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Lincoln National Corp. (NYSE:LNC)

Q1 2009 Earnings Call

May 06, 2009 11:00 am ET

Executives

Jim Sjoreen - VP of IR

Dennis Glass - President and CEO

Fred Crawford - CFO

Analysts

Ed Spehar - Bank of America-Merrill Lynch

John Nadel - Sterne Agee

Jimmy Bhullar - JPMorgan

Andrew Kligerman - UBS

John Hall - Wachovia

Bob Glasspiegel - Langen McAlenney

Suneet Kamath - Sanford Bernstein

Steven Schwartz - Raymond James & Associates

Eric Berg - Barclays Capital

Mark Finkelstein - FPK

Darin Arita - Deutsche Bank

Tom Gallagher - Credit Suisse

Operator

Good morning, and thank you for joining Lincoln Financial Group's first quarter 2009 Earnings 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)

Today's call is being recorded. At this time, I would like to turn the conference over to the Vice President of Investor Relations Mr. Jim Sjoreen.

Jim Sjoreen

Thank you, operator. Good morning and welcome to Lincoln Financial's first quarter earnings conference 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 report on forms 8-K, 10-Q and 10-K filed with the SEC.

We appreciate your participation today, and invite to you visit Lincoln's website, www.LincolnFinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations, and return on equity to their most comparable GAAP measures. A general account supplement is again available on the website as well.

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

At this time, I would now like to turn the call over to Dennis Glass. Dennis?

Dennis Glass

Thanks, Jim, and good morning to all of you on the call. Let me start at the top. This is the first quarter in many that we achieved positive net flows in all lines of businesses. Sales and deposits were ahead of last year, and we have seen no appreciable uptick in surrender activity in any line of business.

Finally, and importantly, all business lines were profitability. Given the recognized rough environment, the results reflect the core strength of our operating model, and the value of the franchise. Our reported net loss reflected the impairments of goodwill on our annuity business, due to capital market factors. Fred, will comment on the specifics.

In recent months, our industry has benefited modestly from some stabilization in the capital markets, and some easing in the turmoil among our important bank and broker partners. At the same time, the industry is beginning to make progress on constructively shaping the next generation of products, including the VA business.

The rating agencies have essentially downgraded our entire industry, but you may have noticed this morning, and we are quite pleased that Standard & Poor's did reaffirm Lincoln's AA- claims-paying rating. Industry actions by the rating agencies have been based on liquidity and capital concerns at a time when the capital markets, while certainly improving somewhat, continued to limit the range of options available to companies. Lincoln has taken decisive actions to protect our balance sheet and to address liquidity.

We have cut our common dividend, easing the cash flow burden at the holding company by $400 million annually, and reducing the draw on subsidiary capital. In April, we completed a 12% workforce reduction. The workforce reduction, plus other non-employee expense cuts across the enterprise add up to the $250 million in cost savings run rate that we previously announced.

These reductions were strategic, meaning we do not expect sales or service to be materially affected as a result. The savings will be muted on a GAAP basis this year due to DAC offsets. However, the $250 million net of tax will meaningfully benefit statutory capitalization on a run rate basis.

On a GAAP basis, net of DAC, tax and related charges, we expect to realize about $45 million of savings in 2009, with the majority coming in the second half of the year. We substantially reduced debt at the holding company, through subsidiary dividends we have redeemed $600 million of debt, and plan to reduce our commercial paper by another $100 million.

We will end the second quarter in a short-term borrowing position of roughly $500 million. Should capital markets remain frozen, which I do not expect, we have $2 billion of contingent borrowing capacity in the form of intercompany agreements and committed bank lines to handle both, any disruption in the commercial paper markets, and senior debt maturities maturing over the next few years for Lincoln.

We also have ample liquidity in our principal reinsurance subsidiaries. Now that we have seen the level of sales and surrender activity during the first quarter, we feel comfortable moving $1 billion out of short-term assets into long-term investments, with the expectation of picking up 500 basis points of yield over the balance of the year.

In the quarter, we increased Lincoln Life's capital base by $240 million, through a life reinsurance transaction, and have initiatives well underway to add more capital to the subsidiaries. Based on preliminary statutory data, our estimated RBC at the end of the quarter is strong. RBC is dependent on many factors, but I'm currently comfortable that we will be able to maintain satisfactory levels in 2009.

Turning to our businesses. The economic environment has made sales more challenging, and we expect this pressure to continue in the near term. Not surprisingly, consumers and their advisors are taking more time before committing to major financial decisions. Our frontline employees, including wholesalers, planners and client service representatives are doing a very good job in this environment, as reflected in our sales and net flows in the quarter.

At Lincoln Financial Network, and Lincoln Financial Distributors, our retail and wholesale distribution companies, the story remains relatively unchanged from the prior quarters. We are focused on providing our clients with advice to help them sort through the noise, work hard to attract deposits, and carefully managing expenses.

In the first quarter, LFD took the strategic step of combining the smaller fixed annuity sales team with the larger and more productive variable annuity team. This action has been well received by our client firms, and has resulted in the expansion of our fixed annuity distribution, across more geography and client firms.

In Retirement Solutions, our Individual Annuities and Defined Contributions had a good production inflow quarter. Total Individual Annuity deposits were $2.2 billion, and Fixed Annuity deposits of $600 million, almost doubled quarter-over-quarter, and while weak by historical comparison, VA deposits of $1.6 billion and positive net flows of over $400 million were good results given the environment.

The industry has been moving to de-risk VA guarantees, and in January, we made changes to raise fees, add investment limitations and reduce benefits. We expect to continue balancing reduced product risk, customer value, and returns. The next set of changes will further reduce risk, but we intend to remain competitive in the VA marketplace.

In our Defined Contribution business, deposits were up slightly from the prior year quarter, while net flows improved dramatically. We saw a strong growth in the large case market, and low lapse rates across our DC product lineup are contributing to the favorable net flow story.

First quarter life insurance sales were down 16% from a year ago. Permanent and COLI sales declined while term and BOLI both posted strong year-over-year increases. The launch of a new term portfolio at the end of March, and continued softness in the high end life insurance sales will likely cause these trends to continue in the near term.

The Group Protection business continued to deliver very solid results. First quarter sales were flat compared with last year, reflecting competitive environment, and a client base that is closely watching employee levels in costs. In Investment Management, results at Delaware benefitted from improved investment performance, ongoing expense initiative, and their well-deserved reputation. During the quarter, Delaware's total net inflows turned positive for the first time since the third quarter of 2007, reflecting strong institutional inflows.

Now, let me turn it over to Fred.

