Lincoln National Corp (LNC) 2011 Q3 法說會逐字稿

Good afternoon, and thank you for joining Lincoln Financial Group's third-quarter 2011 earnings conference call. At this time all lines are in a listen-only mode. Later, we will announce the opportunity for questions and instructions will be given at that time.

(Operator Instructions)

At this time, I would like to turn the conference over to Senior Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Thank you, Tyrone. Good afternoon, and welcome to Lincoln Financial's third-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.

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

Thanks, Jim, and good afternoon to everyone. We produced another quarter of very strong operating results, with increases in operating income, operating revenues, deposits, and flows, with particularly good momentum in our group protection and defined contribution businesses. Highlights in the quarter include sales increases and positive net flows in nearly every business, resulting in $5.5 billion of deposits and $2 billion of net flows, a 6% increase in operating revenues and a 54% increase in income from operations. Also, we accelerated our capital management activities, which year-to-date includes $375 million worth of share repurchases.

On a net basis, our results this quarter were affected by abnormally volatile markets and other atypical items. Randy will go into these in more detail in a moment. Low interest rates and capital market volatility continued to drive headlines for this industry. As we've shared previously, although sustained low interest rates would impact the rate of earnings growth for Lincoln over time, we do not expect low rates to materially affect the balance sheet. Importantly, given low rates, we have taken and continue to take decisive action across the organization to protect aggregate margins.

For example, as discussed earlier this year, we entered into $1.3 billion of Treasury locks with an implied yield of 6.45%, and extended the duration of the life portfolio. We are actively repricing products, as needed, to reflect market conditions. We are making strategic investments to grow revenues and earnings. We are taking risk out of the organization and actively managing expenses. We intend to cover several of these topics in more detail at our upcoming investor meeting.

Now, turning to the highlights from our underlying businesses, sales in our Life business were up 4% driven by our comprehensive portfolio of products and multiple distribution channels strategy. We continued to advance our Life offerings in the quarter by improving the competitiveness of our indexed UL product to take advantage of the growing market for these products. Our strategy of maintaining a broad product portfolio and investing in unrivaled distribution has made Lincoln the number one or two life provider in our top distribution firms.

In our Annuity business, VA sales were up 7%, while fixed sales were off, given low interest rates. Our consistent approach to this business continues to resonate with advisors and consumers. And recent product enhancements -- such as the guaranteed lifetime withdrawal benefit on our fixed product and a new fee-based variable annuity for the registered investment adviser market -- are already gaining traction and should add results in coming quarters.

We had a healthy production quarter in Defined Contribution with a 15% increase in deposits, positive net flows for the quarter, and, now, positive net flows for the year. We continue to gain momentum in this business as our investments in distribution, technology, and marketing come online. Distribution expansion in both mid-large- and small-case segments has propelled sales and pipeline development for this business.

Our Group Protection business experienced significant momentum, including a 7% increase in non-medical net-earned premium and a 9% increase in sales. We were pleased to see loss ratios stay inside our target range as actions we've taken, including pricing changes on new and renewal business and claims management strategies, have led to better results. We launch a critical illness product this quarter to round out our voluntary offerings, and we continue to evolve the distribution force to align the organization for increased productivity and position Lincoln to be a leader in the voluntary benefits market.

We continue to successfully achieve our distribution goals by leveraging the combined strength and reach of our wholesale and retail distribution systems. At LFD, we boosted sales by 8% among our top 20 strategic distribution partners year-to-date, and we continue to see increases in the number of advisors recommending Lincoln products and in wholesaler productivity in most product lines. Wholesaler expansion efforts this year for MoneyGuard, small-case 401(k), and mid-large retirement plans are mostly complete. Lincoln Financial Network continues to execute on its growth strategy by retaining top-level financial planners and attracting experienced recruits. LFN has increased net active producers to more than 8,000, which helped LFN to meaningfully contribute to Lincoln's sales results in the quarter.

Our healthy capital and liquidity levels give us a surplus of strength that we are using to support our strong ratings and to cushion the Company from possible event-risk consequences, including the evolving situation in Europe. For the record, we have almost no direct exposure to European sovereign debt and limited exposure to European banks. Our high risk-based capital levels are, in part, the result of general account management actions to de-risk the investment portfolio by rotating into higher quality assets.

