Lincoln National Corp (LNC) 2012 Q1 法說會逐字稿

Good morning and thank you for joining Lincoln Financial Group's first-quarter 2012 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 the Senior Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Thank you operator, and thank you for everybody on the line. We were delayed simply waiting for people to queue up on the call. So 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 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.

Please note the financial results for this quarter and all prior periods reflect the adoption and retrospective application of the new DAC accounting guidance. 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. I would now like to turn the call over to Dennis.

Thank you, Jim, and good morning, everyone. Overall, it was a very strong quarter for us, with all of our businesses delivering good results.

Let me share some highlights. We ended the first quarter with operating return on equity north of 11%, on book value per share growth of 4.5%. Our revenue growth, in excess of 3% was also an indicator that we are delivering on many of the plans we have discussed during the past year. Specifically, increased deposits and net close in retirement plan services and increased sales in group protection demonstrate that the strategic investments we are making in these areas are paying off. In addition, we are successfully executing the strategy to direct like sales to higher return products. I will speak more about this in a minute, but this pivot strategy is something we have shared with you in the past. Finally, our strong capital development from earnings, combined with our view that our share price remains undervalued let us to accelerate our share buybacks.

Let me now comment on underlying businesses. Life insurance sales for the quarter were $122 million, down from a year ago. This decline was expected, primarily as a result of pricing actions taken on our secondary guaranteed universal life products in response to continued low interest rates. Since implementing changes, many companies have followed our lead in making similar pricing adjustments, though not all of our competitors have taken action yet. Having said this, our pivot strategy, again, moving to higher-return life products is taking hold. Sales of our index universal, variable universal, and term life products were collectively up 11%. Moving forward, our ability to continue executing this strategy and produce strong results will be driven by the breadth, depth and capability of our distribution teams. This strength gives us an edge when bringing to market the right consumer solutions, priced appropriately.

Turning to the annuity business, I like how the variable annuity competitive landscape has shifted in recent months. I believe that the majority of companies that remain in the space offer good consumer value and price their products appropriately. At Lincoln Financial, we are pleased with where we are positioned in the industry, and we have maintained a consistent market presence. As I have said before, we remain more interested in offering products on our terms, using sound pricing assumptions, than we are on taking market share. Positive net flows in the quarter help drive record annuity account balances of $92 billion. Our variable annuity sales for the quarter were up 8% sequentially, driven primarily by strong equity market performance, and consistent with overall industry trends.

Evolving the design of our income products by recently introducing a series of protected funds is a good option for consumers and is also good for Lincoln. Good for consumers, because they can lower the volatility of the returns, and good for Lincoln, because they reduce our hedging costs. Fixed annuity sales in the quarter were down, due to low interest rates. We are very pleased, however, that our new strategic partnership with Primerica has already generated $50 million of indexed annuities sales through April. Our relationship with Primerica gives us access to the middle market, broadening our distribution and product reach to this large consumer market, and helping to diversify our annuity product offerings.

In our Retirement Plan Services business, our strategic investments, notably in technology upgrades and in the expansion of our wholesale and network helped us deliver solid results. Total deposits of $1.5 billion were up 13% versus the prior year, resulting in our third straight quarter of positive flows. Our strong performance this quarter was paced by significant growth in the small market, with new sales coming in at $190 million, up 74% from the prior year. In addition, recurring deposits of $1.2 billion grew 15% from the prior year, reflecting the success of our 300-person worksite distribution team getting participants to enroll and consolidate their assets with Lincoln. In group protection, first-quarter sales of $67 million increased by 47% from soft results in the year-ago quarter. Our sales strength is broad-based and helped by an increase in voluntary sales, which is our strategic direction. Looking ahead, our distribution strength, our expanded product suite, and continuing strong proposal activity position us well to capitalize on opportunities in the group marketplace in the near- and long-term.

