Lincoln National Corp (LNC) 2010 Q1 法說會逐字稿

Good morning, and thank you for joining Lincoln Financial Group's first-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. At this time, I would now like to turn the conference over to Vice President of Investor Relations, Mr. Jim Sjoreen. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Lincoln Financial's first-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 ops, 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, 10-K, filed with the SEC. We appreciate your participation today and invite you to visit Lincoln's website, www.LincolnFinancial.com, where you can find our press release and statistical supplement, which includes a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity to their most comparable GAAP measures. 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.

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

The early part of the year mostly showed signs of an improving economy, more robust capital markets and a growing sense of stability. Our view is that advisers' and consumers' attitudes are improving, but both remain cautious as evidenced by significant amounts of cash still on the sidelines. Lincoln's first-quarter operating results were very good in view of these conditions.

Consistent with recent quarters, our fundamentals were strong. We had good production in all businesses, and high and sustainable levels of sales in several products. We reported positive net flows in our life, annuities, and Defined Contribution businesses. And our already strong capital position was strengthened further with improved general account conditions, recovering net income, and strong overall statutory earnings, leading to higher levels of risk-based capital.

More specifically, we generated total gross deposits of $4.7 billion and positive net flows of $1.3 billion, benefiting from our top 10 or better market position in all of our core product lines and our strategy of maintaining consistent presence in the market with a full suite of competitive products and continued strong distribution support.

Net flows in our life, annuities, and DC businesses capped nine straight quarters of positive net flows in these businesses with a single quarter exception in Defined Contribution.

Looking at annuities, we expect solid demand for annuities to continue, given good consumer interest in guaranteed sources of income.

Providers who are committed to the opportunity, stay in the market over cycles, are disciplined with product features and risk management, and have multiple distribution channels like Lincoln will be the winners. Lincoln capitalized on this approach in the quarter, generating 18% sales growth in our variable products with average account values of 40% over the prior-year period.

Fixed annuities are sensitive to interest rates, and in the wake of lower rates, our fixed annuity deposits were down over the first quarter of last year.

Looking forward, our distribution strategy of having wholesalers carry both fixed and variable annuity products allows us to pivot between our annuities solutions with market conditions and consumer demand.

In Defined Contribution, we've continued to hold a strong market position in the 403(b) business, and particularly in healthcare and K-12 education plans. First-year sales in the mid-large 403(b) market are inherently lumpy, driven by the timing of on boarding new plants. So while first-quarter deposits were weak when compared to the year-ago quarter, which benefited from a few large cases, the second quarter is developing nicely in terms of new cases and deposits.

We are also seeing some improvement in terms of ongoing contributions from larger plans as the recovering economy begins to spur employers to increase salaries and reinstate matches.

Our strategy to build on strategic partner relationships to introduce DC Solutions to intermediaries with small-business clients is gaining traction, with an increase of 68% in first-year sales over last year.

Our core individual life insurance business continues to perform well, with earnings drivers in the 5% growth range. We reported a 68% sales increase for MoneyGuard, where we are the clear product category leader and saw continued high demand for term life, which generated an 81% sales increase. We expect strong growth rates to continue in these products.

Our core universal life business continued to reflect higher numbers of policies sold, up 37% over last year at this time, but extending the trend of lower average base amounts. As consumer wealth rebuilds, I expect case size to increase.

In Group Protection, momentum from high fourth-quarter sales continued into the first quarter with annualized sales of 16% over the year-ago period. Year-over-year net earned premium growth was 6%, which I expect to climb to the high single digits over the course of the year as sales increase.

We are growing our reputation as a voluntary benefits provider and continue to invest in distribution, worksite enrollment, administrative capabilities, and product development to enable us to capitalize on the growth prospects offered in this market. We saw strong market share gains in this business over the course of 2009, and based on [Limber] data, are now the sixth-largest provider of voluntary group benefits in the country. 41% of the sales this quarter came from our voluntary business, up 38% over last year.

We are continuing our product development efforts across business lines to enhance sales, increase profitability and lower risk. Our core, variable annuity and secondary guarantee universal life products were good illustrations of these efforts last year. This year, we intend to further refine our product portfolios to ensure we keep pace with evolving consumer needs and to help spur sales growth. We are introducing long-term care annuity hybrids, group accident insurance, and a new life product designed to meet term-like needs through a universal life design.

Distribution remains a competitive advantage for Lincoln, and our ability to tailor our distribution models to the evolving needs of our partners and clients will be a catalyst for market share gains across Lincoln Financial distributors, Lincoln Financial network, and our worksite sales and service organizations.

LFD remains one of the largest wholesale distribution organizations in the industry, and our ability to leverage our competitive advantage in wholesale distribution helped us to add or expand relationships with seven firms this quarter.

One measure of wholesaling effectiveness is the number of advisers who sell at least one Lincoln product in the period. In the first quarter, that number is up 20% over a year ago. We view this as an indicator of our ability to influence advisors across products and channels. Also, a 23% increase in wholesaler productivity is another sign of how well we are capitalizing on the strength and reach of LFD.

Lincoln Financial Network continues to leverage its model to attract seasoned advisors who value affiliation choice, adding more than 150 new net advisors in the first quarter to approximately 7,850 total with favorable retention rates of top advisors across the network. LFN reliably outpaces the industry in overall life insurance sales, making it both a valuable distribution channel for proprietary life products as well as an important source of information about trends in the life marketplace. We continue to build our worksite sales and service platforms primarily found in our Group Protection and Defined Contribution businesses, which will expand our opportunities in these critical growth businesses.

