place longer-term solutions for capital solutions on our life insurance.

All of those reasons suggest to me, and suggest to us as a company, that we need to retain a level of excess capital down in the Life company as a precautionary measure. Now as these things start to unfold and become more surefooted, this can truly turn into a level of excess capital that could be better utilized for greater returns and investment back into our business. But at the moment we are going to be cautious as we move through the early part of this year.

On the media, a couple of dynamics with the media. As you recall, we had contributed the media asset down into the Life company back a few quarters ago. The impairment itself resulted in about a 6 or so point impact to RBC, and is fully reflected in the 450% estimate.

In looking at that business we have a carrying value of roughly $180 million. And I believe that is split in general between goodwill and intangibles, rough justice. But both intangibles and goodwill will tend to be reviewed for markdown when you're looking at the value of those properties. And so the write-down we took this quarter, for example, was a mix of write-down on both goodwill as well as the intangible aspect of the business.

That marketplace has gone through substantial turmoil. Literally a handful of the largest players in the industry have -- in one case, a player has actually announced bankruptcy. A couple of the players are in the midst of having to renegotiate bank covenants, having been overlevered and seeing a tremendous falloff in cash flow.

So you really have an upside down industry right now among most of the players, and that is weighing down on valuations. And for us, it suggests being patient and continuing to monitor and manage the properties. These are good properties that perform well in their given markets. We like how they are positioned, but we think it is an awfully difficult time to be considering monetizing those investments, and instead we intend to continue to support them for the time being.

Then just any chance you could give a little color on the DC market with the net outflows of $62 million? I know you mentioned that there can be some lumpiness in those numbers, but what is going on there? Is the economy really hurting it? What are you looking at into '10? Could that negative flow continue?

It is Dennis. Was that the DC business?

The DC business, yes.

Well again, the deposits in the fourth quarter were up 5% sequentially from the third quarter, so we did see some improvement.

But down 7% year-over-year though.

Yes, I understand that. But showing some improvement. The small case market was up 20% over the prior year. The larger case market, as I've seen in some of our competitors' releases, is showing more of the impact from the economy. There is not much movement around. Employment is being reduced. So I think it was a tough year just because of external factors as well as internal factors.

Now having said that, we do need to make significant investment in this business this year, and probably next year, to bring our capabilities up to the scale that will make us more competitive than we are right now.

Last year, just because of all the stress that was going on in the economy, of course at Lincoln, we stopped that investment. So I would say that we are a little bit behind where we had hoped to be at this time because of slower investment.

I think particularly the 403(b) market is a strong market. We have a very good position in it. We have very good products. And with continued thoughtful and rifled investment, we will begin to show some more progress in the DC business.

Randy Binner, FBR Capital Markets.

Just a quick question. So there is $1 billion of holding company liquidity net of all the moving pieces here. Is there any update on the amount that you would be required to hold? I think $400 million to $450 million was a number that was referenced earlier. I am not sure if there is any change in the thought on that.

This is Fred. No change in that. As a matter of policy, really liquidity policy internally to Lincoln going forward, we would expect to hold, rough justice, a year to 18 months' worth of liquidity at the holding company, just as emergency cash on hand.

It is one of the things we experienced through the depths of the crisis is that you can have the credit markets seize up on you for a period time. And if that were to be the case, we don't want to be caught in a situation where we are either forced into the market to raise capital in an expensive way, or run into any questions surrounding liquidity or availability of liquidity. So really as a matter of policy we would expect to retain upwards of $300 million to $500 million of liquidity at all times at the holding company.

So $300 million to $500 million, and I guess that would -- would that indemnify you if the commercial paper market seized again?

Yes, that comfortably -- keeping in mind that, that together with internal lines that are available and untapped, you're able to comfortably make your way through any maturities of commercial paper.

Was there any statutory impact from the media goodwill impairment this quarter?

Yes, about 6 points. We had -- contributing the media company down to the Life company when we take the impairment, it had about 6 points of impact on RBC.