Turning to distribution, retail, wholesale and worksite distribution remain a source of strength for Lincoln. These networks helped drive the Company's strategy by executing our product pivot strategy in life, transitioning to protected funds in annuities, and leading accelerated sales growth in our retirement plan services and group protection businesses. Combined, our distribution networks open us up to new markets and drive consistent productivity.

Before I turn the call over to Randy for his comments, let me close by saying we have a very strong franchise, and a sound balance sheet to go with it. The progress we have made three short-term actions that respond to macroeconomic trends and through long-term investment strategies that chart future growth combined to help drive the increased operating ROV and book value growth we experienced this quarter.

With that, I will turn things over to Randy. Randy?

Thank you, Dennis. Last night, we reported income from operations of $296 million or $1 per share for the first quarter. Similar to last quarter, there was very little noise in the reported results, with normalized earnings coming in at $1, right on top of reported results. Overall, the results were consistent with expectations, and I describe the quarter as both high-quality and reflective of many themes that we have discussed over the past year. First, that we have a business model that would generate growth, even in a low interest-rate environment, as demonstrated by year-over-year normalized earnings growth of 3%. Second, that our strong capital position would allow us to continue to return capital to shareholders as we executed upon another $150 million of share repurchases during the quarter. This, along with previous buybacks led to normalized EPS growth of 12%. And third, that we would be making investments in key growth businesses. While this is negatively impacting current earnings, it is building the platform for future earnings growth.

Let me provide some color on the G&A picture. On its face, G&A increased a little over 9%. I'd note that roughly one-third of that increase was due to pure accounting-driven noise, around how on accounts were elements of deferred comp, with the offset to the expense coming through a lower share count. The remaining increase is made up of normal expense growth and strategic investments that we are making. Looking forward, I don't expect large increases in the strategic investment component relative to what we experienced in the current quarter. The key valuation drivers of book value and return on equity both improved during the quarter, with book value per share, excluding AOCI, climbing nearly 4.5% to $37.25, while ROE came in at 11.2%.

Turning to net income, we reported net income of $245 million for the quarter. The only item of note affecting net income was the unhedged NPR reserve, which caused a loss of $84 million. Outside of the non-economic accounting noise that is the NPR, our annuity hedge programs and general account both had excellent quarters, turning in a $34 million gain between the two items.

Turning to segment results, and starting with annuities, reported earnings for the quarter were $137 million, revenues were flat compared to the year-ago quarter and up 6% sequentially. Expense assessment growth during the quarter was muted roughly 1%, by the fact the majority of rider fees are assessed against the guaranteed account value. This will typically produce slower growth in rising markets, but a more stable revenue stream in falling markets. Interest spreads remain strong in the annuity business. Looking forward, I expect to see only minimal pressure on economic interest spreads with any decline due primarily to new business that will put on with lower required interest margins. As I have spent time with analysts and investors it's become obvious there are those who struggle with the risk reward dynamics of the annuity business. From my seat, I want to know how comfortable I am with this business, whether it is the return profile we have experienced over the years, the demographics that drive demand for our products, or our industry-leading via hedge program, we have shown and will continue to show that the Annuity business, if approached in the right way, is a great business.

Retirement Plan Services produced another solid quarter all around. Earnings of $35 million were driven by higher account values that hit a record $42 billion in the quarter. Interest spread performance was very good during the quarter, with rate cuts offsetting the impact of lower reinvestment rates. Looking forward, I would expect to see spread compression of 10 to 15 basis points a year, but I will remind you that all products we sell today are sold with very low guaranteed interest rates in the 1.5% range, so that will mitigate the impact of spread compression over time. Return on assets came in at 34 basis points for the quarter. We are seeing a shift in the retirement business mix, that will result in modest declines in ROA of 1 to 2 basis points a year, although we expect this impact to be more than overcome through strong growth in sales and assets.