From an earnings perspective, I am pleased with the performance and positive momentum in core drivers, such as account values, in-force space amounts, and net earned premiums levels. And we continue to hold the line on expenses despite expanding numbers of distribution partners, clients and accounts. We are mindful, however, that ROEs need to improve, and we are focusing efforts across all ROE drivers to support this goal.

Turning to financial strength, capital levels are stronger at the end of the first quarter with an estimated risk-based capital ratio above 475% and more than $1 billion in cash at the holding company. We continue to see a more positive trend in investment losses and gains as the markets recover. In fact, moving to a net unrealized gain position of $1.2 billion at the end of the quarter. And we believe our investment portfolio is well-balanced across issuers and asset types and well-positioned for a slow economic recovery.

With regard to our participation in the capital purchase program, we are increasingly comfortable with the recent improvements in the outlook for the economy, the strength of the capital markets, our strong operating performance and capital adequacy. Assuming no disruption to this generally favorable pattern, we are likely to accelerate our repayment timeframe.

As I look at the quarter and outlook for Lincoln, I am pleased with the underlying strength, positive momentum, and capital generating capacity of our core businesses. The investments we're making in talent, technology, brand and risk management are all important components of our goal to be a top quartile performer, and I believe the Life Insurance industry is stronger and Lincoln in particular is well positioned to deliver long-term value to clients and shareholders.

Now let me turn the call over to Fred for additional detail on the quarter.

Thank you, Dennis. We reported income from operations of $276 million or $0.83 per share for the first quarter. I would characterize the quarter as on par with our expectations when normalizing for unusual items and higher than expected mortality, impacting both our group life and individual life earnings.

Combined mortality across our group and individual life businesses impacted earnings by $18 million. We expect mortality in both businesses to recover in future periods.

Setting aside mortality, we recorded a positive DAC adjustment of $21 million in our annuity segment, reflecting a refinement to our estimates. This positive annuity earnings item was partially offset by various balance sheet adjustments in our life segment and our other operations that combined to impact earnings in the quarter by about $10 million.

Net income of $283 million or $0.85 per share recovered considerably from recent quarters, as net investment losses were modest and were offset by final gains recorded on the sale of Lincoln UK and the closing of Delaware Investments.

Our variable annuity hedge performance came in as expected with very little impact to earnings.

We reported a net realized loss on invested assets of $28 million after tax, down significantly from what we had been experiencing throughout 2009. Gross realized losses and impairments on general account invested assets were $108 million pretax, also much improved over 2009, where we averaged over $200 million a quarter.

Gross losses were offset by $50 million in gains as we took advantage of recovering credit markets to reduce our holdings in riskier assets, some of which had been previously impaired.

RMBS represented about half the impairments in the period. As housing stabilizes, we would expect these losses to moderate.

We took about $21 million in write-downs in our direct commercial real estate portfolio, including real estate equity. Our overall mortgage lending portfolio remains solid with only 13 loans either delinquent or in foreclosure, representing about 1% of the $7 billion portfolio and adequately reserved for.

Given the ratings actions in Greece, Portugal and Spain, let me pause here to address our exposure. We have very little sovereign debt exposure to the five primary countries under question, Portugal, Ireland, Italy, Greece, and Spain. Less than $3 million of exposure in total. We have zero banking exposure to Greece and Portugal and only $36 million of exposure to banks domiciled in the five countries in question. We will be expanding our 10-Q disclosures on this topic but feel comfortable with our sovereign debt exposure.

Aside from the positive DAC adjustment in the period, annuity earnings continue to benefit from increased average account values and positive trends in asset-based revenue.

Average account values increased approximately $2 billion in the quarter, driving expense assessment revenue up 6% sequentially with stable fixed margins. We ended the first quarter with total average annuity account values of $75 billion, an increase of roughly $19 billion over the year-ago values.

Our DAC model uses a corridor approach to estimating account values for the purposes of amortizing DAC. We reset our corridor in the fourth quarter of 2008. Growth in account values since that time have inched us closer to a positive unlocking. We estimate an unlocking to the midpoint of the corridor will result in a $200 million to $250 million positive earnings impact. As of the quarter end, we estimate markets would have to appreciate approximately 20% before contemplating an adjustment.

Turning to our Defined Contribution business, a steady quarter overall with key earnings drivers of flows, markets and spreads cooperating in the period. We ended the first quarter with total DC account values nearing $37 billion, an increase of $8 billion over year-ago values.

Average account values were up $1 billion sequentially. Revenues from asset-based fees followed growth in account values with expense assessment revenue up 2% sequentially and over 27% year over year.

In individual life, elevated mortality and various true-ups served to mask otherwise stable sequential growth rates in both in-force and account values, rates consistent with our earnings growth rate outlook in the 5% range. It's not uncommon to have higher levels of mortality in the first quarter, but in this case, we had a large single death claim that was not fully covered by reinsurance. This claim alone accounted for roughly half the adverse mortality impact in the quarter.

When looking at the trends in our life results, it's important to take into account two meaningful transactions completed in 2009, the reinsurance transaction in the first quarter and the year-end life reserve financing, the latter of which reduced life earnings by about $6 million in the current quarter.