Just one other kind of housekeeping one. I guess there has been some talk about investments in the Defined Contribution segment. Just from a modeling perspective, how should we comp that? I guess there were expenses last year, but maybe they got put on hold. You had mentioned kind of $0.10 of expense investments, if I heard that right. How should we think about that on a comp basis to last year so we are sure we are capturing that correctly?

Rough justice, the way to think about it is of the investments we're making across the Company -- and what Dennis had mentioned is investments in DC, investments in our group business, some of the branding work we are doing. And there is an assortment of other enterprise initiatives. But rough justice, I would characterize the investment in the DC business as being about one-third of what we plans to invest in as a company. That may be a decent way of thinking about rolling it forward.

So $0.10 for the whole Company, one-third at DC. And that is incrementally up -- but incrementally up from a level you ran at in '09?

Right.

Okay, thank you very much.

Jimmy Bhullar, JPMorgan.

I had a question on -- first on the variable annuity DAC, I think you took a charge when the market was around 900. You had a modest release in the fourth quarter. But just wanted to get an idea on where the market would have to go for you to take a negative unlocking.

Then second -- then secondly, just on your group insurance sales, they seem pretty strong. Other companies have reported weakness, partly because the macro environment. But if you could just discuss what is causing that, and whether you have taken any pricing actions that are helping your group sales?

It is Fred. On the DAC corridor, obviously we have built up a level of cushion, having reset the prospective assumption when the S&P was at 900. It would take rough justice about a 15% or better move in the market for us to be contemplating a positive unlocking off fourth-quarter levels.

Then it would take a pretty severe drop in the markets for us to unlock negatively, upwards of 30%, 35% drop in the market from year-end levels to be contemplating a negative unlocking.

So that is what I mean when I suggest that we have created some cushion. For example, if today we were to unlock, unravel the corridor and unlock to the mean, we would be looking at a positive DAC unlocking of roughly $200 million to $250 million pretax. That gives you a little bit of an idea of the kind of cushion we have built up.

You do see some retrospective DAC unlocking coming through and helping earnings out. That is nothing more than the underlying account values performing better than the DAC model assumption upon reset. And so the combination of a rising market driving account values, positive underlying fund performance, and slightly better than expected lapse rates are all driving account values up relative to our model, and resulting in some level of retrospective unlocking. That is what you saw come through the quarter.

On the Group Protection, a couple of comments. First, the fourth quarter is always larger by far than the other fourth -- excuse me, the other quarters during the year. So that explains in part the fourth-quarter uptick.

Second point, and substantive to the increasing results at the Company -- sales results, is that we are in the second full year of change to the distribution model. So the model is beginning to settle in. And the sales rep development and tenure is paying off. Average rep productivity increased 10% versus 2008 to up to the highest productivity ever of about $3 million per rep.

We have done our annual pricing review in mid 2009. Just like every other year, some prices increased, some prices decreases, but we are certain that pricing is not driving the results.

Furthermore, continued refinement in the service model, underwriting and implementation is paying dividends with improved broker and customer experience.

I guess, in short, the model is working. We continue to focus on the 50 to 500 market. We've got increased penetration in the voluntary market, and we have some what I would refer to as opportunistic sales in the 1,000 employee market, where it sets fits our model, both from a service, the simplicity of product and distribution. Yes, we are doing very well.

Bob Glasspiegel, Langen McAlenney.

One LFD and one disability question. What is your headcount in LFD, and how is that trending, and what is the outlook for 2010 producers?

The current headcount, or at least the headcount at the end of 2009 -- now this removes the investment people, but the total wholesaler headcount is 498. Dennis Glass, managers is 52, and that adds up to 550. That compares to year-end actual '08 of about 760, down 210.

In terms of trending, as I mentioned, we are going to continue to focus on productivity. We are going to add, particularly where we get shelf space that we don't now have that needs to be serviced. We are adding wholesalers in our MoneyGuard product, because we are having such tremendous success in that product.

