Lincoln National Corp (LNC) 2016 Q1 法說會逐字稿

Good morning, and thank you for joining Lincoln Financial Group's first-quarter 2016 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will announce an opportunity for questions, and instructions will be given at that time. (Operator Instructions)

Now I would like to turn the conference over to our Senior Vice President of Investor Relations, Chris Giovanni. Please go ahead, Sir.

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

Before I begin, I have an important reminder. Any comments made during the call regarding future expectations, trends, and market conditions, including comments about sales and deposits, expenses, income from operations, share repurchases, and liquidity and capital resources, 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 on 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 the most comparable GAAP measures.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After the prepared remarks, we will move to the question-and-answer portion of the call.

I would now like to turn things over to Dennis.

Thank you, Chris, and good morning to everyone. First-quarter results were disappointing, as operating earnings fell short of our expectations. Importantly, most items that negatively impacted our earnings appear to be temporary, and we anticipate a nice recovery in the second quarter. Randy will describe this in more detail.

While earnings can fluctuate quarter-to-quarter, our balance sheet and capital position continue to be very strong and resilient as we continue to grow book value per share and actively deploy capital. Our franchise also remains a competitive advantage. Product breadth and innovation, coupled with our distribution reach, gives us confidence in our ability to capitalize on long-term growth opportunities, while also delivering on our strategic priorities, including shifting our new business mix towards products without long-term guarantees.

This quarter, some examples of this included sales of life products without guarantees increased 13%. Group sales grew 5%, marking our first year-over-year increase since 2013. RPS deposits of $1.8 billion increased 5%, and nearly 50% of our annuity sales did not have guaranteed living benefits.

Before turning to business line results, let me provide a high-level view of how the final DOL Rule seems to impact Lincoln's business model. In general, as we anticipated, the final rules mostly moved in a constructive direction. On the positive side, the Rule clearly documents the use of commissions alongside fees as appropriate compensation. Specifically, the DOL agreed in the final Rule that commissions can be more cost-effective for investors who do not trade frequently, as would be the case with annuity purchasers.

In its discussion of annuities, the DOL also emphasized that the FIC exemption is designed to preserve commissions, allowing investors to choose the payment structure that works best for them. The inclusion of grandfathering address the concern of a major disruption related to a backward application of the new rules. The Rule acknowledges the benefit of lifetime income guarantees, which significantly differentiates annuities from other financial products.

The expansion of the education definition leaves our high-touch retirement business value proposition intact. Somewhat negative, but generally not expected to seriously impact Lincoln, would be the inclusion of indexed annuities in the BIC will take some extra work in the independent channels where the compliance ecosystem is not as comprehensive as it is for registered products sold through broker-dealers. In the first quarter, only 3% of our total annuity sales are fixed indexed annuities sold through nonregistered insurance agents in the qualified space.

Adding the group variable annuity to the BIC may have eliminated a competitive advantage under the proposed rule, but we believe it leaves us in a competitively neutral position. Our distribution partner response so far is generally consistent in the expectation that they will use the BIC for commissions.

It also may prove out that distribution partners will need to trim shelf space and focus on fewer higher-quality companies, which I believe would be an advantage to Lincoln over the long-term. Our efforts are now turning to working with the DOL, our distribution partners, and internally, to be sure that an effective compliance system is developed to reduce the right of action risk that remains part of the Rule.

Now, turning to our business segments, starting with annuities. A 4% decrease in average account values and lower variable investment income resulted in annuity earnings declining from the prior year. However, the strong recovery in equity markets later in the quarter led to account balances ending the quarter flat with year-end, which positions us well for subsequent periods.

Total annuity sales were $2.4 billion and net outflows were modest at just $35 million. Over the past year, net flows have added $1.3 billion to account balances. As I have noted in the past couple of quarters, market volatility has dampened consumer demand for equity-sensitive products, and there appears to be some regulatory impact as well. Higher persistency has helped net flows.

Although sales are lower than last year, as we said we would, we used some of the capital, that was to be allocated towards annuity sales, to buy back stock at attractive levels. So, while we have experienced lower sales recently, longer-term, our consistent approach and commitment to the annuity business positions us well to grow this high-quality source of earnings as marketplace headwinds subside.

Turning to life insurance. We recognize there will be a focus on our mortality experienced this quarter. While we typically expect higher claims in the first quarter, we also saw an unusual number of early duration claims. In terms of sales, total individual life insurance sales in the quarter were $132 million, a 5% decrease from the prior-year quarter. Importantly, our focus on selling more products, without long-term guarantees, continues to gain traction.