We suggest adjusting this quarter's reported life earnings for about $14 million of unfavorable mortality and true-ups when modeling our forward earnings.

In Group Protection, the loss ratio came in at 75%, considerably higher than what we have experienced in the last several quarters and outside our expected range. The increase was primarily due to high mortality in our group life blocks. Disability loss ratios remained solid in the quarter with dental loss ratios running a bit higher than our plan levels.

We have reviewed conditions in our group life block for any notable concentrations, including new business, and believe this quarter to be an aberration. We expect overall nonmedical loss ratios, while volatile at times, to fall back towards the low 70% range on average in future periods. The elevated loss ratios impacted group earnings in the period by about $10 million.

Net earned premium increased 3% sequentially and up about 6% over last year's quarter. As Dennis noted earlier, premium growth rates benefited from consecutive periods of strong sales growth. We expect continued progress in year-over-year premium growth rates, up towards the high single-digit area by the close of 2010.

Turning to capital, our insurance subsidiaries remain in a strong position with an RBC ratio estimate in excess of 475%. Statutory results came in as expected with normalized statutory income running at about 60% of GAAP earnings. And our risk-based capital requirement has come down as markets recover and credit quality improves. We have total adjusted capital of about $7 billion and risk-based capital improving from approximately $1.5 billion recorded at year end.

We will pull dividends out of the Life company throughout the year, likely managing our RBC closer to the 450% range while maintaining a strong excess liquidity position at the holding company. Our holding company liquidity position at the end of the quarter stood at roughly $1 billion. During the quarter, we paid off senior debt of $250 million with cash on hand, having pre-funded with an offering late in 2009.

Overall, a strong capital position when contemplating future stress testing with the agencies and regulators and giving us flexibility when addressing life reserve financing solutions.

While net income recovered sharply, book value was up only modestly in the period, the result of adopting a new accounting guidance which changes how we account for our $600 million in credit linked note investments. The effect of the new accounting is to consolidate the underlying collateral on our balance sheet, and in the process, marking to market the securities through equity. All told, this reduced our book value by about $169 million in the period.

This adoption does not represent an impairment of the securities. Going forward, any change in market valuation of our credit linked notes will run through net income.

Enterprise-wide, operating expenses were essentially flat with last year while revenues improved with positive net flows and recovery in the markets. As noted last quarter, we expect investments back into our business to impact earnings per share by roughly $0.10 for the year. These investments will build slowly and impacted first-quarter EPS by only $0.01. It is possible strategic expenses will come in a little better than our full-year estimate.

Overall, we are pleased with the health of our core earnings drivers in the quarter. Positive flows and strong account value growth; a steady build in Life Insurance in force with a more diversified mix of business; we defended spreads overall despite new money rates; and net earned premium growth rates are building in our group businesses.

We would have expected stronger reported earnings but recognize mortality will fluctuate from quarter to quarter. Our capital position has only improved since year end. We think the turnaround in our general account to an unrealized gain position and reduced realized losses and impairments bode well for future capital conditions.

Now let me turn it back to Dennis for some closing comments.

Thank you, Fred. Before we move to your questions, I would like to take a moment to reflect on the landscape post-crisis.

We have a clear strategy and one I am confident in to grow our four core businesses and accelerate growth in Group Protection and Defined Contribution. At the same time, our competitors are re-examining assumptions for long-term growth and profitability and in many cases, rethinking business models in key lines of business. This is a time that I think demands a very strong focus on longer-term strategy and proactively seeking emerging opportunities, which is a key factor in the decision to create a new senior management committee role dedicated to exploring strategic opportunities and actions that can take Lincoln to the next level and also to ask Fred to take on that challenge once a successor CFO is identified.

With that, let me turn the call over to the operator for questions.

(Operator Instructions). Suneet Kamath, Sanford Bernstein.

Thanks and good morning. I guess a couple quick ones. First for Fred, when you talked about your sovereign exposure, was that a consolidated view of Lincoln, meaning did that look into the credit linked notes as well as whatever direct exposure you have?

Yes, it's a consolidated view of our exposure. We really don't have any sovereign debt for specific bank debt exposures within these countries within our credit linked note structure. So it is a consolidated view of our exposure.

Great. And then I guess for Dennis on the acceleration or potential acceleration of the TARP repayment; I think in the past, you've said that you would likely not use any of your excess RBC to repay TARP, but you'd rather leave it in the life sub to deal with some other issues. Is that still your view? And has your view of the mix of capital that you might raise to repay TARP changed at all?

What I was focusing on was that with respect to the subsidiaries, was that I thought they had enough capital-generating capacity to handle their own capital requirements. As Fred mentioned, that still is the case, and we will be pushing some dividends up to the holding company. So, that's that.

With respect to the mix, I don't know exactly what the mix is going to be. But from a philosophical standpoint, what I want to be certain we do is to get a balance sheet that is properly structured in terms of its capital components. And I'm confident that we can achieve that result and at the same time, get a repayment structure in place that won't be dilutive to shareholders.

Got it. And then just the last one up for Fred, any progress on dealing with the LOCs that are maturing in early 2012?

We continue to look at long-term solutions. What I would say is that market conditions have really improved quite significantly over the year, but even in recent periods. It's all -- it's really what you're seeing in the various general account credit markets conditions across the industry. Spreads have come in. There's a lot of money on the sidelines looking for opportunity for yield. And all of that has resulted in better conditions, both in the bank debt markets and bank credit markets when it comes to extending letters of credit and pricing, and also when looking at longer-term funded solutions for LOC replacement.