So there will be additions. We will continue to focus on productivity. And the additions will be focused on the addition of shelf space and/or where there is a product that is really outperforming.

Thank you, Dennis. My follow-up is on LFD. My follow-up is on disability, the business that you got back from Swiss Re. Can you remind me the mechanics of that business, whether it is a closed block or an operating company? If it is operating, are we going to move it back into an operating unit or is it going to stay in your corporate other line?

No, these represent essentially reinsured blocks that are effectively closed blocks, and are effectively in runoff. They are not a business unit. They don't represent a business that we are taking back. And they will be running through our corporate and other segment of the business as a result.

It is all told about $1 billion or so of reserves on three different blocks of DI business that are quite old. And we believe now, after having reviewed the numbers, we have set up certainly adequate reserves to support that business rolling forward.

There is really a de minimis impact the go forward earnings of the Company, and so not really an impact item there. But these there, yes, runoff blocks that we simply have to administer and sort through what we want to do it them in time.

What age roughly is the in-force average age?

I don't know that I can answer that. We would have to maybe get back to you with some more (multiple speakers) on that.

Mark Finkelstein, Macquarie.

Fred, you kind of alluded to A Triple-X solution. You got the Triple-X $400 million kind of capital relief done this quarter, or last quarter. Can you just talk about the status of A Triple-X solutions, kind of what you're seeing in terms of availability? Is it not available now, at what prices? And then -- or do you see the solution being more regulatory-based as opposed to financing- based?

The transaction we did at year-end, the $550 million LOC for $400 million of relief was related to term life block. The degree to which we continue to sell term life, which has been growing, and building any reserves on that front, we feel comfortable that we can find attractively, or at least reasonably attractively, priced long-term solutions.

On the universal life side it is arguably more difficult to structure transactions because of the dynamics of that product. Our approach to it is really the following and that is, we would expect to use a combination of long-term solutions, structured solutions, which they are out there, but they are more complex to execute on. And that is why we want to be patient when pulling the trigger on them.

A combination of that, letters of credit, shorter term in nature or intermediate-term letters of credit, but downsized from our current usage. And then just capital on a temporary basis, so the degree to which we have to absorb and take the after-tax impact of capital related to the runoff of any letters of credit, we will do that within our RBC, just to be patient.

It is a timing issue. We do believe these are markets that will offer up opportunities for term solutions. We also think the bank market is notorious for running hot and cold on letters of credit over the years. So what we are most pleased with in terms of our capital position is that we can be patient, and work to execute a long-term solution that makes sense for the returns in the business. That is what we will attempt to do.

On the regulatory front there continues to be dialogue, as you know, on this topic, but the progress is slow. And we continue to try to push it forward. We think that is very necessary for the industry and good for the industry. But the progress is slow, and I don't think we could build our plans around that kind of a solution, albeit, we continue to work hard on it.

If I might just add something. I think everybody understands the fact that we have redesigned our secondary guaranteed product. That what we have is what we've got in terms of the need to release some of these reserves as LOCs mature. And as Fred has been pointing out, this really is a longer-term issue, and it is mitigated quite substantially even under the most difficult environment by the fact that we have a 450% RBC as we sit here today.

So it is not a growing problem. It is one that we could handle with smaller market availability, if that were to happen. Then I want to make the important point as well that we are the number one player in the universal life insurance. We have been for many years. And that gives us an advantage over others, because we just have such a large number of policies, such varied number of different type of underwriting sales. So if anyone is going to be able to do this, Lincoln is going to be able to do this. And again, I think over time, as Fred said, the banks will be back in this market.

But I would just summarize by saying the size of our block, the skill of our finance team, the different avenues that we have at this point to handle the situation, it is something that we are resolving. But again to use Fred's terms, we have enough capital to be patient as we work through these things.