Turning to our life insurance segment, earnings of $142 million were flat with the prior-year quarter. Earnings growth in the life segment is muted by the removal of capital related to reserve financing transactions that we did last year. This negatively impacted the current quarter's earnings growth by 6%, relative to the first quarter of 2011. Of course, we've used the capital freed up by those transactions to support the share repurchases that we have done over the last year. When viewed in total, the impact has been a positive for EPS.

Reported revenue growth of 7.5% was elevated by the work we did in 2011, migrating to a single valuation system. I would put normalized revenue growth in the range of 5%, consistent with account balances that grew in excess of 5%. Interest spreads increased in the quarter relative to the fourth quarter last year, due to interest crediting rate actions taken during the quarter. Looking forward, I would expect to see 10 to 15 basis points of spread compression per year in today's rate environment. This is consistent with prior guidance on the impact of low interest rates.

The Group Protection business delivered a strong quarter of top line growth as premiums grew 6%. Elevated mortality caused a roughly 1 percentage point increase in the loss ratio relative to the first quarter 2011. This pushed the loss ratio just outside the high end of our expected range of 71% to 74%. We have analyzed this quarter's mortality experience, and see this quarter is nothing other than one of those mortality blips that will occur from time to time. On the disability side, incidents has returned to our long-term expectations. I see this as a positive as we look forward, although with long as the economy stays muted, I will retain a note of caution around my positive outlook.

Before moving to Q&A, let me touch on a couple of additional topics. First, on capital and capital management. Less company capital remained level during the quarter at $7.6 billion, as a strong statutory earnings of approximately $250 million were offset by dividends to the holding company of $150 million and a reduction in our deferred tax assets. RBC came in at approximately 500%, down slightly from year-end, and cash at the holding company exceeded $800 million at the end of the quarter, as we took advantage of favorable markets to pre-fund our third quarter debt maturity. On the share buyback front, we repurchased another 6 million shares for total cost of $150 million. Looking out over the remainder of 2012, capital generation that is benefiting from favorable equity markets and the reduced level of life sales should allow us to exceed our original guidance for $400 million of capital management. As you know, I don't give specific guidance around share repurchases, but our actions over the last year and a half are part of an intentioned strategy. Simply put, our current capital position is very strong, and we will allocate that capital to the most productive uses while still protecting our valuable franchises.

Let me finish up my comments by noting that I find our current valuation to be at odds with the actions we have taken and the results that are flowing from those actions, including share repurchases of $750 million over the last six quarters, a 60% increase in shareholder dividends for 2012, multiple price increases in life products that were particularly impacted by low interest rates, risk reduction across our general account that is reduced below investment grade holdings by nearly 4%, book value per share that has continued to grow over the last year, despite the decision that we made to write off $750 million of goodwill at the end of 2011, and last, but definitely not least, a return on equity that has been steadily improving and came in at 11.2% in the current quarter. We will continue to do the things we need to do to produce those sorts of results going forward, and I firmly believe that will eventually be reflected in our evaluation.

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

(Operator Instructions). The first question comes from Jeff Schuman with KBW. You may begin.

A quick question on the retirement business. One of your competitors is getting out, and I think at least one of your competitors has already seized some of their distribution relationships and taken some share. Are you able to take advantage of that situation and gain some share in the near term?

Jeff, as I said in my remarks, we are more focused on the companies who remain in the business than we are the ones that go out, and as I said, I think the companies that remain in the business are high-quality companies with good management. We are not expecting big increases in market share because of a couple of exits from the industry. We are comfortable with the kind growth we are seeing, and we continue to price our products appropriately. And again, we don't expect to answer your question specifically with any big increase -- I presume this was the retirement business that you were talking about.

The retirement business, exactly.

The retirement business, I'm sorry, or the VA business?

The retirement plans business.