So right now what we're really doing is it's less a matter of capacity and more a matter of dialing in the most efficient structures we can. We're going to have a bias over time for putting in place long-term solutions, bringing down our regular exposure to letters of credit. And so with our excess capital position and improving market conditions, we feel pretty comfortable with where we're at right now. We just need to dial in the right strategy. So we continue to work on that.

Okay, thanks.

Andrew Kligerman, UBS Securities.

Good morning. A quick question for Fred on the RBC ratio of 475%; I think that's up -- or you said excess of 475%. Last quarter, it was 450%, and you stated an excess capital base of about $1.5 billion. Would this imply that you've added about $350 million, $400 million to that? Where is the excess capital level?

Yes, essentially what's happened is your total adjusted capital has gone up in the neighborhood of $300 million. And your risk-based capital on the denominator has come down about $40 million or $50 million or so from year end, and that's really what's driving the strong risk-based capital dynamics.

Right now, Andrew, if the overall question is really where do you think you're at from an excess capital perspective, I'll give you my vantage point on it.

First, recognize that I think the industry is being asked to hold relatively higher levels on average of risk-based capital. So when I was quoting you excess capital last quarter, I was using sort of the conventional standard of 350% risk-based capital. I think it's safe to assume that the industry is going to run a little higher than that now, probably approaching more like 400% for a period of time.

But even when using that as a high watermark on risk-based capital, we still, between insurance company and excess liquidity at the holding company, are comfortably in about $1.5 billion excess capital range. And that's after holding a level of idle capital at the holding company for liquidity needs and carrying ourselves at a higher standard of risk-based capital around 400%. So that's the way I would size it up right now. And the only adjustment in that really, Andrew, is just recognizing that as we talk with the rating agencies and we watch the environment, it appears to us that for at least a period of time, the industry is being asked to run at little higher RBC levels.

And then just shifting over to the other question, the Defined Contribution business really had a pretty light net flow of I think $109 million. And I appreciate that sales can be lumpy. I had always thought the seasonally, DC was the biggest in 1Q by a long shot. But it just doesn't appear to be -- the business -- the net flows in that business really seem to be weak, and that's been going on for quite a while.

Maybe elaborate -- and I was glad, too, to hear Dennis say that the second quarter showed a pickup. But maybe elaborate on what you are doing and maybe where you can get to in terms of flows maybe a year or two from now, net flows.

I think it would be hard to predict what the net flows are, Andrew, going forward because it's so dependent on the markets. As I said, we do think that because of the lumpiness in this mid to large market and sales that we actually made in the first quarter that will show up in the second quarter, that we will see some good deposit growth in the second quarter.

We are investing significantly in several areas to improve our results, our organic results. That includes, as an example, in our retirement consultant work site group, we are investing in that, upgrading to people, changing their focus from service to asset gathering. That will help. We will probably be -- because of added shelf space -- we will probably be expanding our support inside of Lincoln Financial distributors by adding wholesalers to increase opportunity with our advisors there. So we are making investments there.

I think we have been fairly clear that we had administrative investments that need to be made in order for us to be in the game all the time, or when we're in a competitive situation. And we think we will have that resolved in the next 12 months. So, we are doing that as well. So I would say that the momentum is strong. It's taking us a little bit longer than we had hoped. I think we had some missteps a couple of years back about where and how to do things. But I'm pretty confident that this business will begin to show some earnings growth perhaps better than what we've been seeing in 2011.

Thanks a lot.

Okay. Just to add to that, of course, although difficult to find, when I talk about focusing on what's happening in the industry, there may very well be properties coming available, hard to get probably; a lot of competition for them. But this is one of those areas where we can advance the ball with an acquisition if we can find it or we want to advance the ball with an acquisition if we can find it.

So to summarize, I'm confident that we are taking the right steps and that momentum will begin to build faster than it has over the last 12 months or so.

Thanks, Dennis.

Ed Spehar, Bank of America.

Thank you. Good morning. I had two questions. I guess first, Fred, on the annuity business, it seems that it was -- if you adjust for the DAC, it was a little bit less than I was estimating. But I guess what I'm trying to figure out is you have a lower return in-force business because of when the stuff was put on the books. You also have I think some near-term drag related to that business that will go away, I think you've talked about at some point here in the next couple of years. And then you have the new business that is coming on, which I would assume the ROA on that stuff could be as much as -- I don't know, 40% higher than where we are today, just to pick a number.

First of all, do you disagree with what I'm saying? And secondly, can you just help us understand how much of the drag that we see today could go away 12, 24 months from now? Assuming the market just goes up 8% a year?

Yes, I think in general, Ed, your dialogue is reasonable. But let me just give you my perspective.

First, we are seeing the revenue drivers that you would expect to build when building account values happen. We're seeing it happen and come through our numbers. But, what is holding back or being a little bit of a headwind on earnings growth rates relative to market growth rates is the fact that we are really amortizing DAC at a larger level than we have historically. It's really the K factor, using the technical term, the factor used to amortize your DAC. And that's really simply a result of expected gross profits having been impacted throughout the crisis. And do you would expect it to be the case that you are amortizing more DAC.

Now, in the case you're right, in that that sort of environment will over time start to moderate if your markets remain stable and building.