As I noted upfront, sales of these products increased 13% and represented 71% of our total life insurance sales, up from 62% of our sales last year. Included in this are many exciting product stories. For example, term sales increased 32%, as we continue to benefit from product enhancements made in the third quarter. Indexed universal life sales increased 20% as we were helped by our midyear product launch. Additionally, regulation that began last September required many competitors to make significant reductions in maximum illustration rates, resulting in an improvement in our competitive position.

MoneyGuard sales increased 5%, which is impressive coming off record annual sales in 2015. We continue to remain opportunistic with respect to executive benefit sales, which contributed $7 million to total life sales. Looking forward, our pipeline remains very strong, and given our product breadth and strength of our distribution, we remain optimistic about our new business opportunities.

Turning to group protection, we are pleased with the year-over-year earnings increase, driven by the significant improvement in our nonmedical loss ratio, which continues to benefit from our repricing efforts and enhancements to our claims management processes. First-quarter sales of $59 million increased 5% from the same period last year, which marked our first year-over-year sales increase since 2013.

As our pricing actions have stabilized, the degree of market disruption has been reduced. As a result, we expect improvement in sales activity and growth to persist. As I noted last quarter, this will be important, as we look to drive future margin improvement by growing premiums while sustaining pricing discipline.

In retirement plan services, earnings deposits and net flows were generally consistent with our outlook. First-quarter deposits of $1.8 billion were up 5% from a year ago. Recurring deposits increased 6% and benefited from both employee and employer contributions. First-year sales grew by 3%, and notably our pipeline continues to be very strong, which should benefit sales in the second half of the year.

Our focus on specific markets and our differentiated customer experience is working, and help drive positive net flows for the retirement business, which marked the fourth time this has occurred in the past five quarters. Over this period, flows had added more than [$0.5 billion] to RPS account balances.

While we continue to anticipate lumpiness quarter-to-quarter in net flows, we expect annual net flows to exceed 2015 levels. Confidence in our growth momentum is driven by our alignment with the fastest-growing markets and an ability to distinguish ourselves in the marketplace with a high-touch service model.

Spending a minute on investment management, we put new money to work in the first quarter at an average yield of 4%, which was down 30 basis points from the fourth quarter. The decrease in new money rates was due to a drop in treasury rates as we invested at 210 basis points over the average 10-year treasury in both periods.

Our alternative investments generated an $8 million loss in the quarter. Headwinds from our hedge fund portfolio, which represents one-third of our alternatives carrying value and the impact of lower energy prices on our private equity investments, were the primary drivers of this result. Over the last four years, our alternatives portfolio, which is now $1.2 billion of assets, has averaged a 10% annual return, a level we expect to achieve over the long run.

Let me also update you on our fixed income energy portfolio where we continue to proactively monitor and manage our credit exposure. Following nearly a $1 billion decrease in energy holdings in 2015, we trimmed almost $500 million in the first quarter and another $250 million in the second quarter. In total, this represents a 17% reduction in energy holdings over this period. Our sales targeted securities most likely to be at risk of credit loss in a sustained period of low energy prices.

In the quarter, we did experience some negative ratings migration from the energy sector. However, the RBC impact was manageable, and downgrades have slowed. The increase in oil prices have helped reduce our energy net unrealized loss, which was $375 million at quarter-end, an improvement of $100 million from year-end. Bottom line, we feel very comfortable with our energy exposure and the overall quality of our investment portfolio.

Turning to distribution, the depth and breadth of our retail, wholesale and worksite teams continue to differentiate Lincoln. The strength of our distribution force has enabled the shift in sales mix to the point that now 75% of enterprise sales do not have long-term guarantees, up 65% -- up from 65% a year ago.

While we continue to have success shifting sales to products without long-term guarantees, as I noted in the business sections, sales of our individual products were lower. This reflected the impact of market volatility on consumer demand, which keeps money on the sidelines, combined with some impact from regulatory uncertainty. That said, you have heard me say many times, distribution is a competitive advantage for Lincoln, and I expect to Lincoln to once again differentiate itself as market headwinds subside and distributors adapt to regulatory changes.

In closing, I'm looking beyond the first quarter, as I anticipate items that impacted the quarter to abate or reverse, and I expect our earnings to return to levels you have been accustomed to seeing Lincoln produce. Our strong franchise, balance sheet, and capital position create a lot of flexibility and opportunity.