I guess my follow-up is just, Fred, I think you mentioned you put capital in the captive. How much did you put into the captive? And can you give an overview of the capitalization of the captive at year-end?

We put $250 million into the captive at year-end. About $100 million of that was more specifically the result of adopting VACARVM or AG 43 and needing to increase the reserve credit, if you will, that Lincoln National Life Insurance Company needs from the captive. So that was just to marry up assets with the reserve credit.

The additional $150 million was there to bolster capitalization of the captive, recognizing the business that runs through it, and the need to hold higher capital levels to absorb market volatility, etc. I don't have at my fingertips the balance sheet, if you will, of the Barbados subsidiary, other than to say we think the injunction of capital went a long way to building out its balance sheet to absorb some of these movements going forward.

What we are going to have to do, as we watch our overall insurance capitalization, is balance the level of capital margin we have in our core life insurance subsidiaries with what the captives need to support these reinsurance credits that we take.

We also need to be mindful of the fact that these captives need to some degree stand on their own relative to their capitalization. So part of what we did when we injected the capital into Barbados was not simply a VACARVM issue, but also to start moving in the direction of capitalizing these captives at higher ratings levels or the equivalent of higher ratings levels.

Colin Devine, Citi.

A couple of questions. Fred, you mentioned you had to increased, or you elected to the increase reserves on the VA block, and that was related to some assumption changes. Could you clarify how much you had to increase the reserves, and specifically what assumption changes you made?

And then also with respect to the RBC level, is part of the reason why you're maintaining such a abnormally high number right now is that also captures that the rating agencies are looking at LOCs differently right now, that they are factoring it into their models, and that they are putting in a charge for that sort of thing, which we may not be seeing under the NAIC?

Sure. First, on the reserve issue, I think what you are referring to is what we took through the hedge program in a negative related to a refinement of our estimate of 133 versus SOP reserve. What we are doing there, and this is somewhat commonly done in the industry, is when you are offering a variable annuity that has a mortality element to it, such as an income benefit or a lifetime withdrawal benefit, you have to, and are really required, to take a level of insurance reserving and not just a pure FAS 133 derivative.

When you take that insurance component of the reserving, that is done under an SOP approach. In our particular case, it ended up actually increasing the reserves backing these guarantees. The reason being that on a pure derivatives basis interest rate movements and equity market recovery had driven down the derivative nature of the liability pretty significantly, while the SOP or insurance liability is more specifically addressed -- more specifically sensitive to equity markets and not interest rates. So as interest rates rise, you don't have quite the dynamic of driving down your reserve need, as you would in a derivative structure. So that is that result.

So it is a blended or so-called hybrid approach, 133 SOP, and served to increase the reserve in the period, offsetting what otherwise would have been a gain in the actual hedge program itself.

On the RBC, you're absolutely correct, there is a growing level of discussion and work being done at the rating agencies on how best to treat shorter-term securitization or life solutions in the overall capital structure of insurance companies. Most notably, the agencies have been looking at for a while now the notion of shorter-term letters of credit, or long-term solutions that are reaching closer to maturity, and factoring in, or feathering in, some element of that to your overall leverage.

So when we look at the total Company capitalization, the combination of RBC and holding company leverage, we have to factor in the notion of, to the degree we can't find long-term solutions, we have to be delevering the Company to absorb this.

Now obviously we continue to look for long-term solutions. And most of the rating agencies have pointed to the longer-term solutions, out beyond five years, for example, as retaining their capital credit and not being necessarily infused into your leverage. So, yes, it does play into our overall view.

Now with that, when you -- when we think about the profitability of the big secondary guarantee you all blocked that Lincoln has, and as Dennis pointed out, I guess in the industry, what sort of long-term return are you going to make off the in-force?

I appreciate you changed the pricing and adjusted it for the go forward business, but it is the in-force, how much capital does that tie up, and how much is it going to weigh you down?