We're also somewhat amortizing death benefits that were taken when the market was at its low point and we were paying out claims under our guaranteed minimum death benefits. The SOP benefit ratio practice of amortizing those claims or costs into your P&L will hang with you also for a while as a company, but eventually we would find that to moderate over time, certainly as a percentage of our revenue, should account values continue to build.

The other element is of course the DAC corridor. Recognize that when you unlock your DAC negative, you also impact that K factor, and you end up amortizing your DAC at a higher rate going forward, and that's in part what's risen the amortization rates.

The reverse is true as well. If you were to unlock positively, i.e. not use a corridor approach, you would impact positively or lower your K factor and help those amortization rates going forward. So to some degree we are sort of housing, if you will, potential future earnings growth rates in that corridor. And we still think it's the right thing to do.

We think the concept of having a more assured permanency to market moves before you unlock is a good thing. We think it's the right direction to go as a company. But for these periods of time when the market has responded very quickly and recovered, it's going to be a little bit of a hold-back to our earnings growth rates relative to what you would expect with account value growth.

Fred, can I ask you, is it possible to just help us here in terms of putting some numbers on? For example, the amortization of the death benefit costs, how much is that hurting you today? And is that something that goes away a year from now, two years? And similarly --

Yes, it stays with you for a while. I want to remember the pretax amortization rates to be in around the $25 million range pretax.

Per year?

No, that's in the quarter.

Just for death benefits?

That's right. Just the benefit ratio amortization approach to amortizing the death benefits that were paid out when the NAR, if you will, in death benefits was really at its low point and we were paying out claims.

And what happens is that stays relatively stable over time. But of course as your account values pick up and revenues pick up, it becomes a diminishing piece of the overall expense ratio on the business.

But how much was the total amount? You say, so basically it's amortizing what you've already paid out, correct?

That's right. That's effectively how that benefit ratio works.

What was the amount that you paid out?

You know, I don't at my fingertips have that over the -- because I think you're probably asking during the market crisis period of time what was that payout when these guarantees were in the money. And I don't have that at my fingertips. I don't --

Because I guess what I'm getting at, that would seem to be --

Let me ask -- [Jeff Kutz] with us, and he may have some ideas --

A couple things, Ed. If you look at the high watermark in any given quarter, we would have been paying out in excess of $60 million in the quarter at the high in terms of death benefits.

And the other thing to keep in mind is just we are more in the money even today than we were in 2007, and so you will have an elevated level of expected claims going forward as well, so it's not just the claims that we paid over the last year that we need to amortize. It's just -- that's part of it, but you also have an elevated level of future expected claims as compared to a couple years ago that will be a drag for sometime, depending on how markets go.

Yes, but I guess if this is -- $25 million a quarter is a big number, right? And $100 million a year, it would seem like that's something that we could put sort of a life on as to at least relate it to what's already happened. We know what's already happened in terms of what you paid, right? At least we can address that piece.

Yes, we would expect it to be at relatively consistent levels throughout the rest of this year, so if that helps at all. Otherwise we haven't given more formal projections on it. But we can certainly dig into that detail.

I'm sorry. Just one last question. Different topic. On this LOC issue, you know, I think when times were great, it might have cost people 25, 20, 40 basis points for this kind of reserve support. And then more recently you hear companies talk about 200 to 300 basis points. With everything that's happening with credit spreads and the markets becoming better, are we potentially in a position where, when a deal gets done, a long-term solution, we could all be very surprised in terms of what the actual cost is?

A pretty good -- you can actually somewhat see this publicly in the marketplace for Lincoln because our long-term -- cost on long-term solutions, funded solutions, are more or less going to be around our spreads on our bonds that trade out in the public market. They may fluctuate a little bit off of that depending on the structure, but they're not going to be too far off CDS type spreads or bond dollar-based spreads on our bonds.

When it comes to the bank market pricing, it has come in from, certainly, the last several quarters. But it is not back at the levels that the marketplace was experiencing pre-crisis, where there was just a tremendous amount of supply or capacity and very low pricing.

I would say if a company like Lincoln was paying 25 to 35 basis points on letters of credit coming into the crisis, the pricing these days is probably between 100 and 150 basis points, probably more on the upper end of that range. But again, market conditions continue to change pretty quickly, and that's in part why we're being patient.

So certainly it's come in from those 300 basis point levels for sure; I would say at least at the 200 basis point level for a long-term solution. But you can actually see the pricing by just tracking spreads in the marketplace for the life industry.

Okay, thank you.

Jimmy Bhullar, JPMorgan.

Hi, thank you. Dennis, I just wanted to get into the change with Fred's position and the creation of a new role. You mentioned you're seeking strategic opportunities. It seems like your interested in making acquisitions. I'm not sure if you are looking at selling some businesses also. But are there really -- and it seems like from your comments you are more interested in group benefits, maybe Defined Contribution. But have you identified any deals out there that seem likely? Because in the group benefits business, it just seems like there are more buyers than sellers out there. And also, are you looking to sell certain businesses?

And then secondly, I had a question on variable annuity sales. This quarter I think sequentially your sales were down about 10%. Industry sales seem like they will be up around 1%. So not sure what's going on. Seems like you've lost share; you had been gaining share the last few quarters.

On the first question, we are quite happy with the portfolio of products and businesses that we have right now. So we're not planning on selling anything.

What I said was, and I firmly believe, is that there are going to be opportunities in the market as other companies spin off properties that aren't core to them, and that we can't wait until we get a book. We have to be proactive out in the marketplace looking for these opportunities.