I will now turn the call over to Randy.

Thank you, Dennis. Last night, we reported income from operations of $314 million or $1.25 per share for the first quarter, $0.10 below the prior year. As Dennis mentioned, there were several items that negatively impacted our results this quarter. While we do consider these items to be part of normal volatility, at this time we do not expect them to recur in the second quarter.

First, group results were negatively impacted by accelerated amortization of DAC, which ran $18 million or $0.07 a share above our typical quarterly run rate. I will provide more detail on this later, but we fully expect amortization to moderate.

Next, alternatives were below our expected results by $25 million, which negatively impacted the quarter by $0.10. While it is too early to comment on our expectations for the second quarter, the recent recovery in the broader equity and energy markets are likely to have a positive impact.

The equity market recovery should also boost our fee-based earnings. First-quarter results were impacted by a decline in average account balances, though by the end of the quarter, account balances were largely unchanged from year-end. As a result, this should add roughly $0.05 to our quarterly run rate.

Lastly, consistent with first-quarter results the past few years, we experienced elevated mortality, which negatively impacted individual life earnings by $30 million or $0.12. We estimate that roughly two-thirds of this was the seasonally high mortality that we typically see in the first quarter. I will comment more on mortality in the life section of my comments.

Now, shifting to key performance metrics. Operating revenue increased less than 1% in the quarter as another quarter of positive net flows was offset by a decline in equity markets, resulting in a 2% decrease in average account values. G&A, net of capitalized expenses, decreased slightly and notably trailed revenue growth. Book value per share, excluding AOCI, grew more than 7% to $53.25, an all-time high.

Finally, our balance sheet remains an important source of strength, even with interest rates at or below levels we saw during the first quarter. This gives us significant financial flexibility, which we once again exhibited this quarter with $260 million of capital deployed to shareholders. Net income results for the quarter included an investment-related legal settlement, $27 million of variable annuity net derivative losses, and a similar amount of general account investment losses.

Now I will turn to segment results, and starting with annuities. Reported earnings for the quarter were $218 million. A decline in average account values and lower variable investment income, which includes income from alternative investments and prepayments, were drivers of a 9% year-over-year decrease in earnings. Operating revenues declined 2% from the first quarter of 2015, after excluding an increase in fixed income annuities deposits.

Over the trailing 12 months, net flows totaled [$1.3 billion]. This 1% organic growth rate was more than offset by headwinds from equity markets. Return metrics remained strong, as ROE came in at 20%, consistent with our average return over the last decade. ROA decreased 4 basis points versus the prior-year, and stands at 74 basis points. Given the equity market recovery, we expect annuity earnings and returns to see a nice boost in subsequent quarters.

In retirement plan services, we reported earnings of $31 million, down from $35 million in the prior-year, primarily due to a decline in variable investment income. First-quarter revenue decreased 2% year-over-year, consistent with a change in average account balances, as positive net flows of [$415 million] over the trailing 12 months were offset by unfavorable equity markets.

Although average account values declined, end-of-period balances totaled more than $54 billion, in line with the prior-quarter and prior-year. Spreads, excluding variable investment income, compressed 3 basis points versus the prior-year quarter, better than our expectation for spreads to decline by 10 to 15 basis points annually in the retirement business.

A return on assets was 23 basis points for the first quarter. However, more normal variable investment income would produce an ROAE at the low-end of the 25 to 30 basis point range we have discussed in the past.

Turning to our life insurance segment, earnings of $75 million were down as a result of unfavorable mortality, and $17 million of lower alternative investment income. This quarter, mortality negatively impacted earnings by $30 million. And again, roughly two-thirds of this reflects typical seasonality.

Included in this quarter's mortality result were an unusual number of early duration claims, which represented approximately $8 million, and explains why our mortality experience exceeded normal seasonality. To provide some context, during the first quarter, we had claims on 16 large policies that were underwritten within the past two years versus a quarterly average of three policies over the past couple of years.

Turning quickly to the life earnings drivers. Average account values were up 3%, with average in force face amount up 4%, both consistent with recent performance. Normalized spreads decreased 11 basis points, just above the top end of our 5 to 10 basis point expectation. So, the first-quarter once again experienced typical seasonality. However, consistent with prior years, we do expect mortality to improve over the course of the year.

Group protection earnings of $5 million compared to a loss of $6 million in the prior-year quarter, with both periods impacted by accelerated DAC amortization. Importantly, we saw significant improvement in our non-medical loss ratio, which came in at just under 70% -- our best ratio since the fourth quarter of 2009, and an 850 basis point improvement from the prior-year quarter. This quarter's loss ratio clearly benefited from strong experience across all of our businesses.