Fred Crawford

Thank you, Dennis. Focusing first on income from operations, we recorded income of $171 million, or $0.66 per share in the quarter. The storyline is similar for all major insurance operations. We recorded positive tax true-ups, a result of filing our tax return early this year, offset by negative retrospective DAC unlocking, and lower investment income as we remain more liquid in the general account.

Virtually all segments benefited from lower expenses, the result of cost cutting, reduced volumes and some timing of expenditures. However, consolidated results were impacted by a $64 million charge recorded in other operations for an arbitration ruling handed down in the first quarter.

The ruling effectively unwinds a small piece of Lincoln Re sale to Swiss Re, involving a treaty with three individual disability income blocks. While we are still assessing our legal options and the financial and administrative issues involved, we believe it prudent to establish an allowance against various recoverables previously established for this business.

We will be conducting a review of reserves in the coming quarters as the business is integrated back into our operations. Excluding this charge to other operations, we believe reported segment earnings represent the current normalized earnings trends in our core businesses.

Turning to items that impacted net income. Net realized losses and impairments related to general account assets were approximately $85 million after tax and DAC. Gross general account losses were $247 million pretax and pre-DAC. The only significant concentration being RMBS, which represented about a third of the losses.

We adapted the new FASB guidance for the recognition of impairments which reduced pretax and DAC impairments by approximately $112 million. After considerable review, we recorded a $600 million goodwill impairment related to our annuity business. This charge to goodwill reflects the rise in current discount rates applied to the business, along with the market's impact on account values and sales expectations.

Important; this charge does not reflect our view of the long-term value of the annuity franchise, which continues to drive positive flows, supported by a significant wholesaling force and strong client relationships. Also impacting net income were the results of the variable annuity hedge program, focusing on living benefits we experienced hedge breakage of $77 million pretax and DAC, and before the effects of FAS 157. The breakage was driven by being modestly over hedged on our income benefits.

We refined our estimate of the non-performance risk factor embedded in FAS 157, which resulted in a $55 million pretax and DAC loss in the quarter. Absent, refining our estimate, the NPR would have produced a significant gain in the quarter. We ended the quarter with hedge assets equal to our hedge target as defined under FAS 133 or the economic calculation of the benefit liabilities, this excluding the impact of NPR.

Turning to capital and liquidity. We have been building up liquidity in our insurance company given current market conditions. We estimate insurance company cash and liquidity in excess of $3 billion, and maintain contingent liquidity capacity from the Federal Home Loan Bank of Indianapolis.

As Dennis noted in his comments, we have retired $600 million of holding company debt at the end of April, with another $100 million reduction planned for later this quarter. Recognizing day-to-day liquidity will fluctuate, we expect to manage to an average short-term borrowing position of around $500 million throughout the year. In support of that position and as a contingency to any term debt maturities, we have contractual borrowing capacity from our insurance subsidiaries of roughly $1 billion, together with $1 billion in unused bank lines maturing in 2011.

Furthermore, we expect that our common dividend reduction and cost initiatives have set the stage for reduced holding company cash needs, and allows us to build insurance company capitalization as markets recover. We estimate our first quarter RBC to be in the 380% range, after giving effect for impairments in the quarter, and the $240 million of capital raised from our Life reinsurance transaction.

Remember that we utilize a captive for our VA business, and as of quarter end, maintained hedge assets well in excess of current statutory reserving guidelines. Therefore, understating our current RBC as compared to onshore programs. While we have not yet finalized our estimates for VACARVM, we expect the implementation will increase required statutory reserves, and are currently doing the modeling work under various market scenarios.

The insurance company dividend action in the second quarter will be offset to some degree by the contribution of corporate assets, namely our media holdings to the insurance company, where we maintain other private equity positions. We would estimate the net negative impact of the two actions to be approximately 20 points of RBC. We continue to work on long-term reserve securitization transactions of more modest size in the $200 million to $300 million range, and hope to execute a transaction in the coming months.

Let me now turn to a brief comment on our business segment, starting with our retirement businesses. Average account values in our annuity business decreased by roughly $1.7 billion in the quarter, driving expense assessment revenue down by 4% sequentially, and our defined contribution businesses, average variable account values were down just under $800 million, with overall expense assessment down 7% sequentially.

Mitigating these effects of the markets were $1 billion in positive retirement flows, with balanced contribution from variable and fixed annuities, and Defined Contribution business lines. As noted earlier in my comments, the retirement segments experienced weakness in investment margins as a result of remaining more liquid. We estimate this had

We estimate this had a $7 million impact on annuity earnings, and about a $4 million impact in our Defined Contribution segment. As Dennis noted, we are moving to a more fully invested position, and would expect to mitigate some of this impact in future quarters.

While VA death benefit mortality expense continued to weigh on our annuity results, we didn't have material DAC unlocking having reset our reversion to the mean assumptions in the fourth quarter. We are monitoring policyholder behavior, and are yet to see noticeable movement in our surrenders, exchanges or withdrawal rates in our VA products.

Fundamentals remain relatively stable in our life business, with average UL and VUL in-force up 3% over the prior year. Account values is down 2%, driven primarily by the market's impact on VUL balances. Both metrics will be modestly impacted by our reinsurance capital transaction closed at the quarter end.

We continue to experience some weakness in mortality margins. This is not an issue of gross mortality, rather the result of accounting treatment under FAS 113 for reinsurance recoveries in the period. The accounting guidance has the effect of amortizing reinsurance gains and losses on certain blocks of businesses over future period.

Similar to the retirement segment comments, our liquidity position is impacted the period's earnings by roughly $3 million. As we look forward, we estimate the reinsurance transaction closed at the end of the first quarter will reduce life segment quarterly earnings by roughly $7 million. This is somewhat offset by income on the capital generated of roughly $2 million per quarter, which flows through other operations line item.

Overall loss ratios in our Group business were favorable coming in at just under 71%. The disability lines continue to out perform. We believe the weak job market has actually contributed to lower rates of incidents.

Non-medical net earned premium increased 6% over the comparable 2008 quarter. While pleased with the growth, this is where we are experiencing the impact of the current economic conditions, the headwinds of lower overall employment, and salary levels.

Delaware returned to profitability and positive flows in the quarter, with the mark-to-market on seed capital negatively impacting earnings by about $2 million. First quarter market decline drove assets under management down by $3.6 billion in the quarter. We expect quarterly earnings to remain in the low single digits throughout 2009.

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

Dennis Glass

Thanks, Fred. The solid first quarter operating results and actions we are taking establish a good base for more progress during the year. Earnings will be added to over the year by cost reduction actions, and deployment of $1 billion of investable funds into the market.