If you think about -- here is kind of a way to think about it. If you exclude goodwill, we reported an ROE in the Life insurance of around 9.6%, shy of 10%, on an unlevered basis. If you normalize for normal limited partnership income that runs through there, you would kick that up closer to 11%. The reserve financing equation, that is the ability to finance reserves, has in and around a couple of hundred basis point or so benefit to returns -- upwards of 200 to 300 basis point benefits to returns.

So the degree to which you're unable to do any, versus able to do all of it, has a relatively big swing factor in the returns. The actual cost of the securitization is less an impact on the returns. For example, the recent transaction we did on the term life insurance over the course of the entire block of the business would have as much as maybe a 50 basis point or so negative impact on returns.

So finding these long-term solutions is important to supporting the returns of the in-force block. As Dennis mentioned, we have restructured the product and done some level of repricing to alleviate that need on the go forward basis. But we have to continue to address the returns on the in-force. As a result, we will keep looking for these long-term solutions, but what we want to be is patient. We don't want to have a gun to our head to have to put them in place if pricing is not cooperating, or if market dynamics don't dictate. So we are hopeful that being patient we can securitize a lot of this product and do it at rates that defend the returns in the business.

You're thinking over the next two years then, before those LOCs mature?

Yes, in fact, we have been working on it really ever since putting the LOCs in place. It was really never our intention to rely solely on letters of credit. They are available; they are obviously economic, but that is not really the way in which you would normally manage these reserves. We had to take a timeout during the crisis, obviously, because the markets were shut down. But it has always been our intention to term it out. And that is what we will do over the next few years. To the degree that we have to absorb some level of letter of credit runoff, we have got the capital to absorb that.

I would just add that, although it blends in over time, that these repriced secondary guaranteed products with reasonably conservative assumptions are -- the new business is projected to get 12% to 15% unlevered returns. So adding to working hard to get the capital teed up at the right level and at the lowest cost in the business to improve the in-force, we will be adding new business at much higher ROEs.

Dennis, does the timing of this than impact your potential -- or potentially impact your ability to repay the TARP? Do we really have to get this thing fixed -- that is the last question -- or addressed before you can really button down the TARP repayment?

Of course, a lot depends on what is going on in the markets. As I said, we expect to repay TARP at the end of 2010, the beginning of 2011. I guess you might think of it in two buckets. One is the capital that we have at the holding company, and we have substantial excess capital there as well as available to prepay CPP. And then you can think about the insurance subsidiaries, with this high level of RBC, is probably the dominant bucket, if you will, to worry about these other things. So in short, I think the CPP can be handled in our timeframe, given where we are today.

Thank you. Very helpful.

One other thing I would add, because it is a worthwhile -- it all has to be factored into itself, but one other thing I would add is that the CPP is treated as 100% leveraged by the rating agencies, because the notion is that it will be repaid. So despite its preferred stock nature it serves to pump up your leverage.

So repayment of CPP, whether with cash on hand or other forms of financing, will naturally be a delevering event. And you want that delevering event to take place as you then go out to tap the credit markets for long-term solutions on life insurance. So there are some sequencing issues that really work in your favor as a company. You want to do favorable credit spread actions as a company, when you're looking to then go out and find these solutions on the life side.

Tom Gallagher, Credit Suisse.

I just wanted to follow up on the A Triple-X question. Not to beat a dead horse here, but I think there has been a lot of attention on the $1.5 billion of LOC refinancings that lie ahead of us. But I guess what surprised me was when you announced the Triple-X deal that there was a source of capital relief, not capital pressure.

So I guess my question is, are there other pockets of the in-force Triple-X or A Triple-X that you currently don't have a solution for that are creating similar strain? And if so, might we hear about more Triple-X or A Triple-X deals ahead, which are not to alleviate pressure, but rather to lift RBC?

I think -- that is a good question. A couple of things. One is, we really always had a level of additional reserves held on our balance sheet related to term life NUL. In other words, we have always been absorbing some level of Triple-X and A Triple-X onto our actual balance sheet. So at year end you simply saw us take a block of that business that was otherwise held to capital weighing down on our RBC, and finding a better financing solution for it out in the marketplace.