Notably, life and disability continued to benefit from our pricing actions, while the latter saw further improvement in claims management. These positive earnings drivers were offset by a couple negative impacts from lower persistency, owing to our extensive repricing of policy renewals. Notably, nonmedical earned premiums declined 9%, and we experienced accelerated amortization of DAC.

As I noted upfront, the acceleration of amortization reduced earnings by approximately $18 million when compared to our typical quarterly run rate. As the first quarter is our heaviest renewal period, the amortization impact is greatest in this period, with decreases in subsequent quarters. In fact, this is exactly what we saw last year as well, which gives us confidence that group's earnings power will continue to improve.

Let me discuss liquidity, our capital position, and capital management, before we turn to Q&A. Holding company cash ended the quarter at $539 million, above our target of $500 million. Statutory surplus stands at $8.4 billion, and we estimate our RBC ratio to be approximately 480%, slightly below year-end, despite active capital management, and a roughly 10 point negative impact from ratings migration.

Additionally, I would note that we executed on a reinsurance transaction in early April, which generated approximately $400 million of capital. This capital provides a buffer for uncertain macro environments while also giving us incremental capital to deploy.

This quarter, we repurchased [200 million] of Lincoln shares, as we took advantage of our strong capital position, the decline in our share price, and capital that was freed up owing to lower annuity sales. While I remain very comfortable with our long-term free cash flow outlook of 50% to 55% of operating earnings being available for buybacks and dividends, I do see upside to this number this year, given the strength of our capital position.

As we've noted in the past, returning capital to shareholders remains a priority for Lincoln. As a result, we expect to go to the Board in a few weeks to ask for an increase in our share repurchase authorization, consistent with past practices.

So, wrapping things up, earnings were short of our expectations, but we see clear signs that our earnings power will recover in the very near-term. As Dennis noted, our strong franchise gives us confidence in our ability to capitalize on long-term growth opportunities, while the strength of our balance sheet and capital generation capabilities allows us to continue actively deploying capital.

With that, let me turn the call back over to Chris.

Thank you, Dennis and Randy. We'll now move to the Q&A portion of the call. As a reminder, we ask that you please limit yourself to one question and only one follow-up; then re-queue if you have additional questions.

With that, let me turn it over to the operator.

(Operator Instructions) Jimmy Bhullar, JPMorgan.

So my question is on life margins. If you look at the margins in the business, they have been weak for, I think, the fifth straight quarter versus our estimate. But we've had a steady decline in earnings in the life insurance business; used to run around $500 million to $600 million on an annual basis. Now is, last year, earned less than $400 million.

So really just trying to understand what's going on. And is there more to it than just seasonality? Or is it just the [re-blocks] that you recaptured or something else that might imply that the future earnings power of the business is lower than what you had earned prior to 2015?

Sure, Jimmy. This is Randy. Thanks for the question. When I think about the life business, I tend to think about it over a more extended period of time. If you go back four or five years ago, I would agree with you that I would think of this business as roughly $135 million, $140 million a quarter business. So right in that $550 million range.

If you think about what has gone on in the business then over the subsequent five years, what I would say is that the combined impact of spread compression -- that's a real economic item -- and the fact that we have done a significant number of reserve transactions -- reserve financings over the course of the year, has pulled roughly $35 million to $40 million out of that number. So you start at $135 million. You come down that $35 million to $40 million.

To that, we have added back, I would estimate, roughly $30 million, $35 million a quarter from the new business that we sold over that point in time. When all is said and done, where that leaves you, what I would say today, is roughly $125 million, or in that range, a quarter.

So, we are $140 million. We've pulled a significant amount of money out of the business. Due to the reserve financings, there has been some impact from spread compression, but we've added back a significant amount from new business. So that's what I'd see today, Jimmy.

And so the block that you captured from Swiss Re, how has that performed, not just this quarter but also over the past year or so? And have you -- has that been a contributor to weaker results in the last few quarters?

You know, Jimmy, the block we brought back through reinsurance has performed exactly like the rest of our business. Over the last five quarters, we've seen a little bit of a elevated mortality and sort of the blocks have mirrored each other. There's been nothing outsized about either block we brought back through reinsurance or these non or the other business.

Okay, thank you.

You bet.

Suneet Kamath, UBS.