In terms of capital management, as I mentioned earlier, we have completed $375 million of share repurchases, and we are not done for the year. Overall, I am pleased with the underlying strength of the Company, the actions we are taking to navigate the environment, and our solid momentum in key earnings drivers. With that, I will now turn the call over to Randy for more details on earnings and the balance sheet. Randy?

Thank you, Dennis. Last night, we reported income from operations of $317 million, or $1 per share, for the third quarter. Earnings benefited from continued top-line growth, with operating revenues up 6%; disciplined expense management, with our expense ratio declining to 9.3%; and continued share repurchase, with $150 million during the quarter.

Return on equity was up nicely to [10.2%] while normalized earnings were in line with reported earnings. Book value per share, excluding AOCI, grew 10%, to $41.27 per share, and our overall capital position continued to strengthen with statutory capital expanding to $7.6 billion with a risk-based capital ratio of approximately 500%, after paying a $250 million dividend to the holding company. Cash at the holding company ended the quarter at $770 million.

Of note, our net unrealized gain, before DAC and tax, rose to $6.2 billion, with $3.2 billion attributable to the Life segment. I mention this because there tends to be a focus only on the liability side of the balance sheet when thinking about the impact of low rates. The unrealized gain is the other side of that equation and is evidence of the strong ALM discipline, which our businesses operate with.

We completed our annual review of assumptions in the quarter. In total, the impact of unlocking during the quarter was minimal. Looking at this by segment, Life results were negatively impacted by $8 million. The most significant item of note in the Life unlocking was a resetting of new money rates to current levels, which negatively impacted results by $26 million.

Annuity results were positively impacted by $8 million, including a $30 million benefit from a reduction in our ultimate lapse rate assumption. Some of the Annuity assumption changes also impacted net income, which I will touch on in a moment. DC and Group Protection experienced little impact from unlocking. Net income was impacted by a number of items during the quarter, which fell primarily into 2 categories -- investments and results in our annuity hedge program, both a reflection of extreme volatility in the quarter.

Net realized losses and impairments totaled $28 million, driven largely by non-agency RMBS as the volatility in the housing market persists. Additionally, in the investment portfolio, we had a $69 million negative impact from mark-to-market assets, primarily in our credit length note holdings where the underlying collateral experienced widening credit spreads. I view this as non-economic, in fact, we received an upgrade in the rating of 1 of our 2 credit length note holdings during the quarter and have seen some recovery in value during October. The hedge program results included a negative impact of $72 million, driven by the reduction in our ultimate lapse rate assumption.

We also experienced $83 million of breakage in the hedge program, primarily from 2 sources. Funds basis risk was roughly half of the impact. I would expect to get this back over time as has been our experience with this item. The balance of the breakage was due to extreme volatility in the capital markets.

The variable annuity hedge liability increased $2.5 billion during the quarter and the hedge program was very effective, covering well over 90% of the increase, which is above the assumption we assume when pricing. Offsetting these 2 items, the MPR adjustment was $92 million. In the staff supplement this quarter, you will find a revised page 6, which clearly details all of the above items. Finally, we recorded a $14 million negative impact from the finalization of taxes on the sale of Delaware, and a one-time impact from calling a debt security.

Turning to segment results and starting with annuities, earnings during the quarter came in at $162 million, or $132 million after normalizing for taxes and unlocking. Operating revenues were up 8% on an 11% increase in average account values over the prior year. Strong equity-market performance in October should offset the headwind created by the fact that quarter-end account balances were about $4 billion lower than the third-quarter average. In our Defined Contribution business, we had a very good quarter, with earnings coming in at $41 million. Variable revenues and account values increased year over year in line with the markets -- roughly 7% -- while spreads held relatively steady at just under 230 basis points, and the pre-tax margin in the quarter came in at 22%, comparable to last quarter.

Turning to our Life Insurance segment, I told you on last quarter's call that there would be some line-item noise in Life this quarter, and you can see that in our results, due both to the unlocking process and the continued conversion of our valuation platforms. At a high level, the benefits and DAC amortization lines are where the majority of the noise occurred with the impacts essentially offsetting each other. This line-item noise should largely be behind us. We can provide more detail offline.

Earnings drivers performed as expected with Life Insurance in force up 3% and account balances up 5% quarter over quarter. Normalized interest spreads remain strong, in the 190-basis-point range, and were in line with the year-ago quarter. Life earnings of $132 million were essentially flat with the prior year, after giving effect for the notable items in both quarters.