I'm sorry, I was answering on the VA business, we are pretty committed to our program there. We are in the right segments. We are expanding our distribution, our technology, we're achieving our pricing targets. Some of the growth that we have seen this year has come, as I have mentioned from the strength of our distribution, two particular cases. One is the increased productivity of our wholesalers in the small group market, they have more tenure, and the other one is the 300-person strong worksite marketing group that goes and visits specifically with our client firm employees, to try to increase their retirement contributions, and again you saw that 15%. We are getting our returns, we're making progress. We think it is a good business, and I hope that answers your question.

It does, thank you.

Thank you. Our next question comes from Ed Spehar with Bank of America. You may begin.

The question I had, Dennis, in the past you had given a sense of where your pricing is in the life business relative to competitors, and I'm wondering if you could update that, given some of your comments about price action you have seen in the market following yours?

There has been some movement, I would say in the level pay area, roughly speaking, we're 3% to 10% across the board on our products' off-the-top pricing, where it's only 3%, we can compete pretty well on that. In the single pay area, we are still double-digit percentages off the lead players in these markets, and so we are going to continue to see, and intentionally so, a decline in contribution of short-pay premium type products.

Okay, the one follow-up to that would be, given the decline in life sales that we saw in the quarter, how much of a benefit did you see in the quarter to statutory earnings as a result of the decline in the first-quarter sales?

Randy and I have talked about this before, rough justice, $1 less of premium is $1 more of capital.

And that generally worked out in that fashion the first quarter?

During the quarter, as I mentioned, we had stat earnings of $250 million. That is above the $200 million level that you would have seen us experience in the past. And that benefited from two items, both the lower level life sales and the favorable markets during the quarter, but it was a strong quarter from a stat operating earnings standpoint.

Thank you very much.

Thank you. Our next question comes from Chris Giovanni with Goldman Sachs. You may begin.

Dennis, you have obviously shown discipline and commitment to shrinking business where appropriate, and I'm curious what the response has been from your distribution partners?

The Company is run very tightly, so that our distribution organization internally is obviously aligned on our strategy. As I have said, the ability of our distribution organization to take that out to our partners and explain why we are doing it and the consequences both to them and to us, of it, it is understood and accepted. We are pretty delighted, and this takes time to do. Let's just take an individual life producer. If he's been building a practice around single pay or periodic pay SGUL sales, it's going to take some amount of time to have him understand, say for example, the benefit of an index UL sale. As I said, that shift is occurring off a small base of 11%, and our successes here will be to be able to continue to do that, so in short, we are taking the message to our distribution partners. It is being well-received and understood, and it is up to us to implement it and execute on it. It's interesting in one fact, we made some pretty significant changes in the wires on some of the compensation, and the wires took our compensation structure and asked everyone else to meet it. There is some leadership demonstrated there.

Okay. Just on capital, you have clearly also shown a commitment to accelerating share repurchases based on the share price, but you also have made comments in the past about wanting to get bigger in the group business as well as the retirement business. There are some of those properties that are on the market. Should we expect that M&A is a possibility, or do you believe share repurchases, just given where the share price is, will be the primary use of capital?

We have been pretty clear we are anxious to organically, first and foremost build and increase our group and retirement businesses. We spend 100% of our time trying to figure out how to build them organically. At the same time, with a clear path for organic growth, from time to time, a property might come along that is consistent with the type of business, the type of distribution that you are trying to build, and so there is some economic advantage to accelerating your organic growth plans with a property that is consistent with those organic growth plans. Let me make two comments on that. One, it takes money to grow the group business and the retirement plan businesses. We're talking about hundreds of millions of dollars of investment in those two areas over the next couple of years. If we have an investment that we can make that offsets that, that might make sense.

The second thing I would say, more specifically to your question about share repurchase versus acquisitions, it is not a dollar-for-dollar equivalency. When you do share repurchases, you are taking capital out of the Company, which reduces book equity and has other consequences, and again, we're happy to do that and we will continue to do that, when you make an acquisition, the capital is staying in the company, and so you're not for example reducing your equity, and therefore lowering your ability to meet your debt to equity ratios. I think that covers it. Again, let me underscore three points. You have to invest to grow with the business, if you can do an acquisition that offsets some of that investment, the dollars that you spend on that investment aren't gross, they're net, and the share buybacks which we will continue to do, we have demonstrated that we're going to do them on a dollar for dollar with making a strategic investment.