Randy, I wanted to follow-up on the reinsurance transaction that you just talked about towards the end of your prepared comments. Can you, one, give us a sense of what may be the earnings impact of that transaction is? And then, two, in terms of that $400 million of capital, was that contemplated in your original 50% to 55% capital return guidance?

So, first, on the reinsurance capture, I'll go back to what we said at the beginning on our expectations and our actual experience hasn't changed. We expected it to have a modest impact on the actual earnings of the life insurance business. But in total, we expected it to be accretive to EPS through the fact that we were going to deploy a significant amount of capital in share buybacks, which we did.

So, overall, net-net, we expected that recapture to be accretive to EPS. And it has been.

The second question, Suneet --?

Sorry, I was -- yes, I was referring to the thing that you just did in April; not the Swiss Re thing, but the thing that you just talked about at the end of your prepared comments.

Yes. We are constantly working on optimizing the balance sheet. What I would say about the $400 million of capital that we generated through a reinsurance transaction, it's related to our New York book of business.

If you remember -- it was about four years ago -- the industry entered into an agreement with the NAIC on reserving for secondary guarantee. Well, at that time, 49 states signed onto that. New York, unfortunately, decided to go a different way and didn't adopt the agreed-upon approach. That created a significant amount of non-economic reserves.

If you remember for us, we have been putting up $90 million of additional reserves a year over a five-year period -- we are in the fourth year of that -- and for a total of $450 million of additional reserves. When that happened, we set about immediately trying to figure out a way, and figured there would be a way to manage, in a more effective way, those additional reserves we were putting up.

You are working in New York, so you have to be -- it's a little more restrictive in terms of what you can do. For instance, a captive related transaction is going to be much more difficult. So it took a little more time, but we were eventually able to enter into a more traditional reinsurance transaction. And that's what generated the $400 million of relief I talked about.

We figured we were going to get that done exactly when the timing was going to be, Jimmy, was uncertain, but we did complete it here early in the second quarter. In terms of how does it impact or did it impact my expectations, I'd just go back to what I said in the script. Over the long-term, we expect 50% to 55% is well within our wheelhouse.

But then this year, given the strong capital position, given the fact that we continue to generate strong amounts of capital, continue -- given the fact that annuity sales are down a little bit, given the fact that we did this reinsurance transaction, we fully expect to exceed that long-term guidance this year.

All right, got it. And then just the second one on the DOL, Dennis. I mean, you talked about conversations with your distribution partners. But is your sense that these partners would be comfortable that there is enough Safe Harbors within that BIC exemption that they would still be willing to write business on commission?

I think I would go back to my opening remarks and reiterate that the Rule not only allows commissions, but suggests that, in certain transactions, commissions may be a better outcome for the consumer than annual fees. So, I think everybody is trying to move forward within the guidelines of the rules. There's certainly some difficulties associated with the right of action.

But as I said, our partners preliminarily appear to be gathering around the idea of creating compliance requirements to continue to sell products on a commission basis. Again, I think back to my specific comments, the DOL is saying that one may not be better than the other compensation versus -- upfront compensation versus fees, depending on the facts and circumstance of the product, the sale, and the ongoing advice cycle.

And just lastly, how long do you think this transition is going to be? There's -- clearly, there's a lot moving along -- moving around here. But just -- I mean is this sort of a two-year transition as people kind of get accustomed to the new rules?

The implementation is within the window, I believe is when the next -- is January of 2018. So we know for sure that everything has to be done by then. But I suspect most companies are doing what Lincoln is doing, which is we have large numbers of people moving forward with specific time tasks and responsibility, plans to comply with the regulations as they exist today.

One example of that would be in our broker-dealer, where we very much intend to pay commissions on variable annuities. And we are building the right compliance infrastructure to make sure that we are not taking risk on unnecessarily.

Thanks, Dennis.

Erik Bass, Citigroup.

I was hoping you could provide some more details around group persistency this year around year-end versus what it was in the first quarter of 2015? And maybe what you would think of as sort of a more normal level when you weren't going through repricing initiatives?

Sure, Erik, this is Randy. If you look at the period of time over which we've been going through this repricing process, you've definitely seen persistency year after year decline. You go back a few years ago, persistency ran in the range of 80%. As you came into 2014, persistency ran in the mid-70s.

As the sort of a cumulative impact of the pricing actions started to really bite, we moved into the mid-60s in 2015. And that was similar to what we experienced in the first quarter of last year also. And then this year in the first quarter, Erik, we came in at 57%. Now -- so we are down about 8 points from where we were last year.