Growth in the Life segment has been masked by the fact that we have completed a couple of reserve financing transactions over the last year. These transactions have freed up capital that we have allocated to other areas, including share repurchase. Mortality did increase in the quarter, attributable to a handful of large claims. Looking at the full year, our experience continues to be better than priced for mortality.

Turning to group protection, we had an excellent quarter with all key metrics showing strong results. Non-medical net-earned premium grew 7%, sales were up 9%, and the non-medical loss ratio for the quarter came in at 71.8%, continuing the trend of improvement this year. Strong growth metrics combined with actions that we've taken over the course of 2011 to build up claims management and increase prices produced earnings of $28 million, very much improved from a weak 2010 quarter.

Turning to expenses, expense management was strong during the quarter with expense ratios declining on both a sequential and a quarter-over-quarter basis, even as we continued to invest in key growth initiatives primarily in the Defined Contribution and Group Protection areas.

Let me spend a few minutes addressing the issue of low interest rates and share with you the information we've provided to the market. In early September, we provided a forward-looking perspective on how a sustained 2% 10-year Treasury rate would affect both the income statement and the balance sheet. We said earnings would decrease by $50 million in 2012, with an incremental $50 million per year in 2013 and 2014.

We also said that the balance sheet, both statutory and GAAP, would not be affected over the next 5 years, outside of assumption changes. Based upon what I know about the dynamics of the business, I don't expect any meaningful changes and will provide more color at our investor conference.

Before moving to Q&A, a couple more items. The expected impact of regulation 09-G is detailed in the press release. By and large, the impacts appear consistent with estimates that I've seen in many of your reports.

Turning to capital management, as noted earlier, during the quarter we continued our capital redeployment activities. The strength of our balance sheet and holding company free cash flow contributed to our ability to accelerate share repurchase activity in 2011.

Current plans are to use holding company cash to pay off a $250 million debt maturity in the fourth quarter; and, as is our practice, we will be reviewing our shareholder dividend with the Board during the fourth quarter. I look forward to discussing capital management further with you at the investor conference. With that, let me turn the call over to the operator for questions.

Thank you, ladies and gentlemen. (Operator Instructions) Suneet Kamath, Sanford Bernstein.

In your prepared remarks, Dennis, you mentioned that in terms of share repurchases you aren't done for this year. Can you give us what you're thinking in terms of fourth quarter order of magnitude?

We're trying to avoid specific guidance; I won't give you a specific number. I would say though that the guidance around annual free cash flow continues to be important to us, but we might back off of that this year a little bit if we continue to feel good about our conditions.

Okay, then maybe as a follow-up, if you can just maybe, Randy, walk me through what happened with the RBC ratio this quarter because last quarter you said you estimated around 500%. I think you're saying the same thing this quarter; but you took a dividend out. And then obviously the equity markets were down, so if you can maybe help me reconcile how you stayed flat with those other effects, that would be terrific.

During the quarter, as I mentioned, we took out the $250 million dividend. Offsetting that, we did do a reserve financing transaction during the quarter, which picked up a couple hundred million dollars of capital. That explains the movement in the total capital during the quarter.

On the RBC side, we continue to see improvement in the general account, which continues to push down the overall C1 factor. Despite the fact that the general account and the whole Company continue to grow, you continue to see a less than normal growth in the denominator factor, which allowed the overall RBC rate to stay in that 500% range.

Got it, and just a quick clarification. Does that RBC reflect or include any of the captive subsidiaries that you have; and if not, what would be the impact if we threw those in there?

Yes, it does include the majority of the captives that we have rolled up into the overall results.

Ed Spehar, Bank of America-Merrill Lynch.

Thank you. Randy, following up on some of the statutory questions, I think you've talked about stat earnings in the $600 million-range. Surplus note interest I think is another $100 million. When you look at reserve financings, how should we think about this as a potential source of additional capital generation looking forward? And then I have one follow-up.

Historically, we've been able to do about $200 million in reserve financings a year, which really has represented the growth in both the term XXX and the UL AXXX reserves. This year, we actually have done a couple of transactions, so we've seen a little more capital generation this year from the reserve financing line. I would anticipate as we move forward that a couple hundred million dollars a year is a reasonable estimate given growth in term and UL across the organization.

When we think about statutory capital generation then, it's a number that's in addition to this $700 million by the reserve financings, correct?

Correct.

And one last question in terms of the overall strain from new business, can you give us a sense of what your view is of the statutory earnings power of just your existing book excluding the strain that you're having from the new business writings?