If the recent equity market rally holds, this will increase fund balances, and also add to earnings. We have sufficient financial flexibility at the holding company for the foreseeable future. We are focusing our attention on adding capital to the insurance subsidiaries as some level of additional investment losses are likely to occur.

All of us recognize that external factors remain an issue, and can change quickly, but in general, I'm confident in Lincoln's strength, and that we will manage through the challenges in 2009.

Now let's go to Q&A.

Question-and-Answer Session

Operator

(Operator instructions) For our first question we go to Ed Spehar with Bank of America.

Ed Spehar - Bank of America-Merrill Lynch

Thank you. Two questions. First, Fred, I was wondering if you could talk about the bank lines and the letters of credit that are associated with the intercompany reinsurance. The question really is, to what extent does the bank line get drawn down further if the equity mark were to go down significantly, let's say the 700 that you talk about in the 10-K?

The second question is on goodwill. I guess it's a little bit hard to understand how you get a goodwill charge that's market related of this size, when you are talking about the Jefferson-Pilot acquisition where there really wasn't a significant variable business.

Fred Crawford

In terms of the bank line and the LOCs, we have about a $3.1 billion total bank facility that is supported by upwards of 20 banks or so, and that bank line allows to us draw either cash borrowings underneath it or issue letters of credit.

We have got a little over $2 billion of letters of credit issued, which primarily support reserve redundancy or excess reserve securitization on the life side. We would not anticipate the LOC needs to be climbing here over time, in part due to the interim solution and other mechanics that have lessened the need for reserve securitization on a go-forward basis.

So, that's why we are quite confident in the $1 billion of cash availability that backs our liquidity needs as a company, and really actually also backs our commercial paper program as a prime issuer. I also wouldn't expect necessarily the markets in themselves to give rise to a different need for letters of credit under that facility.

In this particular case, while we do use the captive for our variable annuity program, we have got fairly significant assets held in Barbados in support of that program that we believe we could utilize to help with the reserving.

In terms of the goodwill, it is a bit of an unusual element in terms of when you step back and look at the JP merger, but there's a couple of reasons. First of all, this is the result of the PGAAP allocation process of goodwill when you are going through a merger, and several things drive a goodwill allocation to the annuity business.

First, remember that we did in fact acquire a fixed and indexed annuity book from Jefferson-Pilot. So, there was an acquisition there, but you also allocate your goodwill for where you believe there to be benefit in the business after giving affect for the merger.

So, for example, expense savings achieved across the company will typically benefit all of the segments, and particularly, the major segments of the company, which would include annuities. Certain revenue synergies by combining the distribution platforms and selling product into each other's distribution network is helpful.

Also, we viewed the actual combination with Jefferson-Pilot as creating more capacity to write variable annuities, having a much better balanced mix of earnings and much less of a concentration in equity market exposure as we did in it Lincoln before the time of the merger.

So, all of those things contributed to the original allocation of roughly $1 billion of goodwill to the annuity business, and now we've taken the impairment really to reflect the market, and most particularly, the rise in discount rates given the volatility in the market.

Ed Spehar - Bank of America-Merrill Lynch

Fred, just to follow-up on the LOC question, can you just give us some sense of what the dollar amount of LOCs would be related to the VA business versus the life business?

Fred Crawford

Right now we don't really have any LOCs set up for the VA business at this point in time. We do have cash capital that is housed in trust that helped us get reserve relief under, particularly the death benefit reserving requirements which spike up more considerably under AG 34, but we don't really have much in the way of current LOCs allocated to the VA business.

Operator

We go next to John Nadel with Sterne Agee.

John Nadel - Sterne Agee

So really my focus for this morning is on risk-based capital and statutory capital levels. I guess I would be interested in sort of understanding as we look out for the remainder of 2009, is your expectations, especially maybe under some stress scenarios of the ins and outs and just what might cause calculated risk-based capital to fall below 300% by year-end?

I mean may be along those same lines just to help sort of direct the discussion, what your expectations are for statutory operating earnings? Is there any meaningful change in your outlook for that relative to 2008?

Fred Crawford

I will try to give you some color around RBC and see if in the process I get to answer your question. We ended the quarter at 380% RBC, and that RBC was weighed down somewhat by CARVM adjustments, where just the market coming down in the quarter and also not only the impairments we took in the quarter, but also a level of ratings migration, which requires us hold more capital against the bond exposures or asset exposures that we have under the RBC calculation.

So, you've got a couple of different things that were influencing that and then, of course, we closed on the reinsurance transaction, which bolstered RBC in the period. As we go into the second quarter, we've got a couple of moving parts. We have got the ordinary dividend that we have announced that we'll be taking out of the life company of $400 million.

We anticipate contributing the media company assets which is really now more or less a private equity holding of the company to the insurance company, which has in and around a couple hundred million dollar or so positive capital impact albeit with higher risk based capital held against it.

Then we continue to explore securitization techniques in the marketplace and are working hard on that. We have been stressing our general account for stress conditions in the asset portfolio with the target of taking the necessary steps to manage our RBC in and around the 350% range, which we would dictate as a longer term range that we want to manage to as a company.

So, what we'll dictate dropping below or above that will be things like markets, which as you've seen have done some level of recovery here in the second quarter, a continuation of realized losses, and again we have utilized stress conditions in our estimate of defaults going forward throughout the year. And those will be some of the bigger issues, of course, the pace of sales also has implications and the mix of sales has implications for capital.

In terms of statutory earnings, our statutory earnings came on in the quarter roughly on plan with what we would expect when modeling out our RBC. At this moment, absent any unusual fluctuations and realized losses or the equity markets and its impact on CARVM adjustments, we don't expect material deviations in the statutory earning going forward, but again much of this is market related.

John Nadel - Sterne Agee

If you say statutory earnings in the first quarter around the plan, can you give us a sense?

Fred Crawford

Yes, statutory earnings were after-tax about roughly $180 million. Now, those statutory earnings included the benefits of the ceding commission we collected on the reinsurance transaction, which was in and around $150 million to $160 million range after-tax.

If you take into account the reinsurance transaction and the realized losses in the quarter, we had a negative net income. So this is all in, of about $53 million or so. So not much of an impact to total adjusted capital from that result. What pushed down RBC in the quarter was the fact that the denominator, RBC kicked up in the quarter, mainly due to ratings migration.

John Nadel - Sterne Agee

Last one for you. It would just be on the commercial home loan portfolio. I know you guys talk about a 59% weighted average LTV, but that's I think based on original valuations. Do you have something more recent?