Thanks so much.

Thank you. Our next question comes from Randy Binner with FBR. You may begin.

I have a question about AXXX. I haven't seen this in the release or anywhere else. Has there been any material AXXX transactions completed this year?

Not by us, Randy. We have not done a transaction in the first quarter. As you remember, We did three last year. That was more than we typically do in a year, so when I talk about this year, what I have said is that I don't have one in my base plans, but we're going to work very hard to see if we can't execute on another one.

A couple follow-ups there, my impression was that the plan was to at least have one or two freed up around $200 million of capital. Is that still the plan, or could we expect to maybe not see one at all?

In a typical year we plan on maybe we can do a $200 million of capital generation. Last year, we did three transactions and generated in excess of $200 million and you saw that in the capital management we did last year where we did about a total of $800 million of buybacks and delevering. Coming into this year, we start with that same focus, $400 million of capital management. We will try to go out and do additional reserve financing transactions and other things, like the reduced life sales which are generating incremental capital. That can allow us to add to that $400 million level.

Just one more if I could. Is there something, rates are still low, the equity market is higher. Is there a cap? Could you give us quick color on kind of the capital markets dynamic and demand for these types of transactions?

I think the supply is definitely out there. I would say the prices have continued to come down on the transaction proposals that we see floating around out there. There is a very robust market with our investment banking partners and bank partners primarily for these sorts of structures. Good long-dated structures at a very good price, that is below what we priced for in these transactions.

Great, thanks. Hopefully we'll see one.

Thank you. Our next question comes from Joanne Smith with Scotia Capital. You may begin.

Good morning. I just want to go back to your comments regarding the disability business. You have had decent results, whereas others have continued to struggle or are actually seeing some deterioration in their business. I'm wondering if you could talk a little bit about that. And generally speaking in the group business overall, you had really good sales growth and I'm wondering how you reconcile that with the fact that all of your competitors are talking about very soft pricing conditions?

Randy and I will take aspects of that question. Let me, Randy, go first. Let me come back to sales. I said they were up strong off a soft quarter, but having said that, they were broad-based. Sales by industry classifications remained stable. We have seen solid growth across all case sizes. Our proposal activity remains strong. And back to pricing, a little bit on pricing, last quarter we got into detailed comments, and it kind of hurt our sales efforts, because it was a competitive situation. So we are not going to speak to specific price changes in the marketplace anymore, or what I will tell you is that we are getting our ROEs on new business in the 12%-plus range with the business that we are selling. Randy, you may want to expand on that.

Joanne, on the last point of your comment. What I hear from competitors of the few calls I listen to and discussions I have had, is that a lot of people see a market that is actually hardening, that is what I've heard from a number of competitors. I haven't heard necessarily the softening comment that you made there at the end, it is the other way actually. We feel pretty good that the market is hardening, consistent with actions we have taken over the last couple of years in this business. The disability business is a good high-quality business. There are a number of things you have to think about when you pricing the disability case. As I mentioned, we have seen incidents come down to our historic levels, and very happy about that. But undoubtedly, we have to continue to be cautious and continue to be very disciplined in a business like this, which has some linkages to how the overall economy is performing.

One more comment on my side, you really have to parse out, and we talk frequently about segments that are more important than broad industry discussions. The most competitive, and this is across a lot of product lines, but it's always more competitive when you're dealing with bigger sophisticated companies. They've got more people paying attention to it, and they've got consultants, they're spreadsheeting. As you go down market, it is still competitive, but not, I don't think to the same level it is, particularly in the jumbo group size, the very large companies. So as people talk, Joanne, and you listen to them, it is really more segment specific.

