Lincoln National's CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: Lincoln National (LNC)

Lincoln National (NYSE:LNC)

Q1 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

Will Fuller -

Dennis Glass - Chief Executive Officer, President, Director, Member of Executive Committee, Member of Committee on Corporate Action and Head of Lincoln Financial Distributors

Randal Freitag - Chief Financial Officer and Executive Vice President

Mark Konen - President of Retirement Solutions and Insurance Solutions

Jim Sjoreen -

Analysts

Joanne Smith - Scotia Capital Inc.

Thomas Gallagher - Crédit Suisse AG

Jay Gelb - Barclays Capital

Darin Arita - Deutsche Bank AG

John Nadel - Sterne Agee & Leach Inc.

Jamminder Bhullar - JP Morgan Chase & Co

Steven Schwartz - Raymond James & Associates, Inc.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Eric Berg - Lehman Brothers

Edward Spehar - BofA Merrill Lynch

Christopher Giovanni - Goldman Sachs Group Inc.

Colin Devine - Citigroup Inc

Operator

Good morning, and thank you for joining Lincoln Financial Group's First Quarter 2011 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to the Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Jim Sjoreen

Thank you, operator, and good morning and welcome to Lincoln Financial Financial's first quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about liquidity and capital resources, premiums, deposits, expenses and income from operations, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday, and our reports on Forms 8-K, 10-Q and 10-K filed with the SEC.

We appreciate your participation today and invite you to visit Lincoln's website at 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 their prepared remarks, we will move to the question-and-answer portion of the call.

I would now like to turn the call over to Dennis.

Dennis Glass

Thanks, Jim, and good morning. In aggregate, we had another good quarter of operating results. Gross deposits of $5 billion plus and net flows of $1.4 billion were both up in the 12% to 13% range, and along with rising equity markets, drove account balances to $162 billion, up 11%. Interest margins across lines are strong. Life and Annuity mortality margins were very strong, and our G&A expense ratio improved modestly over the fourth quarter.

Operating revenues of $2.7 billion were up 7%. We were a little more aggressive on capital management, repurchasing $75 million of equity during the quarter, about the same amount as we did all of last year. In summary, strengthening fundamentals, steady to somewhat improving margins and capital management drove the strong ongoing operating earnings that we reported. Net income per share came in close to operating income as we saw less investment loss, hedge fluctuation and other noise.

Looking at the pieces, sales in our individual Life Insurance business of $159 million were up 12% over the year ago quarter, driven by our well rounded product portfolio and multichannel distribution system. MoneyGuard's sales helped overall growth, benefiting from increased shelf space and wholesaler support. Other recent actions to strengthen the Life business and build sales included repricing our survivorship product and increasing our maximum mortality retention for new business.

Turning to annuities. Individual Annuity sales were up 16% over the prior year quarter with VA sales up 17%. Our strategy in the Annuity market is to lead with strong distribution, maintain a diverse suite of products that provide good consumer value but not the most aggressive features and to remain consistently in the market. As an example, our living benefit guarantees remained among the lowest of those offered by top-selling VA writers, a solid guarantee that provides good consumer value. Also, we have been ranked in the top 5 for VA sales since 2006, and we are the only top VA provider that is also ranked in the top 5 for indexed annuities.

Less rich and well priced VA product features lower the product's risk. Multiple products and distribution reach allow us to pivot to the best solution for the consumer in different market environments, and market consistency pays off in better profitability and stronger distribution relationships. We continue to make progress on this strategy in the quarter. We launched our repriced income rider, introduced a fee-based variable product into a major planning firm, prepared for our second quarter launch of VA long-term care and substantially enhanced our B2B technology for fixed and indexed annuities in the wider channel.

Our Defined Contribution business produced a solid quarter with account balances of more than $40 billion, with total deposits up 3% over the prior year period and positive net flows. Net flows in this business fluctuate based on the timing of larger plans, rolling onto our platform and rolling off over the course of the year, and we expect that to continue in 2011. We are implementing our strategic investment plan in DC, including building out distribution support for our small- and mid- to large market business, and we'll begin to add plans to our new recordkeeping platform in the fourth quarter. We believe these investments will increasingly contribute to DC's results through 2011 and 2012.

We saw some good progress on the Group business. Nonmedical net earned premiums grew by 7%, and we saw improvement in our disability loss ratios in the quarter. For example, our long-term disability incident rate was the lowest that we have seen in the last 4 quarters. We are continuing to manage to better overall loss ratios through renewal and new business price increases and extra resources in our claims management area.