As a matter of routine you should know, each year, year in and year out, there is an actual build in some of these reserves. And we carry that build through our statutory income, and we remain profitable in our Life insurance despite carrying those levels of excess reserves.

So by nature the answer to your question is, yes, there will always be a level of reserves that could be subject to financing solutions. But it would probably be the case that we are not going to simply securitize or find solutions for every last dollar.

It is always going to be the case that we retain a level of this in our balance sheet, in our RBC, and we would expect to do that going forward. I think most of our activities, particularly because of the new product we launched that starts to stop the issue going forward, most of our activities would be addressing in-force and addressing more refinancing activities related to our current use of letters of credit.

So, Fred, all else equal, that is probably the last big in-force deal, and then what we need to focus on would be the LOC refinancings on the $1.5 billion or so?

That would be what we are focused on. Over time, as we continue to sell term life and other business, there will be opportunity likely to bring more of, particularly the term life out into the marketplace, but that will take some time. So our focus now is going to be on the refinancing of existing solutions to really term them out into longer-term structures.

Than just one follow-up. The re-rating benefit, PIMCO, and did you also get a CMBS re-rating benefit from Realpoint? And if so, could you quantify each one of those?

No CMBS impact in the quarter. But we did have the RMBS impact. It had about a 20 point positive impact to our RBC (multiple speakers) with the NAIC process.

Got it, thanks.

Eric Berg, Barclays Capital.

Fred, you have talked -- you and Dennis have talked repeatedly in this call about plans to find permanent solutions, term out some of the shorter term solutions that you have had for Triple-X and A Triple-X. But after all securitization in general was at the center of the financial crisis, and my sense of things tell me -- whether it is your sense -- is that the securitization market in general is basically dead. There may be some securitizations, but it is a very, very small market.

I am not aware of any, if there have been, I am not aware of them, major securitizations of life insurance reserves. Why are you hopeful that this market will come back? Do you perceive it, for example, as being materially different from say the traditional securitization markets of car loans and auto loans? Or isn't there a risk that investors will just use securitization as one sort of nasty thing that they don't want to ever hear about again?

I think first, it is absolutely important to be planning your capital structure to not rely on any piece of the capital markets necessarily being there and being attractive at a moment in time. So most importantly, while we do have confidence that we can structure solutions in time, we need to ready our capital structure to be patient, because it takes time to structure these. They are not always available, just as you have noted. So that is A number one, is we are not relying upon having to have a solution to manage at a competitive and strong risk-based capital for our ratings.

Having said that, these markets, the engineers that surrounds these markets are quite creative and quite active. As you can imagine, we are in a level of dialogue, and have been for quite some time, looking at a number of structures, many of which have pros and cons that you have to weigh before you would look to execute.

One of the things that we wanted to be very careful about and set ourselves up for is not having to have a rush into a marketplace that is disruptive and costly. and that is what we mean by being patient.

Letter of credit markets are notorious for falling out of bed and then coming back. Reserve securitization structures can fall out of favor and back in favor. And so you're right to say it is more complicated. You're right to say that the financial crisis has hurt the securitization market. But we do think the dynamics around this are such that we can find some longer-term solutions in time. And if we can't, we need to retain the excess capital to absorb any temporary shortfall. (multiple speakers).

The strong message that we are sending is, given the capital conditions in the Life company, we add no pressure from an RBC strength, even if we don't do the LOCs. So from my perspective this is -- and Colin was driving at it -- this is all about how do we maximize the ROE on the book of business. I think that is the key issue, not the -- not this impending LOC issue.

My second relates to sort of a follow-up to an earlier discussion on CPP. I certainly heard -- your message is coming through loudly and clearly, Dennis, that you're going to do this when it is appropriate. But do you really have -- do you have excess cash at the holding company, given your desire to have more liquidity than in the past?