I don't want to get into the details of splitting up the in-force of new business, I don't have those numbers at hand. I would say in general if you look at overall required capital, that the required capital in a normal year inside the life company would grow roughly $250 million to $300 million. So of those statutory earnings you referenced earlier I normally expect about $250 million to $300 million to be used up by growth in required capital.

Jay Gelb, Barclays Capital.

Can you give us an update on the potential for how the goodwill testing is coming along in 4Q?

Obviously we're in the middle of the analysis, so I don't have the answer on where we're going to end up. I'd like to focus really on what the primary driver of goodwill is, and that's sales. The most important thing that we can do to drive long-term value in this organization is sell products that earn appropriate turns.

That's what we have been doing. Dennis referenced a number of the pricing changes that we've made. And that's what we're going to continue to do in the face of the economic environment that exists today. While the answer on goodwill is going to come out of the analysis, let me be clear that we are going to make the changes we need to make to earn appropriate returns on any new business that we sell.

To what extent would the stock trading below stated book have a meaningful influence on that outcome?

It's an item at the end that you need to take into account. I still think the most important item driving goodwill is sales, and it's referenced by earlier comments.

And then on a separate issue there was some concern raised in the press about reserving for universal life. Can you give us your perspective on that?

Let me start by saying that I have absolutely full confidence that our reserves are more than adequate and that we comply with this particular regulation. I'd further note, many of you probably haven't seen it, but our main regulator at the State of Indiana, came out with a statement this morning that essentially confirms what I've just said.

With respect to where we are in this process at the NAIC that is, this is not the first time we've gone through this process on AG38. We went through it in 2005, and I believe we'll have the same result and that is that we'll come up with a solution that is satisfactory to all the parties. We have a lot of smart people inside the NAIC that are practical and want to do the right thing, and we just need to work through this issue.

When do you think we'll get resolution on that?

It's unclear.

And just one last follow-up on that. What's the actual process that comes into play? It's important that your primary regulator supports the reserving process, but what needs to happen for the rest of the NAIC to support that as well?

What's occurred so far is simply you have a group of state actuaries looking at the issue. They've come to some conclusions that aren't, in fact, entirely clear. Then it moves up through a committee process at the NAIC. Exactly how this will move through the committee process at NAIC is not clear at this moment.

Okay, so hopefully we can get an update on that at the Investor Day.

Jimmy Bhullar of JPMorgan.

I had a question on just if you could give us an update on your DC business. You reported decent flows this quarter. Have you seen any disruption as you move to the new technology platform and is that starting to abate? And then secondly, can you talk about incidents and recovery rates in the disability business? Your margins have stabilized the past couple quarters, but the losses were elevated in 2010. If you could talk about the pricing environment in the business as well and any type of price actions that you're taking.

With respect to the DC business, the good news is that we're actually putting our first large case on this new system in the third quarter and that is going well. We expect it to be executed very well. As we said in past quarters, some of the advisors that put us in the penalty box until they saw that we were executing on this new administrative platform.

So I guess to the extent that we have moved now into implementation of specific customers onto the platform hopefully that will take us out of the penalty box with those 1 or 2 consultants that had put us in the penalty box. So I would say that it's going very well and it should continue to improve optically in the marketplace with consultants, and it will continue to be a good result for the customers as they get on to that platform. The consumer or the employees themselves will have much better service, much better access, and we're really quite excited about it.

On the group side, we're still seeing the incidence level a little bit elevated from the historical level, even though it continues to move towards that level. I'd just say that, in combination with the work we've done in the claims management side. The price increases we've pushed through have us in a place that we're very comfortable with and we look for this experience to continue.

Are you seeing competitor behavior change at all in terms of pricing in the market? In disability specifically?

Pricing in any of our products in all of our markets is a moving target. I think the best thing I can tell you is that what we are being able to achieve in the group protection at the moment -- year-to-date on our non-dental products, we've been targeting around 3%, we're getting about 4%, a little bit more than 4% on our dental target. On our renewal pricing, we were targeting 8%, we're getting about 9%. So on our renewal pricing we're doing better than we hoped for and from our perspective, that's a good outcome.

Chris Giovanni, Goldman Sachs.

Question on the interest rate commentary you had. You mentioned the earnings impact as well as the balance sheet impact and how that hasn't changed and don't expect really a material impact absent a change in some of the assumptions. Can you comment to the extent that you change some of maybe the long-term yield assumptions or others how we should be thinking about sizing that up?