I think as you look forward, we would expect that persistency to start to grow back. Where it ends up over the long-term, I expect sort of those mid-70s as a sort of consistent with the industry experience in this business.

Great, thank you. That's helpful. And then, Dennis, I just had one question on DOL, where I think you commented that sales of indexed annuities through independent agents would prove more challenging. But it seemed like you were implying that you think those sales would still be feasible.

I guess this is a little bit different from what we are hearing from some competitors who worry that the insurance company would have to be the signor of the BIC, since independent agents aren't qualified financial institutions. So I would just be interested in your perspective on that.

Yes, specifically what I said is that we only had 3% of our sales of fixed indexed annuities into qualified plans. And I think I then went on to say that the independent distribution channel, where you are selling products -- nonregistered products -- is a -- what's the expression? -- is going to be a long bore through a hardboard for companies to get to where they need to be from a compliance perspective.

I would also say that I think there's a couple of sentences in the DOL rule that maybe could be -- or interpretations that could be -- tweaked to lessen that challenge. But if you let me be absolutely clear, it's a much harder road on fixed indexed annuities through nonregistered distribution.

Got it. Thank you.

Michael Kovac, Goldman Sachs.

Thanks for taking the question. One for Dennis coming back to the Department of Labor here. Just want to think about -- the variable annuity sales were obviously down fairly significantly. And part of it driven by the market, some of it likely driven by pending rules. And with the final rules out, have you seen any change in trends in April? Trying just to disaggregate what you guys are seeing internally as to what's leading to lower sales.

It's pretty hard. I keep saying there's a hint of the DOL in the reduced sales. But, in fact, the reduction in sales was not that much different between qualified and nonqualified plans. So we think what we don't know is how much more qualified sales there would have been without the disturbance of the rules.

But just again, mathematically, qualified sales actually decreased a little bit less than nonqualified sales. But again, it's what was the upside opportunity that was missed that I can't put a number on.

No, that's helpful and sort of leads to a follow-up on that basis. Do you expect, as you talked to distribution and think about sort of the forward with the DOL now out, there being some sort of maybe two-tiered regulatory system where qualified versus nonqualified plans are sold differently by your distribution partners? Or do you expect a longer-term merging between the two?

You know, that's a very difficult question to answer, and I would hesitate to speculate. What I do think is there's greater transparency because of all the technology that's available. There's trends around best interest requirements.

So, it will be interesting to see how regulation develops. But from my perspective, and Lincoln's perspective, we'd have to continue to do and offer products and compensation that's in the best interest of our clients, and is consistent with regulations. And that's what we'll continue to do.

And if I could sneak one in for Randy here. When you think about -- I think you guided us to it in the past -- [$1 billion] -- or [$1] slowdown in VA sales leads to about $0.05 of deployable capital, which you could utilize for share repurchases. Can you give us a sense of the timing and terms of when that comes forward? I know you suggested that you may see higher deployment going forward. We didn't necessarily see that come in the first quarter despite the lower VA sales.

Yes, Michael, it comes pretty quickly. I mean, you don't make that $1 sales and so you don't have put the capital up. So, from that regard, it comes immediately. And I think you saw some of that in the first quarter buybacks, where we did $200 million. As I noted, that was an aggregation of a number of issues, including the strength of our capital position, but also including the fact that we did see annuity sales running at a little bit lower levels.

Great, thanks.

You bet.

Ryan Krueger, KBW.

I had a question for Randy. On the group loss ratio, it was obviously a very favorable quarter. I think in the prior to a few years ago, I think you have always talked about a 71% to 74% target. I guess was just wondering, given you've done a lot of the repricing now, what type of expectation you would have going forward?

We haven't, Ryan, really updated that at all. I would say, as the proportion of business that is employee-based becomes a bigger piece of the book, that that has a modestly lower loss ratio. So, over time, you would expect that target to trend down a little bit.

When you look at the quarter itself, we came in at 69.6% for the quarter. You know, it's really -- you start to try to split the -- split these things to a pretty much finer level than you truly can. But when I look at the actual experience in the quarter, there are three primary items that really drive loss ratios, if you're talking about disability insurance.

You have incident rates. You have terminations, and you have the average sized claim that comes on the books. When I look at those three items and how they impacted the quarter, once again, you are starting to split these things pretty fine, but it's probably about a 1 to 2 points better than we would have expected for the quarter. So, that 69.6% had a little bit of favorability in it but not too much.