Sales were somewhat softer overall, tracking slower group protection sales industry-wide. We expect muted sales near term in the current economic environment. We continue to build out capabilities that will position this business to take advantage of opportunity in the voluntary benefits, including introducing new products, enhancing the sales team structure and transitioning to a leading edge technology platform.

Turning to distribution. At Lincoln Financial Distributors, we continue to execute our growth strategy by focus on increasing the number of advisers who recommend Lincoln solutions, increasing wholesaler productivity and attracting top talent to LFD. We saw a good success in each of these areas in the first quarter, including attracting additional advisers to Lincoln and achieving a 10% increase in wholesaler productivity, the eighth straight quarter of productivity improvement at LFD. Our strategic expansion efforts, including fee for partner relationships, new firms and targeted wholesaler expansion, will continue to generate lift throughout the year.

Lincoln Financial Network continues to grow its population of experienced advisers with a total of more than 8,000. The consistent ability to retain top advisers and also attract new adviser's has enabled LFN to contribute a meaningful portion of Lincoln Life and Annuity sales throughout both challenging and favorable market cycles.

Turning to the balance sheet. We continue to hold ample capital and liquidity to support investment in growing our franchise and returning capital to shareholders. Overall investment credit quality is good, and we have taken steps to reduce credit risk at the margin by rotating into higher-rated securities as we wait for further signs of recovery.

Overall, I am pleased with our progress and momentum in the first quarter. I'm confident that our franchise strength, our healthy fundamentals and ability to execute, along with active capital management, position Lincoln for a strong year.

With that, I will now turn the call over to Randy for more detail on earnings and the balance sheet.

Randal Freitag

Thank you, Dennis. Last night, we reported income from operations of $349 million or $1.08 per share for the first quarter. Overall, the quarter's strong results reflect on key themes that we have discussed in recent quarters: First, that execution of the business model and tailwinds from the capital markets will and are driving strong results across many areas, including deposits and flows, investment income, equity-based fees and an improving and solid risk profile; second, that our consistent approach to selling and distributing high-quality products with strong risk and return profiles, is benefiting the bottom line; and third, that a strong capital position is allowing us to become more proactive with our capital management activities.

Strengthened investments and underwriting were the major contributors to $0.14 per share of earnings outperformance. The main contributors to the strong performance were detailed in the press release, and I will not be repeating them as I go through business unit results.

Turning to interest spreads. Spreads across all businesses benefited from strong income from alternative investments and prepays. Excluding that impact, I described spreads as solid. And while spreads will not be a tailwind as we move forward, I do believe that any downside is very manageable. Consolidated return on equity for the quarter was 11.5% or about 10% after adjusting for the favorable earnings results, up from 9.5% from 2010. I'll speak to our segment ROE performance throughout my comments without the impact of corporate actions, that is, excluding goodwill, leverage and excess capital. Overall, a very strong and positive beginning to 2011, demonstrating strength and growth throughout the company.

Turning to segment results and starting with annuities. Positive flows in markets produced another strong quarter, driving a 14% increase in total account balances to a record $88 billion and a 16% increase in revenues over the prior year quarter. The Annuity business reported a return on equity of 23%, 20% after normalizing earnings and up from 19% in 2010.

In our Defined Contribution business, strong deposits in markets drove account value and revenue growth of 10% over the prior year quarter. The DC business reported a very strong return in equity of 18%, 15% after normalizing earnings and in line with our long-term expectations.

Turning to our Life Insurance segment. Earnings drivers performed as expected, with Life Insurance in-force up 4% and account balances up 6% quarter-over-quarter. The Life business reported a return on equity of 11%, 10% after normalizing earnings and in line with our near-term expectations.

Turning to the Group Protection segment. Nonmedical net earned premium grew 7%, a solid result, as some of the factors that are contributing to a challenging sales environment benefit in-force premiums. The nonmedical loss ratio of 74% is down from last year's first quarter ratio of 75% and a full year 2010 ratio of 76%. LTD incidence rates, which have been driving elevated loss ratios, came in at 3.95 per thousand in the first quarter, up from 3.57 in the first quarter of 2010 but down from 4.36 in the fourth quarter. While we continue to watch this key metric and manage it closely, we are encouraged by the improvement.

Group Protection reported a return on equity of 11%, somewhat below our long-term expectations but up nicely from the 2010 full year ROE of 8%. Expense ratios in the first quarter improved over 2010 levels. As we move through the remainder of 2011, we do expect expense ratios to increase, primarily the result of growth in strategic investment-related spends across the company. We estimate the impact at $0.01 to $0.02 per share when compared to the first quarter.