The only assumption I can really think of that, as I look out over a 5-year period, that would realistically be changed as I can think of it would be the long-term run rate assumption. We've talked about a reduction in that assumption by 50 basis points is roughly $100 million. I'd note that during the unlocking this quarter we did adjust our J-curve. We brought the front end of the J-curve down to be consistent with where we're investing money today and that was about a $26 million hit to our earnings during the quarter.

What we've done is we've lowered the J-curve assumption to reflect what we know and that's where we're investing money today. When you look at the longer term, where we have been investing over the -- if you look at the full spectrum of 2011, it's really right in line with what our J-curve assumption is. For the last couple of months it's dipped below, but to change it now based upon what we know today just wasn't called for.

Okay, and then maybe for Dennis just in terms of capital management, obviously you are committed to share repurchases and makes sense given where the stock's at. But can you talk some about how you're thinking about the dividend policy? Obviously you used to pay a higher dividend. At what point would you start to think about trying to bring that back?

Well, we've been pretty clear all along that, myself as well as our Board and my management team, believe in increasing the dividend at the appropriate time to higher levels certainly than it is at today. We will review that decision with the Board, the decision to raise or not the dividend in a week or 2 at the Board meeting.

Bob Glasspiegel, Langen McAlenney.

Just a follow-up on the NAIC task force. You're comfortable they are going to come to their senses, I appreciate that perspective. Your comment letter in the Journal, they quoted you as saying that their position would needlessly constrain the capital position of companies. If they didn't come to their senses, how seriously would this constrain your capital position?

The whole process is unclear at the moment. All my letter did was repeat what their exposure draft said, which is that the exposure draft would increase reserves. But I want to come back to my comments that I made a few seconds ago. I am confident that our reserves are more than adequate. I'm confident that we are in compliance with AG38, the State has just re-confirmed that for us publicly, and the process is underway, and it's unclear if -- what if anything will change.

Okay, that's clear. You would disagree with the Journal's characterization that your accounting is more on the liberal side versus others in the industry?

I don't remember the Wall Street Journal attributing any conservatism or lack of conservatism in our accounting. I think they've mentioned us as one of the companies that had made comments, which we did. I don't think there's any -- to my recollection the article didn't say that.

Thomas Gallagher, Credit Suisse.

A couple of questions. First is, Randy, I just wanted to clarify if you changed your aggregate earned yield assumption -- ultimate earned yield assumption by 50 basis points, which at least this was on the life insurance product. I think it was 6.25 down to 5.75. That would only be a $100 million total impact to -- I assume that's just an all-in catch-all balance sheet-type impact. Is that right?

Yes, that's correct, Tom. We lowered it 50 basis points last year and it had an impact of right in the area of $100 million. And when we look at if we were to lower it another 50 basis points, it's another $100 million impact. Of course, any impact of that runs through earnings and ultimately ends up on the balance sheet.

Got it, okay. The next question I had, I just wanted to understand how to think about your RBC. The 500% RBC, is that consolidated including the captive or is the captive stand-alone and the 500% just your lead life Company?

You can get the complete details offline, but when you look at the captives, you have some that consolidate and some that don't. What I'd remind everyone is that we don't calculate RBC as it's calculated for the blue book on a quarterly basis. This is an estimate and that's why I say approximately 500%. What we see is that capital continues to grow. Things like the general account continue to improve in quality. So we're very comfortable with the number as calculated.

Got it. And just stepping back for a minute, can you give us an idea of how -- if we looked underneath the covers within the captives how the performance of your VA liabilities -- and I'm thinking about this just from a statutory standpoint. How the VA liabilities performed relative to the performance of the hedge assets? Were those a net loss, did those look something like GAAP or maybe just provide a little clarity there?

Tom, I'd point you to my commentary where I talked about the breakage.

Right.

That breakage is essentially that. It's the difference in movement between the assets and the liabilities. We have the breakage and we had the unlocking impact during the quarter, both of which negatively impacted that result. If you looked at the end of the third quarter, we had assets that exceeded our liability by between $200 million and $300 million inside of the captive.

So the breakage would have looked similar in terms of -- on a statutory basis in terms of the way this is disclosed?

Yes, our -- statutory, of course, is a different calculation, but the statutory liability at the end of the quarter actually is below our hedge target. So you would have more of an excess over your statutory liability.