Okay, great. That's helpful. And then just a quick one on the DOL. Do you have any view of potential incremental costs at Lincoln, as you deal with the compliance aspects of this?

I guess somebody earlier today mentioned that there is 1,000 pages worth of regulation. There will be some manageable cost increase. Over the years, I've seen a lot of, for example, when SOx was introduced, I've seen a lot of people worried about the increased cost of managing it. I think most companies who are effective in how they implement the requirements of new regulations, can do it on an economically manageable basis. And certainly at Lincoln, we think we can implement whatever we need to on a manageable basis.

Got it. Okay, thanks a lot.

Randy Binner, FBR.

I have a couple more on DOL. I guess to Dennis's comment on the Lincoln Financial network looking to pay a commission on variable annuities on a go-forward basis, that would be under the BIC. And so, I hear all the comments that the BIC is more workable. But I guess the question kind of quantitatively is, what do you think commissions would look like in that scenario?

My belief would be that they would be a lot lower. So my question is, how much lower commissions would commissions be? And how do you feel about how that might affect people's motivation to sell those products?

Randy, I'm not certain I agree with the conclusion that the DOL regulations caused the reaction of lowering compensation. Let me come back to the examples that we shared in our comment letters with the DOL, and take a look at the difference between an annual advisory fee -- let's say 1% -- which is not even available to smaller sized customers; it would be 2% or more.

So if you have a 1% annual fee, I think the breakeven point on a full upfront commission on annuities versus that 1% fee is in four or five years. And so, it -- again back to the contract language, what's in the best interest, based on this product that's being sold, what's in the best interest of the client and a long-term contracts upfront compensation, may very well be the answer as to what the best interest is.

Now, broadly speaking, I think -- the financial services industry is moving toward, in total, more pressure on fees, more transparency. But I think that's an independent issue from the Department of Labor.

Yes. No, I appreciate that. I guess the thought process we had -- and we are not alone in this -- is that the right of private action would seek to find issues where the fiduciary interest is not held up, and they will try and build a class. And they will look for data, and they would essentially be looking for the higher commissions products first. Is that not -- I guess if you pay normal commission, would that increase your legal risk, if you are going to sell VA's under the BIC?

These questions are hard to answer sort of in a general statement. So let me come back to a very real differentiation in the fixed annuity market. There is a segment of the market that focuses on less liquidity, so that surrender charges and commissions are higher. But then, that value proposition comes along with investing longer and presumably paying a higher crediting rate.

Now, we don't participate in that market, and so we don't pay -- we have a more liquid, lower-commission product, which is appropriate for our distribution channels and what's Lincoln's view on consumer value is. So, you're going to have to look at each situation like that. And I don't think that you can automatically come to the conclusion that a less liquid, higher-credited-rate product with a higher commission is going to automatically be litigated versus the kind of products that we sell.

All right. Thanks for the perspective.

Humphrey Lee, Dowling & Partners.

Thank you for taking my questions. Just a follow-up on the comments about the $400 million of reinsurance capital relief. Randy, you mentioned that some of it would be for buffer and some of it could be for capital deployment. Could you maybe remind us how do you size as a capital buffer that you would like to hold in a current environment, at least for the near-term?

Humphrey, yes. I made that exact statement or script. I would tell you that I would make that statement at any point in time, any time we have an amount of capital come along. I mean, we have capital and we are always prepared for any economic uncertainties that would come along.

I mean rest assured, I will go back to my other comments that we will be very active in buying our stock back, both in the second quarter and for the full-year 2016. Fully expect, as I said, to go above the 50% to 55% of operating earnings long-term guidance. And part of that will be because of the $400 million of capital that we were able to generate from that transaction.

Okay, got it. And then in terms of group protection, looking at the kind of adjusted number in terms of the after-tax margin, it was a little bit over 4%, maybe, like you mentioned, the visibility on the underwriting was a little bit favorable. But looking longer-term, how close are you back to kind of the historical margin that you target for? And then maybe, given where we are right now, do you expect you will achieve that kind of longer-term target in the near-term horizon?

I think that the -- I shouldn't say think -- what we say is that our long-term margin expectation is 5% to 7%. We had originally thought we'd get to that earlier, maybe the full-year 2017. But because we had higher -- lower persistency than we expected and we've had declining premium, our loss ratio -- excuse me, our expense ratio isn't where it needs to be.

And so I think we are looking out to the lower end of that range latter part of 2017 or even 2018. Now, if sales, which could happen, moved along properly priced and more robust, let's say 4% or 5%, which is sort of the industry average, that could occur sooner.