Thanks very much for that. I have one follow-up on a completely different subject. You had some success with index UL, I believe, and the variable ULs, have you done anything there to enhance the product? I understand that strong equity markets have been a factor behind the revival in sales in the industry overall, but have you done anything to tweak the product to make it a little more attractive?

We are constantly tweaking products to make them more attractive. There is a continuation of that but nothing dramatic on variable universal life. I will come back to my point that having a broad-based strong smart distribution capability enables you to talk to customers and partners about different products and why they might work and it is that rightful focus on these pivot products and the distribution to be able to do that, that is going to help.

Thank you.

Thank you. Our next question comes from Andrew Kligerman with UBS. You may begin.

Good morning. Dennis, you talked about the pivot strategy and now you are the UL, indexed UL. What return are you generating on that business, and what is the return of the secondary guarantee legacy UL, I mean the legacy secondary guarantee UL?

You were breaking up a little bit on us, Andrew but if I heard the question, what is the different new business returns on the pivot portfolio, and what are the current returns on SGUL. The pivot portfolio is our typical 12% to 14% type of new business returns in the products that we are selling. We're getting that on. The SGUL products continue to be below our targeted objectives. We think this year in the aggregate on the business we expect to sell, that we can do better, and we hope to do better than 10% but that depends on us being able to make this pivot to the extent that we have it in our plans. So far so good. We are gaining traction and moving in the right direction.

Got it. And the second question would be going back to the capital and I'm thinking to investor day and you had given guidelines of GDP at 12%, business growth of 2%, unemployment at 9%, housing down 3%, S&P 1175. You have the capital margin of 1.5, and as you are alluding to in this quarter with free cash flow around $400 million, you could deploy that any which way you want. Now with Randy, I think I'm hearing this right, Randy, you are saying you could do a few securitizations that might add a $200 million. I want to get a sense of how excited -- Dennis, you mentioned earlier the valuation seems low, I would absolutely agree. What is your appetite? Do you want to go beyond the $400 million this year and are you seeing a lot of M&A opportunities, is there a big pipeline out there? I just want to get a feel, some color around those things.

As we sit here today, I fully expect to go beyond the $400 million for the year. Once again, I'm going to go back and link this to how we did this last year. We came into the year with the same $400 million guidance, did some additional reserve financing transactions, sold a couple corporate assets, ended doing a total of $800 million in capital management last year. It is the same approach this year. We came in with that guidance of around $400 million, and as I said last quarter, I love to under promise and over deliver on these things. We're going to do everything we can to over deliver on capital management.

The key levers that we have got are the positive impact we are getting from reduced SGUL sales, as Dennis mentioned, about $1 of capital generation for $1 of lower sales, there's one. And then, incremental reserve financing transactions that we can do. It is a good robust market for reserve financing transactions. We still have some capacity on our balance sheet, so the team is going to do their level best to execute another one of those. We believe we are undervalued, Dennis mentioned it, and I mentioned it, and we are definitely not shy about buying back our own stock.

And the deal pipeline, is there a lot out there on the other end of the spectrum?

I think we are aware of the companies that have exited the businesses and announced sales, Andrew. As compared to 2010 and 2011, two companies is more than there has been in those two periods, other than what Pru and Met and others did overseas. My guess is over the next 24 months, that there will be companies refocusing on core businesses, and maybe a little bit more M&A activity. We are not building our growth plans. We think we can develop, even in this interest-rate environment, as we said very attractive organic growth through the combination of our franchise strength and capital management. If something comes along that makes sense, great, but we are delivering results to our shareholders based on our organic strategies, as we typically do.

Very helpful.

Thank you. Our next question comes from John Nadel with Sterne Agee. You may begin.

A couple questions for you. In retirement plans, can you update us on where Lincoln stands with respect to the new disclosure requirements? And around that, are you seeing any impact in terms of sales opportunities where either being in compliance or not with those new requirements is having an impact on your competitiveness?