Fred Crawford

No, we tend not to do regular appraisals on the properties with just one exception. When these properties move into more of a watch or concerned list category, then we will typically as a matter of routine get updated appraisals on those properties. So, much of that LTV is an origination LTV, recognizing that we have got a well-aged portfolio of commercial real estate, meaning that we booked many of these at an originally conservative loan-to-value. Those values rose throughout the years and then more recently, of course, have declined.

What we tend to focus on as a more immediate measure of the health of the portfolio is the debt service coverage on the portfolio, which stands at about 1.6 times. This is a particularly good metric. First of all, it's a current metric. Secondly, it's also a particularly good metric when you realize that much of our portfolio is amortizing.

Operator

We go next to Jimmy Bhullar with JPMorgan.

Jimmy Bhullar - JPMorgan

I had a few questions. The first one, if you could just give us an idea on how much the new FASB rules benefited your book value through better marks, and if there was a net income benefit also for that.

Secondly, if you could talk about the chances of you breaching the covenants on your hybrids, and what the implication of that would be?

And the last thing, you mentioned that you haven't seen an uptick in withdrawals because the ratings downgrades, but if you just talk about, just general in terms of have you seen any impact on your sales or your competitive position in the markets in any of the products because of the downgrades?

Fred Crawford

Okay, Jimmy, I will take the first two, and then I will hand up to Dennis to comment on sales activity. In terms of the FASB, the FASB Staff Position 115-2, on OTI, we did as we mentioned early adopt it. The impact of it is it effectively lowered the pre-tax and DAC OTTI in the quarter by about $112 million. And most of that was related to not surprisingly structured securities or RMBS, upwards of $100 million of that had really more particularly to do with lowering what otherwise would have been the impairment on RMBS in the quarter.

Now in addition, we also took a pre-tax and pre-DAC $200 million cumulative adjustment from adopting as of 1 Jan, 2009. After-tax and DAC, that's about $102 million, and we take that through the statement effectively through the balance sheet. It has the effect of increasing retained earnings and increasing the unrealized loss position by that dollar amount. So, it essentially comes out of earnings and back into OCI.

On the second question which is the hybrid, these are the roughly $1.6 billion of capital securities that we'd issued as part of the financing of the merger with Jefferson Pilot. These securities have something called an alternative coupon payment mechanism, which is triggered based on the combination of risk-based capital, earnings, and shareholder equity tests. At the end of the first quarter, we have tripped the earnings or cumulative net income tests and also one of the shareholder equity tests.

There's another one, that's a two-prong test. Effectively what that means is that over the coming quarters we are essentially sitting right on top of the trigger, which means over the next couple of quarters, our earnings or net income in the period and the growth in shareholders equity will dictate whether or not indeed, we actually trip these triggers. So, as of right now, we are right on top of it and it will be really the next quarter's results that will dictate.

The practical implication of this is that we would have to effectively issue equity in an amount to satisfy the ongoing interest payments under these facilities, until such time you move outside of the trigger event through increasing your shareholders equity, which can come in obviously a number of different forms. We have about $100 million a year of interest expense on the securities.

The next couple of payments that are due are in November and January in total about $33 million. So we'll simply have to monitor conditions over the next couple of quarters to see how we operate under these provisions.

Dennis Glass

Jimmy, with respect to the impact of the rating changes on our sales, let me first make the point that the industry has been downgraded, obviously not just Lincoln. And where we stand relative to our principal competitors is pretty good. So that it's not helpful to get downgraded and it does create noise with our retail distribution partners and of course, our wholesale distribution partners take a little harder look at us. So, at the margin, it's not positive.

But, again, I come back to the fact that the Lincoln value proposition across the product lines is strong, distribution, knowledgeable people, selling to needs. We've good products that are competitive, not the most competitive, but are competitive and of course, the ratings are important too. But, when we had everything together, again as I've said a couple of times this morning, I have confidence in the strength of the franchise and that we will continue to forward with our fair share of sales in the industry.

Operator

We go next to Andrew Kligerman with UBS.

Andrew Kligerman - UBS

First question, can you give a little more color, given the loss or the arbitration issue with the Swiss Re contract. Could you come back to that whole transaction going back to 2001 with Swiss Re and give us a sense of what your exposure is right now, involving the Lincoln resale to them? And what should we expect going forward if we might see any charges there?

Fred Crawford

Yeah. This is really a fairly long standing and really the remaining, I guess I would call it the remaining stub, if you will of disputes that took place after the sale of that business. As you recall, having followed us a long time, Andrew and many of you following us, we've gone back and forth over various issues involving the sale of this business over the years.

This was an arbitration that had been underway for actually more than a few years, and really involved several components of a small segment of DI business that was sold as part of the transaction. And the dispute involved administrative-related matters, involved reserves and reserve adequacy, involved collection or recoverability from third-party reinsurers that were involved in the blocks.

So, frankly, there were several things and crediting rates used on the funds withheld treaty. So, honestly, this was an outstanding carved out item from when we had settled once before on this transaction. So, we had been arbitration for a while and quite frankly got an arbitration ruling that was really unexpected. I believe somewhat unexpected by both parties, which was, we understand both arguments and so we are going to effectively unwind the transaction in its entirety and all of the cash flows back and forth.

We simply think at this point in time, based on the nature of the disputed items that it's practical for us to put up a provision against the recoveries and various receivables involved in the transaction over the year and that's what gave rise to the charge. What we will have to do going forward is monitor the reserve adequacy on this business as we would with any business and it's a business that we haven't owned for several years.

We have no reason to believe the reserves are adequate or inadequate, but we do need to do that work. That's simply something we can't do until we take full possession of the blocks of business, which we anticipate doing shortly.

Andrew Kligerman - UBS

I see. So, if I recall correctly, years ago you settled, I thought you'd finally settled it for about a $0.50 billion, but then you had this secondary issue outstanding. But at this point, there's nothing we should be expecting with regard to Swiss Re that's kind of behind you. Is that the way to think about it?

Fred Crawford

Yes, there's nothing related specifically to the transaction. Now, as I mentioned in my comments, we continue to weigh any and all legal options that we have available to us as a company. So, that continues to be something we review as a company. These were the bucket, if you will, of unresolved items that were in arbitration. So, the only exposure we have is really just the underlying performance of the blocks of business going forward, as with any block of business and we'll have to monitor as we go forward.

Andrew Kligerman - UBS

And then the second question would just be, in terms of your gross realized impairments and losses on sales. Could you give a little color as to what securities represented the biggest component and if you have specifics that'll be great too?