Let me wrap up with a few comments on risk management and capital and liquidity. Pre-DAC and pretax net realized gains or losses on investments of $6 million for the quarter were down from $59 million in the prior year quarter. Current quarter losses were focused in lower-rated RMBS and CMBS securities. While some ongoing stress will likely continue in these asset classes, we expect any stress to be at very manageable levels.

The variable annuity hedge program continued its history of strong performance and ended the quarter with hedge assets of $750 million, well in excess of the hedge liability of $175 million. Estimated RBC increased from year end levels of 491% to approximately 500%, supported once again by improving credit quality and continued capital generation. Total adjusted capital of $7.2 billion was up nearly $100 million for the quarter after taking dividends to the holding company of $150 million. Quarter end net liquidity at the holding company was approximately $700 million, level with the year end amount and in excess of our targeted level of $500 million.

During the quarter, we continued our capital redeployment activities with the repurchase of $75 million of common stock. Looking ahead, we expect to commit another $100 million to $150 million to buybacks over the remainder of 2011, as our businesses continue to generate free cash flow and as the environment continues to stabilize. All in all, a good quarter and a healthy position for the company at the start of the second quarter.

Earlier, I referenced our improving and solid risk profile. Before we move to Q&A, let me provide some proof points around that comment without getting too exhaustive. As we have moved through and out of the financial crisis, we have repriced and restructured two of our key product lines, UL and VA, to reflect the market conditions and capital dynamics; adjusted our long-term assumptions on equity markets and interest rates, establishing DAC and reserves at conservative levels when compared to current markets; extended financing under our corporate credit facilities into 2015 and reduced its usage in support of reserve financing by approximately $1 billion; continued to allocate capital in support of the VA hedge program; opportunistically reduced risk in the general account by the purchases to higher quality securities and selling out of our more volatile holdings on pricing strength; and finally, we have built our capital and liquidity position to absorb strep conditions without disrupting ratings. Importantly, we've been able to accomplish all of these things while, at the same time, making strategic investments in our business model.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Suneet Kamath of Sanford Bernstein.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

My question is on capital redeployment. I guess the -- Randy's comment about the $100 million to $150 million of incremental buybacks in the balance of the year would obviously put you above what your original guidance was, which I think was $125 million through the end of 2011. So my question is, given the increase in buybacks, should we sort of take off the table in our minds any potential increase to the common stock dividend over the 2011 time frame?

Dennis Glass

Suneet, just on that last question, we, first of all, want to register that we believe in increasing the dividend over time when appropriate. So that's certainly a goal for Lincoln. We make our annual dividend decision, and that's a board decision, in November. And so we certainly won't be making any decision before that time. Again, our hope is, and our intention is, to continue to increase the dividend.

Randal Freitag

Suneet, on the capital deployment, we have upped our previous guidance. Of our original guidance, which total $125 million over 15 months, we've accomplished $100 million. We have now guided to an additional $100 million to $150 million, so essentially a doubling to a little more than a doubling of where we were before. That's consistent with the businesses that continue to generate free cash flow. We continue to see improvement in the overall economy, general economic conditions, and it makes us more comfortable contributing more of this capital to activities like share buybacks. And so as we continue to see those dynamics in place, continued capital generation, continued improvement in the economy, we'll continue to look to these sorts of capital activities.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Got it. And my follow-up question, again, on the buybacks, is so as we think about the remaining three quarters, should we sort of expect that buyback pattern to be fairly even across those three quarters or sort of like you did in the first quarter perhaps an acceleration earlier in the year to sort of benefit from a timing perspective in terms of equity in the share count?

Randal Freitag

Yes. I think it's dependent on market conditions. But let's start with the assumption that it will be leveled, and we'll go from there as conditions evolve.

Operator

The next question is from Steven Schwartz of Raymond James.

Steven Schwartz - Raymond James & Associates, Inc.

A couple, if I will. A lot of things going on in the VA market with deferral bonus rates changing, risk charges changing, whatever and, of course, you de-risked yours a bit. I'm just interested, the sales were -- your VA sales were very good. Dennis, do you have a sense of maybe what your market share looked like? Do you think you picked up any or just kind of went along with the group?

Dennis Glass

Steven, the numbers aren't out yet, so I don't know if we've picked up market share or not. But let me say that this is not a business where we're really focused on market share. Now you can build a lot of market share very quickly as -- but, you can do that if you have very aggressive features. And as we continue to repeat, we're not going to do that. So I would say that we're very pleased with the growth, and we have a lot of runway for further growth in the VA business. And we're selling product and features on our terms that we think are good values to the consumer and a good risk-reward proposition for our shareholders.

Steven Schwartz - Raymond James & Associates, Inc.