Okay, got it. And then just the last question is, as I think about the statutory cash flow and the ability to do some securitizations to free up capital, let's just say you're able to do $200 million a year. Are you essentially just accelerating earnings there? I'm just trying to think about this conceptually. In a securitization you're basically selling -- getting cash up front in exchange for future cash flows. Aren't you just swapping future earnings for getting the cash in the door today? Aren't you giving up future earnings in exchange for doing those transactions?

Yes, that's exactly right, Tom. You essentially are bringing some efficiency to your capital usage by bringing forward something that would happen over the next 30 to 40 years and recognizing it today.

John Nadel, Sterne Agee.

Just two quick ones, one is more of a check-the-box just to make sure my math is right. Randy, I think you mentioned $7.6 billion of stat capital at the end of the quarter, and is that equivalent to the numerator of what you had estimated around a 500% RBC?

Yes.

In the past you have talked about the UL book of business and what proportion of that is currently at minimum trending rates versus what proportion is not. Can you just update us on where that stands?

Yes, I'll expand a little bit, I'll talk about both life and the DC business, just businesses where we're getting close to our guarantees. Both of those businesses are in the area of about 8 basis points of room left to their guarantees in total. I would anticipate where rates are today that over the next 6 months we would move pretty much all the way to our guarantee based on actions we have in place That's why you see when you move out past that, the $50 million impact that I talked about as part of our interest rate sensitivity.

Chris Giovanni, Goldman Sachs.

Just wanted to follow-up on the management position that was created for Fred back in March of last year to see if there's any update given the volatile macro environment, how you guys are thinking about long term whether it's changes in strategy or investment profile.

We described in our remarks already the rotating of our investment selection process -- new money investments to higher grades and that helping with the higher investment grades. We're doing quite a bit more work around stress testing the asset portfolio, looking at different ways to get better results over the long term. We have Fred and his team doing that.

There's excellent work being done and we're going to share some of those stress tests with you at the upcoming IRB meeting. I think you'll have an opportunity to see better and more completely what I see now, which I think is pretty good work. And the answer has been pretty good as well by the way.

If we think about potential capital strain as we look out over the next couple years. Do you view capital strain more sensitivity for you guys relative to equity markets or interest rates?

Capital strain? In the life insurance industry, actual economic hits to capital typically come from investment losses. That's why we focus a lot on talking about what we're doing in the portfolio. Interest rates can also, in some instances, create some reserving changes for your variable annuity business and we'll talk about all these things --

Yes, I would just expand on Dennis a little bit. It's credit that causes capital strain. With the hedge program we run against the variable annuity business, you see the primary areas where you would have immediate stress from equity market movements or interest rates mitigated by the performance of that hedge program.

Ed Spehar, Bank of America Merrill Lynch.

I jusy wanted to follow-up on the question about reserve fundings. Isn't the issue though that it's the amount of capital that you have to commit up front in the reserves, which are deemed to be redundant? And it's the reason that there's a securitization market or a funding market that exists so that it's really helping with the strain of the business considering the reserving? Is that not correct?

Yes, absolutely. What you're doing is you're bringing some efficiency to your capital usage. You're putting capital behind reserves that you deem to be in excess of what you should use from an economic standpoint. You enter into a reserve financing transaction so you can effectively release those reserves and use that capital in other areas, like we've done today.

As I mentioned as part of the life business where these reserve financing transactions occur, we've been able to free up that capital and put it to other more productive uses such as the share repurchase activity we've done over the first part of the year.

The question then is it's not that if you have $600 million of stat earnings today that you're going to have $400 million of stat earnings next year because you've done a $200 million reserve securitization.

No, and as I mentioned, the $200 million of reserve financing, if you remember, that would come out over the next 30 or 40 years on these books of business. These are very long-tail businesses, so the annual impact, the front end of that is very small and it's more than overcome by the new business that we put on the book.

Ladies and gentlemen, this ends the Q&A portion of today's conference. I'd like to turn the call over to Mr. Jim Sjoreen for any closing remarks.

Thank you, and again as always we appreciate your time on today's call. Just as a reminder, as we've referenced in our remarks, we will be hosting our annual conference for analysts, investors, and bankers on Tuesday, November 15. And information will be available on our website on how to join the webcast for that. As always, we will take any follow-up questions on our investor relations line at 1-800-237-2920 or via e-mail at investorrelations@LFG.com. Again, thank you for your time today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.