And similarly, given that you have said -- you have acknowledged that the rating agencies are going to sort of haircut your capital at the insurance company for LOCs, do you really have excess capital that in theory could be a source of funding to repay CPP from the Life companies? Do you really have money right now to repay the CPPs is really the question?

The question as to how we are going to repay CPP is -- has to take into consideration the different sources. I don't want to get into, because we don't know exactly what mix of cash/debt and some small -- possibly some smaller amount of equity in terms of the reduction of the whole amount. But as Fred said, we do have a policy now -- not a requirement so much as a policy -- of keeping about $300 million to $500 million at the holding company.

So if we've got $1 billion, because we have already netted out to $250 million we need next year, we really only need $300 million to $500 million at the holding company. So in theory at the low end of that we would have $700 million of cash available to repay CPP, at the high end $500 million. So, but yes, there is capital. And let me see say it differently, there is significant cash available to pay a portion of the CPP, as we sit here today.

Operator, we have time for one more question.

John Nadel, Sterne Agee.

Under the wire. Just a couple of quick follow-ups. Fred, did you mention what 2009 statutory earnings were?

No, I did not. Pretax earnings, the statutory earnings, I think ran around $900 million, give or take.

The operating earnings, Fred, ran about a little over $1 billion on an after-tax basis. And of course we had to realize losses that went against that, giving us net income in the $200 million range.

So do you follow that?

No, I just missed it. So pretax or after-tax, I'm not sure?

Operating earnings after-tax about $1 billion. Then you have realized losses and impairments that brought the net income down to about $200 million.

Got it. How we think about 2010 relative to 2009?

A couple of comments I would make on those results. Those are very strong stat earnings results for our Company on a normalized basis -- relative to a normalized basis. Meaning, it would typically be the case that you would generate statutory income of rough justice 70% -- between 60% and 70% of your GAAP earnings, year in and year out. That is assuming you have a growing business platform, which we do.

So what you saw come through this year was adjustments related to the market increase and CARVM adjustments running through, some favorable tax items that were running through the year. So we were afforded a particularly strong stat earning. Now don't lose sight of the fact that we also got damaged on the stat income side as we rolled through 2008.

I was just going to mention that is probably just a lot of recovery. Yes.

Right, some of it is recovery. But just be careful about running forward with a normalized stat income assumption that we experienced here in 2009. We would expect it to normalize down a bit.

Then you made a comment early on, Fred, I think I missed it, just on -- and I think you made a comment on your outlook for alternatives yield in 2010. I just missed it.

Our outlook would be that the portfolio would start the process of recovering, and would generate between 5% and 10% returns pretax. That is a $700 million portfolio.

And 5% to 10% for the year. Okay. Then the last quick one then. So putting that together, I think you mentioned, what was it, $0.05 of pressure relative to the securitization, $0.10 from investment spending. Was there any other sort of incremental items, one way or the other, just to summarize them?

The $0.05 was related to unabsorbed overhead from the sale of Delaware. (multiple speakers).

That's it. Sorry I missed that.

Then the $0.10 is on strategic investments. The only item we noted was the impact of the securitization, or the LOC -- really I use the term securitization, but really these are financings that we are doing on the Life side. And the structure of that financing, together with the movement of reserves, and that is the assets out of reserves and into unallocated capital, brings down the Life segment earnings by about $7 million a quarter.

But don't lose sight of the fact that that is going to be picked up -- about $4 million of that will be picked up in other operations, where we hold unallocated capital.

And those are both after-tax numbers?

That's right.

Terrific. Thank you very much.

That does conclude our question-and-answer session. I would like to turn the call back over to Mr. Sjoreen, for any additional or closing remarks.

We want to thank all of you for participating this morning. And if you do have any follow-up questions, 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. So again, thank you for participating, and have a good day.

Once again, that does conclude today's call. Thank you for your participation.