Okay. And then if I could just stick with the annuities for a sec, Dennis, you mentioned it twice, index annuities. I think that's twice more than normal. I think -- I'm kind of interested maybe if you could tell us what you think you're going to be doing in the broker dealer channel. That's kind of a holy grail of that market. So I'd be interested in kind of how you plan on attacking that.

Dennis Glass

Yes. First of all, let me state, once again, we have very well structured indexed annuity products and so much so that I think we're one of a few, and perhaps the only manufacturer, that are currently in the wirehouses. And that's a recent development at the wirehouses, wirehouses which sell this product. It's a good product because it provides downside protection, 100% downside protection and depending on market conditions can provide a pretty comparable upside potential. So we're going to stay in the market. It's a good product. And again, it's part of our overall comprehensive portfolio of annuities. And again, we continue to make investments in all of the products. This product is again something that's more popular with some distribution systems right now, and that's why we've mentioned it.

Steven Schwartz - Raymond James & Associates, Inc.

Okay. And then if I may, the product in the BDs, are you looking at a registered product or unregistered?

Dennis Glass

Unregistered product.

Operator

Next question is from Jay Gelb of Barclays Capital.

Jay Gelb - Barclays Capital

Good. Two questions. First, could you give us a bit more sense on why the group disability loss ratio improved so much versus 4Q? I think it went from 78% to 70%, a big improvement there. And then if you can also just kind of square up your ROE expansion outlook for the rest of 2011.

Randal Freitag

On the loss ratio front, it was really driven by the incidence rates. So as these incidence rates have come down, you'll see a comparable decrease in the loss ratio. That's really the primary driver. I think as we said last quarter, this has been all about incidence rates, which we believe are linked to the economy in total. So as we continue to see the economy stabilizing, I would anticipate that you would continue to see that improvement in those incidence rates.

Dennis Glass

Yes. On ROE, I wouldn't say there's any dramatic change in our expectation. We've continued to keep this as one of our highest priorities. Increases, as we've said on several occasions, are going to be resulting from an increase in the mix of business to higher ROE business. New business ROEs are stronger than in-force capital redeployment and margin management. And we're very pleased with what was a little bit of an acceleration in the first quarter of our expectations. And frankly, I hope we can continue to see that kind of improvement.

Jay Gelb - Barclays Capital

Are you thinking about that 10% normalized that we saw in the first quarter or more like 11% sort of as reported?

Dennis Glass

I'm thinking about the 10% normalized, which is up 50 basis points from the fourth quarter.

Operator

Our next question is from Jimmy Bhullar of JPMorgan.

Jamminder Bhullar - JP Morgan Chase & Co

Just first one, Dennis on, your remarks on just the potential buybacks over the rest of the year, is it fair to assume that the M&A pipeline looks relatively dry if you are buying back this much stock?

Dennis Glass

Well, let me answer the question about the pipeline. I don't think in the financial services industry, broadly speaking or at least in the Insurance business, there's not a lot of activity right now. Having said that, as we all know, Fred is spending a large majority of him time trying to find opportunities. So when I think about share buybacks, just to get back to the share buybacks or acquisitions, share buybacks are really more about ongoing generation of free capital than they are anything else. And so if you've heard Randy say this, our increase in our share buyback program has to do with improving fundamentals in our core businesses and, therefore, increasing cash flow or at least better comfort in our free cash flow at the holding company.

Jamminder Bhullar - JP Morgan Chase & Co

Okay. And then just a question on your -- in the Group Insurance business, maybe if you can talk about what drove the margins in the group life and then to lower and then also just competitive environment in that business, given that your sales were relatively weak, if you could talk about competition in the Group Insurance market.

Dennis Glass

Maybe I'll ask Mark Konen, who's sitting next to me to give a little more in-depth answer to that. I would say that just at a high level, the group market is, industry-wide, weak. And on the loss ratios, Randy's already addressed the issue of LTD incidents being better this quarter than in the last four. So at a high level, those are observations. And maybe, Mark, you'd want to add to that?

Mark Konen

Sure. Jimmy, just a couple of detailed points on your specific question. First, on dental. Dental, as you might expect, if you think about that product line, has a degree, a fair degree of seasonality to it in which the first quarter and, to some extent the second quarter, are the highest usage quarters for that product. So you'll see the loss ratio spike up in the first quarter and than come down over the balance of the year in a normal year. And that's what I think what drove the dental loss ratio up this quarter. If you compare it to first quarter 2010, we did see some improvement in the loss ratio year-over-year, which is something we've been working on in the dental line. On the Life business, again, the Life mortality was pretty good. But what also comes through that line is because of the peculiarities of how the accounting works is life waiver, which again is driven by disability and disability incidents, and that was slightly elevated.