Fred Crawford

Sure. The largest component, as I mentioned, was really a mix of RMBS which included, by the way, a mix of prime and Alt A and subprime. And that was about, if you breakdown the roughly $247 million of pre-tax and DAC impairment, that was about $84 million of it. We then took about $34 million of pre-tax and DAC impairment on automotive-related exposures.

These are tended to be a primary, so called tier one suppliers to the auto industry, which were falling on hard times and took impairment there. We took a sizable impairment in what we would call the gaming industry, but more specifically, it was on Harrah's Entertainment Inc of about $22 million. And then, after that, Andrew, really a mix of small, relatively minor impairments that were relatively spread out.

Operator

We go next to John Hall with Wachovia.

John Hall - Wachovia

I was hoping that, Fred, you might be able to take a look at April as it were, and give us an idea of how the month of April has had an effect on the unrealized loss position in the bond portfolio, and perhaps what it is done for the VACARVM?

Fred Crawford

In terms of unrealized loss, what has happened in April is we've seen corporate spreads come in quite a bit from roughly 550 basis points to, say, 380 basis points for example. So, in general, that has been helpful from an unrealized standpoint. You've also seen, though interest rates rise during that same time period, and so I don't have the April ending pluses and minuses for you, but that's by and large the movements that we've seen since the end of the quarter.

In terms of VACARVM, as I mentioned earlier, we are still in the midst of doing some of the modeling and model refinements under various scenarios. Obviously, we have seen a recovery in the market thus far in the second quarter, and VACARVM tends to be particularly sensitive to the markets, whereas FAS 133 type definitions tend to be sensitive to not only markets but also particularly interest rates, and of course, volatility.

So I imagine the VACARVM estimates across the industry have recovered somewhat in the month of April, but we are still doing all that modeling work.

John Hall - Wachovia

Maybe I missed the spread, but did you quantify the size of the DI block, the DI assets and liabilities that you are going to be taking on, and did you talk about what effect if any that this might have on the deferred gain that you carry?

Fred Crawford

Yes. We are taking on about $900 million worth of DI reserves in total across the three blocks that we're talking about, that I mentioned. So, over time, you are not talking about a particularly sizable block of business in general when it comes to things like earnings and so forth. I'm sorry, your second question?

John Hall - Wachovia

Whether there is any effect on the deferred gains carried?

Fred Crawford

Yes. John, what we are talking about is, because we sold the business through indemnity reinsurance, we booked a gain at the time of sale and had been amortizing that gain into our earnings. There will be really not a particularly material effect. In fact, my Chief Accounting Officer is nodding his head, none, i.e., no effect related to the amortization of the deferred gains, that's because we've amortized it?

Unidentified Company Representative

As we didn't have any differed gain really associated with DI block.

Fred Crawford

If you heard that, we didn't have much of a deferred gain on the DI block, and [if it sells], that's part of the component of the component.

John Hall - Wachovia

Great. You chose dividend of funds from the operating subsidiaries, a couple of them up to the holing company. Why did you go that route as opposed to using some of that intercompany borrowing capacity?

Fred Crawford

The main reason, John, was we felt as if it was a more definitive, clear, statement of providing real cash liquidity at the holding company to pay down the debt because, we found folks having a lot of questions surrounding the nature of it, and understanding fully the intercompany lending arrangement. Frankly, we had excess capital in the insurance companies and subsidiaries, and felt that was the higher and better use of the money to just outright pay down debt.

So, it has a lasting effect of reducing the leverage and it creates more of a cushion for short-term liquidity needs, including any liquidity surprises that could come with market conditions and what have you. So, we just felt it to be a cleaner move, a cleaner step, and a better balancing of holding company liquidity versus insurance company and capital conditions.

I might note it was an ordinary dividend also, meaning, we did not need to or request any special approvals. This is within the ordinary dividend guidelines, albeit as a matter of practice, we spend time with the state, whenever we take out a sizable dividend, which we did of course.

Operator

For our next question, we go to Bob Glasspiegel with Langen McAlenney.

Bob Glasspiegel - Langen McAlenney

I will stay on the TARP topic. Dennis, bring me up to speed on where you stand on that? What you think the time horizon for decision is? How important is it that you get it, and is there any need in talking to the government that you actually have to do transactions in order to qualify?

Dennis Glass

Bob, those are questions that frankly most people don't know the answers to, but let me from a big picture perspective, tell you that both, at the time of the former administration, and now currently, the ACLI has been in discussions and making a compelling case to treasury that the insurance industry become eligible for TARP funds, and particularly the CPP.

So, at the time, when Secretary Paulson was in charge, I think he thought that including the insurance companies was the right thing. However, the administration has changed. Again, the ACLI is driving conversations with Treasury, but at this point, it's entirely up to treasury, both with respect to the decisions that they make as to eligibility of the insurance industry, and the timing of those decisions

Again, I think the case being made by the industry is compelling, particularly in that the same issues, if the recession deepens and the stock market plunges again, the same issues facing the insurance industry will manifest themselves that were manifested by the commercial banking industry.

As an industry we have roughly the same relative asset-to-capital ratios as the bank industry does. So, again, to me they are parallel situations, and the insurance industry I think, logically should have access to TARP. However, again, I have no information with respect to whether it will be or what the timing of it is eligible for TARP, and when it would happen.

Bob Glasspiegel - Langen McAlenney

A follow-up. I assume there's no comment relative to the Dow Jones story from a couple of weeks ago of a rumored asset sale and Goldman Sachs being hired?

Dennis Glass

We don't comment on either acquisitions or dispositions that we might be thinking about.

Operator

For our next question we go to Suneet Kamath with Sanford Bernstein.

Suneet Kamath - Sanford Bernstein

I had a couple of questions on the variable annuity business. As I think about the industry and the comments companies have made, it almost seems like there are two groups. Companies such as yourself that are making changes to the in-force business in terms of price increases, in terms of investment restriction, and then other companies that are just making changes to the new business that they write, and sort of leaving the in-force business intact.

I'm wondering as that plays out, given that you are one of the companies presumably making changes to the in-force business, is this going to have an adverse impact on your ability to sell-through third-party channels? That's question number one and then I have a second question.

Dennis Glass

Question number one, I don't think the modest effect on the consumer of the changes that are being made on the in-force block are going to cause any difficulties with our distribution partners. We're quite clear about what flexibility for consequent changes that not only Lincoln but other VA providers have in their contracts. So, I don't think that's particularly a big issue. And what was the second part of that question?