I've done this once before at a point in time where I thought it was most important to have somebody with Fred's qualifications to simply focus on these opportunities. If you have something that you want to get done, the best way to do it is to put somebody who's really talented in charge of it. And no matter how difficult the markets might be, will be in a better position to be successful I think with this change. So that's the answer to that question.

With respect to variable annuity sales, every quarter can be affected by different competitive actions. Last year, a couple of our competitors were closing out products that had high features, which gave them a temporary lift in their sales. So each quarter I think stands on its own and you have to look at the entire competitive environment to see if we are plus or minus in the quarter.

I would also say that, importantly at Lincoln, where we have relied more heavily on the wire houses and the banks, that the wire houses and the banks for all of last year were still trying to find their people equilibrium if you will with all of the integration and purchases that were going on. We are beginning to see some uptick in sales from the wires. So, we remain pretty confident that we will continue to hold share, hopefully improve share over the course of the year.

But, in the first quarter, the results are what they are. I'm not disappointed at all in the results. And I expect them to continue to improve.

And just on your rationale for seeking opportunities, is that partly to get away from being as exposed to the variable annuity market, or is there something else?

I've been pretty public in saying I think -- I've said it already in my notes today -- I think the way we go at the variable annuity market, it's a good business, it's a profitable business. Even though the profitability has come down, my recollection is that we are still achieving ROE's in the 15% range or better on the current level of earnings. You don't see that too much in the insurance business, those kinds of returns. Again, the demand, there's no question in my mind that the demand for these income guarantee products are going to continue. So I'm quite optimistic about the growth rate in that business.

At the same time, I don't want, for a variety of reasons, I don't want the individual annuity business to overwhelm the rest of the businesses in terms of its contributions to earnings. Right now it's about 30% and frankly I'd like to keep it in that range. And I say that because a lot of the earnings are generated inside the VA contract from the equity markets.

I would rather be able to drive earnings in good equity times, in good equity markets and bad equity markets. And so I think diversifying into businesses where it's not so dependent, or where so much of the earnings growth is driven by market reaction, is a good idea.

So just to summarize, I like the annuity business. We're going to continue to invest in it. We're not holding back at all. But it requires us to look for faster growth inorganically as well as organically in our other businesses so that we're not getting too reliant for growth just on that one business. Okay?

Okay, thanks.

Randy Binner, FBR Capital Markets.

Thanks. Just wanted to follow up on some RBC commentary from Fred. You said that the industry might have to run more like 400% for a period of time. Just wondering how long that might be, and to clarify that it's the rating agencies that are asking that. If that's the case, what is their main criteria for asking for that higher level of RBC?

You know, it is predominantly in my view, driven somewhat by rating agency expectations. It's certainly not a regulatory expectation to run that high. That's obviously many multiples above what would be necessary there.

I think -- I would tell you, Randy, that I'm not so certain that CFOs in the industry don't feel as if it's a period of time to be running at higher RBCs anyway. I would tell you that's generally where my head is.

And for the simple fact that we are all patiently watching things unfold in the economy. We've learned here this past week with announcements out of Europe that things can still be choppy from time to time. And so I don't know that we are altogether misaligned at all with rating agency views.

I think once markets truly stabilize and feel more and more comfortable, which clearly that's taking place, you may gradually find risk-based capital levels moderating at a lower level. I would also say that there's been adjustments in the approach to risk-based capital that have taken place throughout the crisis and continue to take place, whether it's variable annuity reserving issues; there are discussions going on around the amount of capital to carry against mortgages. There has been several different changes that have moderated over time. And I think once those all settle in, and once the rating agencies make their appropriate adjustments to their models, then we could see some improvement in risk-based capital levels, given that the reserving requirements and capital requirements overall have really risen for -- particularly on variable annuities.

So we just simply have to see it play out, Randy. It's difficult to predict. I think the rating agencies are going through a lot of change and adjustments in their thinking and we need to let that settle down as well.

Fair enough. And then just a quick follow-up there. You had mentioned that you maybe have more like a 450% goal. And I was wondering if that would hold even post a potential TARP retirement. And on the TARP retirement, if it would just be the principal or if it would include the warrants too.

Yes, the TARP retirement exercise really doesn't adjust my comments or thinking around where we would settle into on an RBC basis.

I think we have plans to send dividends up to the holding company that are in excess of our holding company cash needs. That's really done to just support further holding company financial flexibility for really alternative needs or opportunities, including the repayment of CPP. So my view on the Life Insurance capital front is that we've gotten ourselves into a good position both at the Lincoln National Life level as well as our captives, and that's what I mean when I say that we will hover around 450% is -- that's a comfortable level to be in and gives us plenty of room to maneuver through life reserve financing solutions as we go forward, which is good.

And just real quick on the warrants, would that potentially be part of the CPP retirement?

We're not commenting on specifics around that topic, so, I don't really have any clarification on what may be our direction on the warrants. So we're not really prepared at this time to comment on that with that level of specificity.

Okay, that's it. Thank you.

Thomas Gallagher, Credit Suisse.

Good morning. Fred, first question is just a quick follow-up on, when you had mentioned 200 basis point cost of long-term LOC solution right now, roughly. Is that a pretax or after-tax cost? And what in particular are you referring to? Is that a ten-year LOC? Is that a 20-year?