Jamminder Bhullar - JP Morgan Chase & Co

Okay. And just on -- and then lastly, just -- as you are transitioning to a new technology platform, I think, later this year in the DC business, should we expect your sales to be weak as a result of that? Or should that have any -- should there be any disruption in your business in terms of inflows as a result of this?

Dennis Glass

Yes. It's interesting. There's really two reactions in the marketplace. One is very happy to see the improvement in technology, and we want to be part of it. And a lot of the sales cycles are 6 months long. So by the time -- and mid- to large case, in particular, by the time you get the sales and the money in, we can be putting it onto that platform. Little -- on the other side of that coin, little people that want to -- a little sentiment about waiting to see. So on balance, we don't think it is a negative or a significantly positive issue for our sales for the balance of the year.

Operator

Our next question is from Ed Spehar of Bank of America.

Edward Spehar - BofA Merrill Lynch

Dennis, I wanted to go back to the dividend and just, I guess if I look historically, Jefferson Pilot and Lincoln both had very high dividend payout ratios versus the payout today, I think, on the run rate earnings that we would come to for this quarter would be about 5%. So if we're looking at -- if we think that the marginal returns in your business are close to the high levels that Randy cited, and I think you'd probably agree that the overall secular earnings growth rate for this business is in the single digits. Can you tell us why wouldn't the dividend payout ratio be potentially five or six times the current level, and why wouldn't we be potentially getting to that type of number fairly quickly?

Dennis Glass

Everything you say is true on a historical basis, Ed, so you're right about those things. I'll come back to what drives, in our mind, the level of dividend, and that is free cash flow at the holding company. And right now, we have approximately $300 million of free cash flow at the holding company. We expect that to grow over time, but that's what drives dividend. So you can see there is more room there. And when we absorb that amount of room, the timing of that again is a director's decision. But let me reinforce my point, which is we think growing the dividend is an important objective for the firm.

Edward Spehar - BofA Merrill Lynch

Could you talk about what you think the normalized, if we think going forward, what the normalized level of free cash flow at the holding company is relative to your GAAP earnings level?

Dennis Glass

Well, let me ask Randy to do that. But let me just -- before I ask him to do that, it's both spent well. It's statutory income as a percentage of GAAP income, and then there are some other pieces. And let me just turn it over to Randy. Randy?

Randal Freitag

Sure. Ed, if you look at cash flows at the holding company, we generate on an annual basis about $700 million of cash from our operating companies. And as Dennis mentioned, the cash needs, primarily from interest expense run right at about $300 million or a little above that. That gives you, as Dennis mentioned, free cash flow in that $300 million to $400 million range, which is used to support things like dividends, things like share buybacks, things like delevering, which is a theme we've talked about in recent quarters, and I think a theme we'll continue to talk about some more, delevering as we move forward. When you look at what drives that with GAAP earnings running in the $1.2 billion, $1.3 billion range, you're talking about free cash flows above about 25% of that. When you look at the stat earnings, which ultimately drive the amount of cash inside your holding company, I think we're still consistent with what we've always said, which is we have stat earnings running about 60% to 70% of our overall GAAP earnings.

Edward Spehar - BofA Merrill Lynch

I guess, Randy, when you talk about delevering, though, why couldn't you use -- I think you've talked about maybe 400 RBC being the kind of the new target. Why couldn't you use the, I guess that would be about 1 point, the $1.5 billion or something of -- $1.4 billion of capital above what you are telling us that is the sort of required level?

Randal Freitag

Right, so let's talk about excess capital. Based upon a 400% RBC and a holding company liquidity requirement of $500 million, calculates out to $1.6 billion. I believe that over time, that we are going to move towards those levels. But there is going to be an interim period, where we're going to operate at a high level for a couple of reasons. It's a fact that we are only a short time from one of the worst financial crises since this Great Depression, when capital markets shut down and a number of other things occurred. So we are, as I mentioned, not that far from that point in time. And it's reasonable, in my opinion, to sort of continue to watch those markets recover and stabilize a little more before you move ultimately to that final level. And then there's the additional item of the rating agencies whose views are also somewhat slow to respond, which really isn't surprising with what the financial industry experienced. Their views are going to evolve just like, I think, our views will evolve. And they'll meet at some point in time, as I mentioned, in or around 400% RBC and $500 million of holding company liquidity for a company like Lincoln.

Dennis Glass

And let me just come back, again, I want to reemphasize that better -- increasing our capital management activity is a goal and the better economy that we're in and continuing good results, which we expect at the company, will accelerate our perspective on that on capital management.