Suneet Kamath - Sanford Bernstein

The second part I actually didn't ask yet, but I will now. Hartford talked about two groups of VA writers, in terms of going forward, one group being the simpler guarantees, low cost kind of companies and the other group being the ones that still offer the richer benefits with higher costs. So I guess I'm wondering if you agree with that and then if that's correct, where do you see Lincoln playing among those two groups.

Dennis Glass

First of all, you heard on numerous occasions that we have been a less rich feature company and in the middle on pricing. So, many of the product changes that are being discussed by the competition, bring their rich benefits more closely to the benefits that we have in place today.

We've always been able to compete and take market share, not because we have the most aggressive product features at the lowest costs, but the overall value proposition of a very sophisticated wholesaling force and very sophisticated retail distribution system.

As we move forward, and the changes that we make, we'll be consistent with that philosophy, which is continuing to reduce risk from the insurance company standpoint, not providing the richest features, and combining a very good product with a good, customer value proposition with the needs of our shareholders from a risk perspective, and the significant capability that we had with our distribution organization.

Suneet Kamath - Sanford Bernstein

Just last question on timing, when do you think you are going to be rolling out some of these new products?

Dennis Glass

Probably in the third quarter, in that range. Remember, again, we don't have to move as fast as other people have to move, because, again just take our withdrawal benefits. The [Rachet] has been 5% and others have had 10% or 8% or 7% or 6%, and so they've had to move more quickly and, again, they have moved back to where we are in many instances already. So if you think we are going slower than the competition, that's because we don't have as much need as some of the competitors to move as quickly.

Operator

We'll go next to Steven Schwartz with Raymond James & Associates.

Steven Schwartz - Raymond James & Associates

A couple of quickies and then more theoretical question. Fred, merger-related expenses, I believe we're done in the second quarter; is that correct?

Fred Crawford

We actually had a small amount of merger-related expenses in the period, Steven, but it is absolutely winding down. Total merger-related expenses in the quarter were just under $7 million. What I would say, though, and I'm glad you asked the question, is this, that as we talked about, we have put in place a fairly aggressive cost cutting program. Much of that is taking place in the second quarter, and so you would naturally have a level of restructuring charges that come through.

So you will notice in our statistical supplement that we had pre-tax about $5 million of restructuring charges that came during the first quarter as we started to get going, but most of the notifications and actions were taking place in the second quarter.

Our estimate right now is after-tax we would expect something in the neighborhood of $20 million or so of after-tax restructuring charges in the second quarter as our current estimate right now.

Steven Schwartz - Raymond James & Associates

I think it was Dennis who said that he thought savings in the second half would be about $45 million on a GAAP basis, presumably not including the restructuring charge offset. Could we see that maybe in 2010?

Dennis Glass

We'll hold off on that projection for a little while. That number would be likely double, given the fact that most of it is coming in the second half. So, I would say quick answer to that is $90 million to $100 million.

Steven Schwartz - Raymond James & Associates

And then a theoretical question. I think historically you've kind of targeted to 375 of RBC. You are talking today about 350. I'm wondering about your thinking is that that you are at these ratings and that's where you're going to stay and that's 350, or are you taking into account that VACARVM is going to move you there and it's simply changed an accounting as apposed to change in economics or may be both?

Dennis Glass

My view is that the 350% RBC is just a target that the company has meaning that that's what I think is commensurate with in and around the low AA-rated range of financial strength ratings across the agencies. This, of course, dependent upon the market environment that you are experiencing, so the intention of the company would be to watch the various ins and outs of what moves your capital up and down and try to take actions in such a way that we manage in and around that range.

We will drift above it at times, as we did in the first quarter. We will drift below it depending on the timing of impairments and transactions that we look to take action on, but I do not have a VACARVM estimate in that target. That's something that we still have under review.

We are heartened somewhat by the fact that we maintained pretty substantial assets that back our VA business. As I mentioned during my prepared remarks, we ended the first quarter with hedge assets pretty considerably or well above that of the current statutory guidelines, but VACARVM will increase reserved. Those reserves do behave differently than the derivative valuations do due to interest rates and we'll have to monitor conditions, as we go forward and make adjustments accordingly.

Operator

Our next question comes from Eric Berg with Barclays Capital.

Eric Berg - Barclays Capital

Thanks and good morning to both of you, and to Jim. It sort of felt like in the March quarter that while there were many companies, several companies had liquidity issues. It sort of felt to me like Lincoln was scrambling, that even though everyone was in a similar operating environment, that somehow Lincoln was in a pinch and had to sort of borrow from here and take from there. We've heard have a lot about taking money from here, reinsurance, Federal Home Loan Bank.

I suspect you are going to think that the use of the word scramble would be an unfair characterization and it's perfectly fine for you to say that, but, that's sort of how it's felt. What would be your view on that Dennis? The right characterization to the liquidity position and what happened to Lincoln during the quarter? And then I have a second question.

Dennis Glass

Yeah, Eric, it seemed that a couple of things sort of combined to focus on Lincoln's liquidity a little bit more than other companies, when we saw that happen, we immediately began to respond in the market place, with the comments and actions that we've been taking. I think the decision to upstream the dividends and just take this issue of the financial flexibility off the table for quite a number of years, probably helped to clear up in the minds of people what the real circumstance was.

Fred's already mentioned why we've done that, and I can tell you that, I believe that liquidity is taken care of. We don't really have significant debt maturities, they run in the $200 million range for the next three or four years. So, we don't have anything on the horizon that's not manageable.

The other thing is so, if you just say to yourself, look, they are taking care of financial issues at the holding company are in good shape and a lot of resources. We can now focus entirely on all of our efforts to be sure that even under our stress scenarios, that we have action that we can pull the trigger on to maintain adequate RBC. So, that's where our focus is as a management team. And, again, I'm quite confident that even under the stress situation that we will manage through the challenges of 2009 from the capital perspective.

Eric Berg - Barclays Capital

Thanks. My second question is much a narrower and technical one. Fred, you mentioned that during the quarter the non-performance risk, there was change in the addition to your GMWB liability related to the non-performance risk. Can you go over whether that was a benefit or a detriment and what the earnings impact would have been, you discussed this. I'm just hoping you can review it, what the earnings impact would have been absent that change? Thank you.

Fred Crawford

Yes. We refined our estimate really to lessen the sensitivity of the NPR to our particular spreads at the holding company level. On the view that insurance company liabilities are generally less sensitive to our credit default swap-type issues, at the holding company. And so that was our view and that's what gave rise to the change.