It would be -- really kind of a funded solution that would mirror our long-term debt spreads, predominately. So that could be a 10+ year type solution. And it would be pre-tax rate. That would be a yield we pay on a pre-tax basis.

So, I guess my only -- and this may be just more a comment than a question. If we're talking about after-tax costs of in the low 1% range, approximately, what are you waiting for? It seems like that's reasonably attractive relative to what the hit to capital would be. Is it a capacity issue? Like could you not do the full $1.5 million? I'm just curious like where you're headed at on that.

No, it's really patience has been paying off thus far. And so, we have all along said that we want to move forward on these solutions as markets dictate, and when we think we can lock in the most advantageous cost of capital for the Company in support of these businesses. Recognizing that the excess capital we're carrying right now affords us the luxury of timing things for when markets are at their most attractive point.

Now, I will grant this to you, Tom. We are certainly not naive. We understand that the markets are very attractive. And as you could expect, the energy level about looking for solutions and exploring our options has picked up considerably with the markets improving.

Understood. And then just a follow-up, can you comment on whether you think there's going to be any potential impact for Lincoln as it relates to the potential change in derivatives legislation? Whether that's cost on variable annuity hedges? Whether that's capacity for longer-dated options? Any -- and realizing it's -- you still don't know the full terms and details, but how do you see that affecting you in terms of (multiple speakers)?

Yes, Tom, we really don't have, at this point in time, haven't formulated a concise point of view on it. We're sort of watching it move through the system just as everybody else is. On one hand, there are suggestions of there being greater capital to carry behind derivatives presumably that cost passed on to the users of derivatives. On the other hand, the notion of moving into an exchange environment in transparency and pricing may bring about greater liquidity in transparency and pricing. It's really hard to judge what it may mean for our business other than we're watching it, certainly.

And importantly, these regulatory standards are not really being targeted at our industry. We're simply watching it unfold in the banking industry and then have to make an assessment on what it means for us. So right now we really just don't have concrete points of view on it. We're just watching it unfold.

Okay, thanks.

John Nadel, Sterne, Agee.

Hi, everybody. A couple quick ones. On TARP repayment, could you tell us have you received approval from the treasury to do that yet? Or did you even request approval yet?

John, we're not going to comment about the process at all. It's -- I don't think it's (multiple speakers)

Got to try. The comment on the $1 billion of cash at the holding company, is that the total cash there? I'm not sure if I missed something as it relates to some kind of cushion or dollar amount that you want to keep there? And maybe this $1 billion is over and above that. Could you just clarify that?

No, that's actually what we characterize as our net cash position. And the only thing it's net of is we've got about $100 million of commercial paper outstanding.

Got it. Okay.

And what we have talked about publicly, which I think is wise to do, and a good lesson learned through the crisis, is we're probably going to carry 12 to 18 months worth of holding company liquidity and cash flow needs as a contingency at the holding company level. That is about a $0.5 billion or so, depending on the year for Lincoln. And so that gives you a little bit of an idea of what we're holding over and above this policy of contingent liquidity at the holding company.

Okay. And then just the last one for me is just to -- I wanted to think a little bit about the mortality results this quarter. On the retail life side, sort of that tends to bump around and we already saw from RGA earlier in the week, another seasonally weak quarter.

As you -- but on the group side, I'm more interested there. If I look at your group life and your group dental benefit ratios this quarter, they were pretty elevated, especially on the life side. Is there anything there that as you guys evaluated the experience this quarter, that you say, maybe we're a little aggressive on the pace of our sales growth over the last couple of years? You guys clearly took market share. I just wonder if that is not coming back to you a little bit on the benefit ratio now?

John, just a couple comments I would make. First, on the individual life side, just to be clear, what we are spiking out for you on mortality is over and above what we would otherwise see normally from a seasonal perspective. So, that's something that's very important for us to note. But, if this was just a seasonal pattern that's naturally up, we wouldn't be isolating it for the purposes of understanding our run rate earnings. So this is (multiple speakers)

Got it. Okay.

So this is really adverse mortality over and above that.

On the group question, we did what you would expect any company to do when you see elevated mortality, either individual or group, and that is we dig into the issue. We look at the blocks of business; we scrub it for concentrations or abnormalities or anything that could cause us any concern with the behavior of the block, our pricing approach or structuring of the product. We did a very thorough job of that on the group side, and really came back with no major concentrations or issues that tell us that there's any weakness or challenges from an underwriting perspective or a pricing perspective in the marketplace. So we truly do believe it to be an aberration.

We would suggest that, yes, first-quarter results in the group side will typically be elevated. But again, this was over and above our expectations, and we would expect it to normalize down over time.

Okay. And just as a follow-up on the dental side, are you guys doing what we've heard from a bunch of other dental players in terms of it seems like there's an elevated level of incidents. It's remaining elevated. Are you doing a little bit more pricing actions there on renewals to try to combat that? Is that -- are you experiencing that as well?

The answer is yes, that we're experiencing some of that. We have been fairly diligent in addressing renewal rates on the dental side, and with fairly good success. So we continue to kind of work that. But the simple answer is, yes, we are experiencing what you have seen across the industry.

Okay. Thanks very much.

Bob Glasspiegel, Langen McAlenney.

Just following up on John's question, is it possible -- there's nothing you can do about it if this supposition is right, but some have speculated that mortality may be elevated in 2010 related to the estate tax changes. Is that -- maybe that's already in our expectations and isn't in the delta, but could that possibly be an explanation?