Let me start by saying that we have already put into place all of the sponsor disclosure that's being required. That is done and in the market. I guess it is an important question, but I come back to what we believe is that ultimately, it is our value proposition and delivery model that is critical to the success of this business and is going to drive the results. We are a mid-priced provider with a unique high touch service model so we feel good about how it are positioned. Is there some temporary dislocation in the industry because of this disclosure, who knows, that all of us in the industry are not worried about that as much as we are at delivering good value to the consumers.

I appreciate those comments, it was my understanding that there was maybe a couple of sizable competitors who are not quite there yet in meeting those new requirements and that may be providing an opportunity at the margin for some of those who have gotten there quicker.

Your guess is as good as mine on that one.

Secondly, just a quick update. Randy, good commentary and good outlook on the spread expectations as we move forward, can you update us on where you stand at the end of the first quarter on crediting rates in your various businesses versus the minimums?

We look business by business, not an issue for the group business. In the annuity business, we are in very good shape. I really don't see any pressure on economic spreads in the annuity business a significant amount of mobility to continue to manage the creditor rate in response to any declines in the earned rate. On the life and the retirement side, we are down to low to mid- single digits, 3 to 5 basis points of room. On the retirement side we continue to generate additional capacity as we sell these new products at lower guaranteed rates. On the life side, we are down to a few basis points. I don't see much additional rate cutting coming from the life business. We made a pretty significant rate cut in the first quarter, and that will sustain us for a period of time here. I don't see any large cuts coming on the life side as we move forward. That is why I guide for that 10 to 15 basis points of compression, which is similar to what I guided to on the retirement business.

A quick follow-up on the retirement side, I heard your comment that the new business has minimums in 1% to 1.5% range, what is the crediting rate that you're going out to the market with, relative to those minimums recently?

Were checking our facts on that right now. It's kind of the case-by-case situation. Low single digits for sure.

Okay, fair enough. Thank you.

Could I amplify this on this appropriate focus that everyone has on interest margin compression. Obviously for a company like Lincoln and many other companies in the industry, lower rates affect earnings growth. But let me just add to that. This management team doesn't feel like they are a victim of low interest rates, that we don't have any additional levers to mitigate the impact of that. On top of everything else you heard us talk about this morning, we are doing a couple other things. The first one is after three years of investing in mostly investment grade bonds and mortgages, we have some leeway to take incremental investment risk to boost yield. It's not something we're going to do in large amounts, and we have developed over the same time frame that we are seeing compression from lower bond rates. That will help mitigate this issue. We also have initiatives underway to lower core expenses. I think over time, these two things alone, on top of everything else that we're talking about will help dent some of the impact on low interest rates. I just want to explain to all of you that we keep providing these $50 million a year numbers, which are accurate with respect to if interest rates stay at these levels. Is that the right number, Randy?

Yes, that's the right number.

That's the right number, but we are taking other actions on top of all of the investment to try to put a dent in that over the next two or three years.

When we go out with that guidance, $50 million a year and growing by about $50 million a year after that, we have talked about that over a three-year period, that is the worst-case scenario. It does not assume the sort of management actions that we have taken and will continue to make as we move forward.

Thank you. Our next question comes from Ryan Krueger with Dowling &Partners. You may begin.

Good morning. First, could you give an update on the assets and liabilities held at the VA captive?

We ended the quarter with assets in excess of liabilities, in excess of $400 million. Just to remind everyone, those are real assets generated by our hedge program. The liability itself came down pretty significantly during the quarter, obviously, with the strong equity markets. We saw the liability come down to end the quarter just over $1 billion. Over $400 million of assets in excess of our liabilities with the liability that is a little over $1 billion right now.

Great. And then, commission rates I believe were reduced in March on the MoneyGuard product, I was wondering if we should expect a material impact on MoneyGuard sales going forward for them?

We don't.

So you think Q1 MoneyGuard sales are at a pretty good run rate?