Now, the reason the NPR was actually a negative in the quarter was really more volume-related, meaning that the overall size of the FAS133 liability actually came down in the quarter, due predominantly to interest rates and volatility coming down a bit, but mainly interest rates. So, we were applying the NPR to a smaller base and therefore ended up having the reduction.

Now, had we not made the change, I mentioned that we would have taken a sizable gain. That gain would have been about $300 million in the quarter, had we not made the change. But, as we continue to refine our estimates and work within the accounting guidelines and what we think makes sense, as you look at the nature of the liabilities, we felt the refinements were good on our part, albeit a negative in the quarter.

Operator

We go next to Mark Finkelstein with FPK.

Mark Finkelstein - FPK

I guess one follow-up question, just on the numbers, Fred. You walked through those, I guess, reasonably quickly, I just want to make sure I got these right. I think you said stat net income was negative $53 million, and that is with the benefit of the $150 million reinsurance gain. Would that mean that without that stat net income would have been negative 200 or do I have the numbers wrong?

Fred Crawford

Yes, the net income on the stat basis includes is the actual stat earnings generated naturally of the book of business recognizing carbon reduced earnings in the annuity line and strain from continued good production on the life side. But it also includes the impact of the ceding commission that comes in from the reinsurance transaction.

And then what it brings it into the negative category is really all of the impairment activity, the roughly $250 million odd worth of impairment taken in the quarter on securities. There also tends not to be as greater tax offset to those impairments when you bring them through on a stat basis. So that in part, weighs it down.

Mark Finkelstein - FPK

I just want to understand the holding company a little bit, and maybe just help in terms of reconciliation, thinking, about, outstanding CP. How much, if any, intercompany borrowings exist? And then also what is the cash of the holding company? Really what I'm trying to get at is what are those balances and how do you get those down to the $500 million, by the end of the second quarter? And if there is needed cash coming to get you there where does that come from?

Fred Crawford

Sure, it's actually a good time to walk through this, because just yesterday, in fact, we retired a pretty sizable portion of the so-called c-puff commercial paper, this would be the government commercial paper. I think we retired something in the neighborhood of $300 million of that. So, in other words we are starting to settle in to or towards more normalized levels. As we sit here today, we have about $270 million of commercial paper outstanding, about $60 million of which is under the government program.

So, we've been actively issuing in the tier two commercial paper market between $200 and $300 million, pretty routinely. It took us about a couple of months or so to really initiate a new list of investors, requalify, if you will, investors in the tier 2 commercial paper and we have been quite successful in placing that paper. It tends to be in smaller chunks, but you can also issue it fairly long, 30, 60 days and rolling it without trouble at this point.

We also though have borrowed from our internal CMA or really our overnight sweep accounts and the liquidity accounts that we have across the company to the tune of $350 million or so. Now, if you do the math on that, that brings you upwards of a little north of roughly $600 million, and as I mentioned, we have the second tranche of our ordinary dividend coming later in the quarter at about $100 million. That will then bring you down into the short-term position around $500 million.

Now, a couple of things I want to comment on here. We are a large company that naturally has sizable ins and outs on any given day from our cash flow perspective. We have interest payments that are quarterly and semiannually. We collect dividends from our insurance and non-insurance subsidiaries. We also have tax proceeds that are moving in or moving out of the company depending on our tax position.

So, on any given day, these liquidity positions will move around. When we as a company talk about our liquidity position at around $500 million, that's what we believe to be more of the steady state, managing of our liquidity position on a go-forward basis.

Mark Finkelstein - FPK

Okay. Great. Finally, you mentioned that, pretty far along the way, a securitization structure. Is that an external transaction or is that internal?

Dennis Glass

External in the sense that we would be working with a third party or third party investors to secure that financing.

Fred Crawford

One other thing while I have you here on the topic of this cash management account or cash sweep account. Recognize that we have got several subsidiaries that participate in that arrangement, upwards of 10 to 15 different subsidiaries that will park their daily liquidity and overnight liquidity or extended liquidity into that facility.

I say that only because it's not always the case, particularly when we are not leaning very heavily on it that we are borrowing from Lincoln Life Insurance company of Indiana. Now, granted most of the subsidiaries are much smaller, and our core insurance company would be the largest source of liquidity potentially, if necessary, but it's not always the case that we are directly borrowing from Lincoln Life.

Dennis Glass

I would just add to that, that the sweep account is exactly what it says. It collects funds that we would otherwise invest overnight, and a company our size is likely to have a couple hundred million dollars of funds every night. So, if you subtract a couple hundred funds of float that we have every night from the $500 million, we only really need $300 million from the commercial paper market to handle the $500 million.

I would also say and reinforce that the reduction in interest expense due to the debt reductions that we have made, the additional comment about the $400 million of holding company needs, really suggests there shouldn't be any pressure at all on that $500 million getting higher for the foreseeable future.

Operator

For our next question we go to Darin Arita with Deutsche Bank.

Darin Arita - Deutsche Bank

Thank you. I guess the first question is for Fred. You had mentioned that the dividends coming out of the insurance subs is really based on you seeing some excess capital there. What's your estimate as to where the excess capital is for your onshore and offshore insurance subsidiaries?

Fred Crawford

The way I would describe excess capital at the moment is, if you describe it as having a target of 350, and recognizing the dividend actions we have taken in the second quarter, what we have effectively done Darin is shift that access capital to the holding company. So, while you could argue that we have taken the excess capital that is defined by risk-based capital cushion, and moved it into a delevering position at the holding company, where we would have excess capital in that regard.

So that I think is really the way to think about it. I think right now we have to be conscious of the steps that we can take on the capital front if we were to see continued capital deterioration due to realized losses and impairments in the general account. So, that's the way I would describe the excess capital position at the moment.

The dialogue around excess capital across the industry frankly is, it is really only one you can have when bouncing it up against stress conditions for the general account in the market. So, what you are finding with the rating agencies, and I think implied in some of their actions is not really the absolute RBC, but rather what that RBC looks like when bounced up against potential loss conditions.

I think where we have tended to hold up reasonably will, albeit with some downward pressure is our overall general account, our diversity and quality, and then the risk manager practices on the annuity business.

Darin Arita - Deutsche Bank

That's helpful. How do we think about it for the offshore reinsurers. You can take the [$300 million] out there.

Dennis Glass

The offshore captive had built up pretty substantial asset value with their derivatives position, and we ended up in really an excess asset position as we came off the year end and into the first quarter, primarily a result of being over hedged on our income benefits.

We had taken more of a pure economic 133 derivative like approach to income benefits, and as you know, there's a very real mortality element to that which brings about more of an SOP type reserving regime on that business. So, that afforded us the opportunity to monetize some of the hedge assets, and move that excess capital or excess asset position out of Barbados to pay down debt. Again, simply a decision as to where best we want to hold that capital.