Operator

Our next question is from John Nadel of Sterne Agee.

John Nadel - Sterne Agee & Leach Inc.

I have two questions: one on mortality and the other on capital. I'll beat the dead horse. But my question on mortality, which was favorable in both your Life and Annuity business this quarter, is it just a function of the right people are living longer in one business and, not to be too morbid, but dying sooner in the other? I mean, I guess, would you characterize that as a normal fluctuation in the results, or are you perhaps seeing some, maybe some impact in the Life Insurance side from a more active life settlement market now?

Randal Freitag

No, we don't see any impact from the life settlement market. No, but you're exactly right. I mean, the impact in the quarter, which is positive in both Life and Annuities indicates that mortality moved in a favorable way in both segments, which is exactly opposite, right?

John Nadel - Sterne Agee & Leach Inc.

And we are unfavorable for the wrong people, yes.

Randal Freitag

Right, so it's just one of those quarters.

John Nadel - Sterne Agee & Leach Inc.

Okay, all right. And then let me go about the capital question maybe a little bit differently, maybe perhaps the opposite perspective of Jimmy earlier. If I level set for that ultimate 400% risk-based capital ratio target, it looks like today you're sitting at around $2 billion of excess capital between the life company and the holding company. And I know you've got some level of capital both at the life company and the holding company that you want to keep, but my question is, when we look at and we look at the capital generation from ongoing earnings, compare that with your buybacks of $100 million to $150 million from here, should we take that to mean that you actually do see something, some other competing use for excess capital over the intermediate term?

Dennis Glass

Not really, no.

John Nadel - Sterne Agee & Leach Inc.

Okay. So this is just, we were all around the boardroom table, not 18, 24 months ago trying to figure out if the world was going to survive?

Randal Freitag

Yes. John, let's go to your numbers. I think you mentioned $2 billion. And as I mentioned, just mathematically, it's $1.6 billion based upon 400% RBC on the life company and $500 million of liquidity at the holding company. So let's start there.

John Nadel - Sterne Agee & Leach Inc.

Okay, okay. So $2.1 billion -- and I calculate $2.1 billion, take out the $500 million. Okay, got it.

Randal Freitag

Correct.

Operator

Our next question is from Chris Giovanni of Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc.

A couple questions on DAC. I just wanted to get an update in terms of where you're sitting in regards to the DAC corridor, and then also if you guys have done any early work in terms of quantifying what the potential impact is of adoption of EITF 09-G.

Randal Freitag

Yes. On those 2 items, on the corridor, looking at the variable annuities, I'd estimate the after-tax impact in the $200 million to $250 million range right now.

[Technical Difficulty]

Operator

Our next question is from Thomas Gallagher of Crédit Suisse.

Thomas Gallagher - Crédit Suisse AG

I'm not sure what happened there, but just had a question about where you're pricing business today. I know there was a discussion about having repriced variable Annuity business and universal Life business. Are you still pricing products at a 350 RBC, or has that bar been raised to 400? And if so, how do we think about you eventually getting to ROE targets if there's still a disconnect between how much you hold versus where you're pricing?

[Technical Difficulty]

Thomas Gallagher - Crédit Suisse AG

So I guess first question is, just to reiterate Chris's question on 09-G, what you see as a potential impact there, whether you've done any early work. The second question is just an update on -- I know you've repriced some universal Life business, some variable Annuity business. Are you still pricing it at a 350 RBC? And if so, how do you reconcile that between holding high 400s RBC? And eventually, what does that do to your ROE? And do you need to get down to a 350 RBC in order to hit your ROE targets?

Randal Freitag

Tom, first on the 09-G, this is obviously a very important accounting change, and we do have a full team working on this very topic. I don't anticipate it will be until later in the year, until we're talking more fully about numbers. But I really do not expect our results to be directionally different from our peer companies. If you think about 09-G just to go over sort of the main impact again from this thing, we're going to have lower capitalization, which will reduce earnings. We'll have a reduction in equity and, thus, reduction in the amortization expense, which will help earnings, unless we'll have a uncertain or a muted on ROE. One other impact I'll talk about, which is sort of just a result of all those dynamics, is that I would expect that you would see an increase in the growth rate after all that said and done. So those are the main impacts. We got a full team working on this. It will be later in the year. We'll give a little more guidance on the impact.

Thomas Gallagher - Crédit Suisse AG

And, Randy, if you had to guess in terms of the timing of when we would find out, is that likely to be in your third quarter queue, or when do you think we might hear something on that?

Randal Freitag

I think that's a reasonable, reasonable time frame.