Thank you for the color.

Eric Berg, RBC Capital Markets.

Dennis, thank you for the -- I'm sorry, well, to both of you, but Randy, in particular, thank you for the detail that you provided on the adverse mortality in the quarter in life insurance was very helpful. Given that the -- I don't remember the exact numbers, but I was struck by the difference between the number of early duration claims that you had in the March quarter versus the quarter to which you were comparing.

Given that it was so much higher, if I took away the right conclusion -- tell me if I didn't and I'll -- well, tell me if I don't have the right conclusion -- but given that it appears to be the case that there was such a sharp increase in the quarter in the number of early duration claims, people dying so shortly after they purchased the policies, what is the probability at this point that this is a blip rather than the beginning of a trend?

Eric, it's -- we have, obviously, as we do with any claim that comes in, spent a lot of time analyzing these things and specifically this quarter, because it was an item that impacted the quarter results. We have spent time looking at each and every one of those claims, Eric, analyzed them down to -- gone back to the underwriting that was done. And when you do all of that analysis, it truly looks like a blip.

I mean I think you have to remember that we insure nearly 2 million people. We write, on an annual basis, 40,000 to 50,000 new policies on any given year, and you are going to have quarters where things like this happen. I mean, the claims were spread across a wide variety of reasons. Weather it was -- whether it was cancer or gunshots or whatever it was, you just had a wide variety of reasons that got in there, Eric, and truly looks like a blip.

I think with mortality, you always have to go back to what are your longer-term trends when thinking about what your best estimate of what your next quarter is going to be, as opposed to what happened in the last three months.

Eric, I'd just --

And I -- oh, go ahead, Dennis.

Yes, if I might add, in the short-term, something different about the people underwriting or your underwriting policies and practices would have to change for there to be something ongoing that's different. And that hasn't happened. So, we are pretty comfortable with the remarks that Randy has been making.

You know, it's a different story than is there some bigger trendy than, say, for example, older age mortality. But I don't have to add any -- I don't have anything to add on that point either.

Just one quick follow-up before wrapping up, on this concept of grandfathering. Am I right -- as you interpreted the DOL rule, Dennis, or do you have a different view, that on existing contracts on which the customer is making systematic payments or any ongoing payments, or on existing contracts in which the producer continues to receive trail commissions, that those contracts are not grandfathered, that they are covered by the fiduciary rule?

Eric, some of this stuff is arcane, but my understanding is that so long as a change is not made to an existing policy in terms of what that policy has been -- the payments and so on and so forth -- so long as there is not a change, there is no reason to go back and do anything different. If it's the equivalent of a new sale, in the way that -- if something changes that is essentially the equivalent of a new sale, that would be a different story.

Thank you.

And our last question comes from Yaron Kinar of Deutsche Bank. Your line is open.

I just have one question if it hasn't been asked yet. Going back to the alternative investment portfolio, we actually just heard from one of your competitors talking about their interest in shrinking their hedge fund ownership within alternative investments. As you are looking at your long-term returns from this business or from this portfolio, are you seeing any maybe adjustments that you want to make to the portfolio? Or any areas that are more concerning or more attractive to you?

As to the broad question of hedge funds versus private equities, our intention is similar. I don't know what the magnitude of the other insurers change would be, but we'd expect to move more toward, as a percentage of the total, private equity than hedge funds. We'll do that over time.

And would you keep the overall size of the portfolio, the alternative investment portfolio, roughly the same? Or would it shrink as you move the weightings within the portfolio?

Right now our percentage of alternatives -- the percent of alternatives of the total investment portfolio is about 1.2%; carrying value at $1.1 billion. That compares to the industry averages of closer to 3.2%, 3%. So we feel as if there is room for us to grow modestly The aggregate size of the alternatives investment portfolio, as we shift some of our hedge funds into private equities.

Got it. And could you disclose what the -- roughly what the size of the hedge fund allocation within alternatives is today?

Yes, we are happy to disclose that. It's about a third of the $1.2 billion -- $400 million. And I guess we'd expect that to come down to $250 million over time.

Got it. Thank you very much.

And I'm showing no further questions at this time. I'd now like to turn the call back over to Chris Giovanni for closing remarks.

Great. Thank you. And thank you all for joining us this morning. As always, we will take your questions on our Investor Relations line at 800-237-2920 or via email at investorrelations@lfg.com.

Thank you all, and have a good day.

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