Bob, this is Dennis. We've always -- we've ask ourselves that question. And I think more likely the first quarter is a result across the industry on the individual side, and perhaps on the group side, is more likely if there's one factor, the factor is the cold winter, is probably the biggest issue. It was a pretty brutal winter. It may leak in that people tried to stay alive until 1 January.

But, again, just two things. One on the group side. As Fred said, and I have experienced over the 10 years that I've been watching this business, from time to time, you have a spike in mortality, which is just -- is the way things shake out in a quarter.

Now, when you do that again, as Fred said, you have to go back and make sure cohort by cohort, new business, old business, that there's nothing that is related to the sale of a particular cohort, whether it's new business or old business. And we've done that, and we can't identify anything that would be systemic in a block of business.

The other thing I would point out -- this is one of the few businesses where the earnings of the individual group rep, the 143 people that are out in the marketplace selling this stuff -- if there's bad claims in a block of business that they sold, they have to participate in that with lower economics, a give-back of some of their commissions. So, people are pretty good about paying attention to that.

On the individual side, again, we are carrying on on this a little bit more -- the individual side really turned out to be one large claim, which really wasn't across the board. It ended up being predominantly one large claim, which was a person who had a significant amount of insurance and we're not the only insurance company that will be suffering from that one large claim.

So again, we think -- I'm going into too much detail here -- but we think it's random in both the Life -- Individual and Group Protection. In Group sometimes, randomness can carry on for 60, 90 days or so. So we will be watching it.

The follow-up is -- it seems like your parsing out a niblet of information on TARP, that you have pushed the timeframe up somewhat into an ambiguous time point. I think the midpoint of the range was year end 2010. Is that right?

Yes.

So you now think it will be sooner than year end 2010? Is that what your words were meant to say?

I think if you listen to my comments, you can draw your own conclusions. We've always said that when the conditions with respect to our own capital strength, the conditions in the economy, the conditions in the capital markets have improved, that that would be an indicator of when we felt comfortable with proceeding on the idea of perhaps earlier repayment of CPP. And those conditions are in place. Now that may change in a week or it may not. So if the conditions are right, and we'll just have to move along at a pace and watch all of these things to, again, to make sure that we are comfortable with making a move like that.

By the way, I would also say, just back to this issue of letters of credit, that we apply the same philosophy. And I would say that the conditions in the marketplace are such that, as Fred said, that we would be wanting to do two things.

One, renew some portion of letter of credit to get that off the minds of the analysts. And then what Fred and I and the team are even more enthusiastic about is terming out significant portions of that letter of credit facility as quickly as we can. So, but that's all I would add to it.

Thank you.

Mark Finkelstein, Macquarie.

Good morning. Just one more quick question on mortality generally. I was kind of intrigued by the single large claim with less reinsurance comment. And given that you kind of had that time period of '05 to '07 where you did see more large face older-age type claims, and the comment on reinsurance, and again I have no idea what vintage that particular claim was from. But should we start to see more volatility generally in mortality results? Or was this really an anomaly that kind of was very unique in and of itself?

We think this particular case was very unique and not necessarily symbolic of the types of business we're underwriting or trends in the marketplace.

We have very diligent reinsurance and retention standards from an underwriting perspective, typically very low retention standards. Within our underwriting and new business development, we will take more retentions at a time when we think the risk-reward is good for the Company. But every once in a while, you will have a claim that spikes out in a particular quarter, and that's what happened this time.

But I would not characterize it as symbolic of the trends in the underlying business. Mortality underwriting is mortality underwriting. No matter what the circumstances, the age, the sales and so forth, we properly price and underwrite it as we always have.

Okay. And then just I guess one clarification on the LOCs. I know we're beating this one up. But you've kind of characterized a lot as the issue around cost and being patient. But I mean the other issue is always around structure and AXXX solutions were materially harder to get done than XXX solutions, which you did do.

If I'm hearing your comments correctly, the structural issues around this, have they all been worked out and it's really just a matter of cost? If you wanted to, could you get a deal done imminently inside of 300 basis points that essentially solved the issue?

AXXX in general is typically more difficult to structure around; it takes more time and energy. But, one way to address that is to retain more of that excess capital or excess reserve if you will in your capital structure to help with the structuring.

And so, we have done -- it's maybe a distant memory to all of you -- but we actually have done a $400 million long-term AXXX solution, funded solution. We did this in 2007. And these are the types of transactions that remain available, albeit you want to be, again, very wise about market pricing and when best to tap the market for it. So, that's really what we're looking at.

They are more difficult to structure. But, when credit and capital conditions improve, and there is money on the sidelines, and when your actuarial work suggests that the risk environment involved in it is low, we should be able to execute on these things.

Okay. Thank you.

This concludes our question-and-answer session for today. I would like to hand the conference over to Mr. Dennis Glass.

Thank you. Let me close by thanking you all again for participating on the call this morning. As I said earlier, I view the quarter as very sound; good progress on key earnings drivers; high end sustainable growth rates in several products; a good pipeline of potential sales moving into the next quarter; along with new product introductions late in the year; increasing distributions, scale and shelf space as well as productivity improvements; a strong capital position; and good asset diversity.

So as the external factors improve and advisors and consumer confidence and buying increases, we are well-positioned I think for a strong year. And of course all the discussion about the balance sheet is positive and I think in the right direction. And with that, thank you and have a good afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.