Thomas Gallagher - Crédit Suisse AG

Okay.

Randal Freitag

Now the second question was on pricing on Life products. Let's think about products in total. Any products that we're pricing today, we're pricing with capital standards that are consistent with the 400% that we talked about. Now when you look at the Life book, we're selling products that have been priced over the last couple of years. And so you would have some products being sold today that were sold -- that were priced at 350%. But anything that we're repricing today, like the secondary guarantee UL survivorship product would be priced using capital standards that are consistent with our stated goal of 400%.

Thomas Gallagher - Crédit Suisse AG

Okay. Got it.

Randal Freitag

And just to add to that, the guidance around ROE development certainly takes that comment into consideration.

Operator

Our next question is from Chris Giovanni of Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc.

I wanted to see about end user exemption on swaps. It looks like the industry might get exempted for that use. And just wanted to see how you guys were thinking and positioning around this, and to the extent that it doesn't go through, sort of what you perceive as the risks to your business.

Dennis Glass

Yes. We're paying attention to this, as you would expect us to do, and I don't think anybody knows what the final answer is. But I would make the general comment that the comments coming out of Washington seem to, in most instances, keep excluding the Life Insurance industry from their heavier regulation. And so that's not a specific comment about your specific question, but the trend seems to be one that would leave the Insurance industry in a good condition from a regulatory standpoint.

Christopher Giovanni - Goldman Sachs Group Inc.

And is that a comment related to this specific topic, or is that a broad comment related to a number of regulatory matters?

Dennis Glass

It's a broad comment related to a number of regulatory matters, but it includes this one.

Operator

Our next question is from Colin Devine of Citi.

Colin Devine - Citigroup Inc

I want to commend you and your team on another very solid quarter and getting Lincoln back on track. If I could get one clarification from you, and then I have a deeper question for, really, Mark and Randy. And first on the clarification, I mean, I'm certainly encouraged by your comments not to chase the feature war, and Lincoln hasn't done that in the past. Met is taking the guarantee, their step-up guarantee up to 6% in May. Is it your intention, then, that Lincoln will not follow that? That's the clarification. And then with respect to sort of ROE, as Randy walked through, if we think of the Annuity business and the DC business and the returns on those, which I sort of think, as having come from the Lincoln side of the house, and compare that to the Life businesses and Group, the returns are almost double on the annuities in DC. And as I look at the Life, and you said you repriced your products, how much can you do to improve the returns on the older business which, as you noted, was priced at a lower RBC than the 400. So to get that up to the overall 400 you're trying to run the company at now, when you put that all together, how much lift can you really get on this ROE over the next few years?

Dennis Glass

And I'll have, as you suggested, Randy talk about the second one and I'll handle the first one. It's not our -- now let me say it again, it's not our intention to increase our roll-up rate. That's not to say that what other companies are doing is good or bad. It's just that our value proposition is lower roll-up rates, strong distribution and we think that makes sense. Randy, do you want to follow-up on the rest of that?

Randal Freitag

Sure. Talking about ROE at the high level, at the highest level in total, ROE growth is going to be driven by a number of items, including annuities' mix shift to higher ROE businesses that you referenced: VA, DC and Group Protection, new business ROEs that come on across. Well, Met is really primarily a Life item because the Life ROEs that we put on the books today in that 12% to 14% range are significantly above the reported ROE in the 10% range, capital redeployment management, which we've talked about pretty fully on the call today, and then margin management, primarily in the Groups space as we continue to see loss ratios recover, so all those items mixed together to give us total ROE growth. Now when you look at the Life business in particular, let's talk about we have a near-term ROE expectation of the 10%. And it's true that it's going to be evolutionary with that ROE is it increases gradually over time, as we continue to put on this 12% to 14% ROE business. It's not going to suddenly jump up to 12%. It's going to happen over a period of years, as we continue to put on new business and that new business becomes more prominent in the overall mix of earnings.

Colin Devine - Citigroup Inc

Now aren't you also still fighting the AXXX comp? But I know you've been able to do some alternative funding for that, but you're facing an inherent reserve build here that isn't it just going to require more capital, which means you got a meaningful drag here on your capital for the near to immediate term, I would think. Is that a fair way to characterize it?