We don't give predictions, but we continue to expect good growth in the MoneyGuard business.

Thank you.

Thank you. Our next question comes from Mark Finkelstein with Evercore. You may begin.

You pre-funded some debt maturing later in the year. The question is, are we done deleveraging?

I wouldn't say we are done. I think there is benefit to taking leverage out of a balance sheet also, for a company such as ourself. We feel very good about the leverage position we are at right now, but doing some amount of deleveraging with our capital management, there is a lot of benefit to that. What I said in the past and what I continue to say is we are definitely skewed toward buybacks at the moment, but some element of delevering in our capital management I wouldn't be surprised by. We have other levers to do a little bit of delevering here and there.

Okay, but that would actually be beyond 2012, I assume?

I'm not going to preclude anything in 2012 either. There still could be some element of that. It's not the major component of capital management, but could we do something on the edge, we have flexibility to do that sort of thing.

Okay, going back to the life business and UL sales. I know you don't want to give predictions, but I guess, the question is, is there anything you are seeing in terms of other competitor behavior or pricing change that would give you an indication that the current run rate of sales somewhere in the $45 million to $50 million range is or isn't a reasonable trend-able number for the rest of the year?

Again, we don't give predictions, and I apologize for repeating this again to everyone, end of the year results are going to depend on two things, for total sales for the year. One is, what else the competitors do, and we can't do anything about that, but more importantly, what we can do is continue to execute on this pivot strategy and we think we can get it done. I would say the first quarter would not be our expected run rate for the year.

Okay. And finally, on the VA business, you talked again about the sub-account option on volatility management. What I'm curious about, as more money goes into this account, does it improve the actual return objectives of it, or does it more just manage the outcomes within a narrower band?

Are you speaking from the consumer's perspective?

I'm talking about from Lincoln's perspective.

Let's start with the consumer. What this does for the consumer is create a narrow volatility. Let's just use a number, if you were targeting a 7% return, you might have swings of 30% or 40% around 7%. The protected funds are trying to shrink that spread from 30% to 8%, 10%, 12%. That is just the volatility issue. There is the cost of putting that on, into the program, so the expected returns had to go down by the amount of the cost that we are charging to do that, which is not that significant. Maybe 50 to 100 basis points. That is what's happening from the consumer side. From Lincoln's side, as a mirror image of that, the pricing of a lot of our derivatives is dependent upon the fluctuation of returns in the underlying sub-accounts. To the extent you have dampened that, you have lower the costs of your hedge execution. Does that help?

Thank you. Our next question comes from Sean Dargan with Macquarie. You may begin.

I have a question about the larger VA market. You said you're comfortable with the dynamics now, but with one of the 800-pound gorillas dialing back, are you getting more pressure from your distribution outlets to give them more product, or do you see this market shrinking as a whole going forward?

Let me separate the practicalities of distribution and who is playing the market from the long-term trends associated with the business, and I will start with the latter first. There is no question that consumers are more interested in guarantees than they have been in the past. There is no question about this big demographic move, with more people going into retirement. Those two things are going to build this market over time for everybody.

In the short run, the dynamics with distributors are that if people leave the business, if a company leaves the business, there is some adjustment time to that. It is not an automatic that, that business that they were doing in the short run is going to be absorbed by other companies. It is just who has been selling what, what programs are in place and have to be changed at the distribution partner level. There could be some industry-wide, depending on the channel, in the wires for example you can see some decline, just because of the movement of providers, but that is short-term. And longer term, this is a good business with good reason from the demographic and expectations of consumers about what they want in their retirement.

I will turn the conference back over for closing remarks back over for closing remarks.

Thank you, operator. Thanks to all of you for joining us today. For those of you we didn't get to this morning, we will certainly follow-up with you after the call later today. As always, we will take your questions on our investor relations line at 1-800-237-2920 or via e-mail. Again, thank you and have a good day.

This concludes today's conference. Thank you for your participation, and have a wonderful day.