Darin Arita - Deutsche Bank

Okay. Thanks. One for Dennis, I guess. On the variable annuities, can you talk about the rationale for Lincoln continuing to de-risk? I mean, based on Lincoln's comments, it sounded like the hedge programs has performed well. The hedge assets are in line with the economic liabilities and also Lincoln didn't provide us benefits that are [right] as the competitors and now the competitors are scaling back more in line with Lincoln. Why does Lincoln have to make any changes?

Dennis Glass

The market is going to permit changes and the competition, again, that we have always been from feature standpoint, less risk, the competition is coming in and, again, when you step back and look at the total franchise value of what enables us to be successful with the sales of variable annuities for all of our other products, it's the combination of a lot of things, distribution, product, and the like. So, we have the opportunity to de-risk the product because the industry is moving in that direction and we're going to take advantage of it.

Darin Arita - Deutsche Bank

Okay. Is that any statement on your view of the profitability of the business that you wrote?

Dennis Glass

It is a statement on the fact that we want to reduce the tail risk and that we'll take some reduction in the expected internal rate of return on the product in order to eliminate or not eliminate, but reduce the tail risk. So it's a rebalancing of expected returns and expected risk.

Operator

Our last question comes from Tom Gallagher with Credit Suisse.

Tom Gallagher - Credit Suisse

I just wanted to follow-up on the holding company to make sure I have the numbers right, I guess for Fred. Fred, the $600 million of balances between [CP] and the internal CMA borrowings, should we compare that to the $700 million of dividends that were taken, so you would essentially have a net cash balance of $100 million or have you used some of the cash from the dividends to date?

Fred Crawford

The current CP and CMA balance is after having moved the $300 million out of Barbados and roughly $300 million out of Lincoln Life. We have another $100 million of the ordinary dividend to move in and that's what we'll bring that a little over $600 million down to a little over $500 million.

We don't really hold what I would call much idle cash. We do have some corporate securities that we hold at the holding company, but we really manage to a cash flow neutral environment at the holding company, and that's how we manage the liquidity. Does that answer your question?

Tom Gallagher - Credit Suisse

Yes, it does. You have used up the dividends to pay it down and you will have a rough balance of $500 million between the CP and the CMA?

Fred Crawford

That's right.

Dennis Glass

Let me add, over the last five years, we have always borrowed short in the marketplace, probably north of the $500 million. So this is not unusual the way we manage our investment portfolios and our long/short positions and long-term rates versus short-term rates to be comfortable with the $500 million short-term position. Again, it's somewhat less than we have held on average over the years.

Tom Gallagher - Credit Suisse

So, as we think about it prospectively, you have $500 million there, which I believe you can go upwards of $1 billion of borrowing from the subs if need be.

Dennis Glass

Right.

Tom Gallagher - Credit Suisse

Then prospectively we should be thinking about $300 million of annual interest expense plus an extra $250 million of debt due in 2010?

Fred Crawford

Yeah, and your interest expense at the holding company is supported by normal dividend flows out of the life insurance company, surplus net interest payments out of the life insurance company, and income or dividend flows from non-regulated subs like the UK, Delaware etcetera.

Dennis Glass

I don't think we'll have to dividend off much more than $150 million or so from the subsidiaries over the next couple of years to maintain that $500 million.

Tom Gallagher - Credit Suisse

That is helpful. This is a little further out, but I just want to understand the mechanics. I believe your $2 million of LOCs mature in 2011. A lot can obviously change between now and then, but if we assume debt markets are still frozen by then, how would that play out? Would you have to pay those down or I believe those support a Triple X reserves. So it would just be a stack capital strain of some sort or can you expand on that a bit?

Fred Crawford

The letter of credit facility that matures in 2011 allows you to extend your letters of credit out of 2012. So it allows a bit more time on the letters of credit. Now what we have to do is really manage to the various alternatives that are available to support the redundancy going forward or any excess reserves financing we need.

That would include probably reduced capacity on letters of credit. Going forward, although we would have to see how the markets play out. Longer term securitization transaction and our product modifications that would hopefully help the reserve carry as we go forward. So right now, as a company, we're very actively engaged in looking at the planning exercise around how best to finance these reserves going forward.

Now, at the end of the day, if you have to carry more reserves, the other aspect of this is you simply need to do the kind of internal work, actuarial work to show that you are carrying excess reserves back in your business and that may be weighing down on your RBC. So I think ultimately at the end of the day, that actuarial work on what the appropriate economic reserves are on the whole remains important irrespective of how you finance it.

I might also add that you got to be thinking about product, structure and pricing as well, in terms of the outright costs of that financing.

Tom Gallagher - Credit Suisse

Fred, just one last follow-up. Would you have an estimate of what the RBC strain that was relieved related to the $2 billion, just even ballpark would be helpful?

Fred Crawford

Well, over the course of the last couple of years, we have done reserve securitizations between $200 and $300 million type range using letters of credit or securitization type vehicles. So, I would say on average, it's probably helped out our risk-based capital, in and around 20 to 30 points on annualized bases from what otherwise would be greater strain. Obviously, it depends on the size of the reserve securitizations you do. We've done larger and we've done smaller.

Dennis Glass

I would just add to that, I know that you are looking forward a little bit, but remember, we are doing these reserve transactions in today's markets. And the reason we are able to do that is because they are generally secured by the excess reserves in the form of future cash flows. So, these are secured financings and that's why they are even doable today.

Tom Gallagher - Credit Suisse

So Dennis, you are still able to do those types of deals in this kind of market. So we should be thinking about, although these sound large in the future based on today's market, you'd still be able to essentially roll those over?

Dennis Glass

As I said in my comments, if they are smaller, they are more expensive and they are more challenging to execute on. But, we continue to review and look at ideas and alternatives for where to execute them and how best to execute them. So, clearly the market is a bit different right now, of course to do these things. But, our approach is to string these out, do them in modest size, recognizing that its likely markets will recover and pricing will improve overtime.

Operator

With that Mr. Sjoreen, I would like to turn the conference back over to you for any closing remarks.

Jim Sjoreen

Thank you, operator and thanks to all of you for joining us this morning. Good set of questions. As always, we will be able to take your questions on our investor relations line at 1-800-237-2920 or via email at www.investorrelations@lnc.com. Again, thanks for all your time today and have a good day. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call. Thank you for your participation.

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Source: Lincoln National Corp. Q1 2009 Earnings Call Transcript
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