Randal Freitag

First off, the product we sell today and the product we've have been selling for about the last year on the secondary guarantee side is a product that earns those returns that I referenced without a capital solution. So we do not have a need to go into the capital markets with those. On the other side, I would mention that build has been occurring over the years. So it's not like there's a sudden change in the growth rate of that build. In fact, that build will decrease as once again these new products become a bigger part of the mix. Now in terms of where we are today, from a solutions standpoint, actually, we've pretty dramatically shifted our reserve financing mix. If you go back 2, 3 years ago, the mix was primarily that we were using our short-term corporate credit facility for most of our reserve financing, and we had limited long-term solutions in place, about $400 million. If you look where we are today, that mix has completely shifted. We have about $2 billion of long-term facilities in place, and our usage of our corporate credit facility has declined by $1 billion, as I mentioned, into the $750 million range. So a pretty dramatic change there. In terms of what we have done to our balance sheet, I'd size that in the $1 billion range. And we'll continue to work on working off that existing amount, but I don't see that as a huge issue quite honestly.

Dennis Glass

Colin, it's a good question. I would just come back to all of the issues embedded in your question are baked into our projection of aggregate ROE improvement.

Operator

Our next question is from Joanne Smith of Scotia Capital.

Joanne Smith - Scotia Capital Inc.

I just wanted to go back to the indexed Annuity question because I'm a little perplexed about why the sales are strong and why it's even a desired product at this point. Because all I remember is, when the product was first developed and the participation rates were quite high and there was a lot of profit associated with it, it was very attractive to risk averse clients. And then, then we had the crisis and the volatility in the markets, and the cost to hedge the product became so expensive that it was not even considered a viable product in certain circles, and I'm wondering what has happened. I understand the impact of lower volatility, but I'm -- I had thought that participation rates had come down well below 50%, and that, to me, doesn't look like it's a great value proposition to the customer. Can you just talk about the characteristics of the product and what type of a customer it is appealing to?

Dennis Glass

Yes. Again, it's 100% downside protection against equity markets with a little bit of participation in the upside of equity markets. Specifically at this point, we have two products, one we call a trigger. And what the trigger product says is that the S&P 500 is above the level 1 year down the road from where it is today, you get a rate of 3 1/2%. If it's the same or down, you don't get that. The other product is a 2-year total performance. And it can, depending on total performance, somewhere between 8% to 12 1/2% over the 2-year period, so 4% to 6%. So those are not bad returns. I may have misspoke about that first one a little bit. But in general, those are reasonable returns in this environment with 100% downside protection for some part of some people's overall portfolio.

Joanne Smith - Scotia Capital Inc.

Okay, so Dennis, what you're saying is that -- the product has been completely restructured now. It's not a percentage of the return in the market anymore. It's now a fixed return based on a given percentage that the market has to perform in order to even get that percentage. Is that correct?

Dennis Glass

Well, the first one, the trigger, that's correct. On the second one, it's a percentage of appreciation in the marketplace with caps at those 2 levels.

Joanne Smith - Scotia Capital Inc.

Okay. So you said 8% to 12.5%. That would be 8% to 12.5% of the total return, so a percentage of a percentage?

Dennis Glass

No, I'm saying the upside potential is from 8% to 12 1/2% over 2 years, so the annual rate is 4% to 6% depending on the particular features of the product.

Joanne Smith - Scotia Capital Inc.

Got it. And so this is really a product that's appealing to clients that would normally buy a fixed Annuity, but because interest rates are so low, those are unattractive, but they are not willing to buy a variable Annuity.

Dennis Glass

I think that's a good perspective and probably fair for the majority of the purchasers of this.

Operator

Our next question is from Darin Arita of Deutsche Bank.

Darin Arita - Deutsche Bank AG

I had a question here for Randy. I think you mentioned that you didn't think spreads would be a tailwind, and I was wondering why there wouldn't be an upside to spreads.

Randal Freitag

Well, I think if you think about where rates are today, they're not too different from where they were last quarter when we talked about this. And even though they have rallied, we still talked last quarter about if rates stayed in or around this level, that we would have some negative impact as we move into 2012. I think we sized that about $20 million. That comes through spread. So where we're investing money today, which is in the low 5s, is still modestly below our portfolio, and that implies some level of spread compression. Against that, if you go through the businesses, on the Life side, we have some room but not a lot of room to adjust creditor rates. On the Annuity and DC side, there's a little more than on the Life side. But I just think as you move forward with rates at this level, there's the potential that you would see some spread compression. But as I mentioned, I think it's at very manageable levels inside of the overall growth that we're experiencing as a company.

Darin Arita - Deutsche Bank AG

Understood there. And just a numbers question here. Looking at the Life Insurance segment, the DAC amortization seemed lower than normal. Was there something that happened here this quarter?

Randal Freitag

Yes. We had some adjustments on some different line items that really impacted 3 primary items in the Life space, the expenses estimates, the benefit line and the underwriting acquisition expense line. If you sum them all up, they came up to about exactly 0. But going through the three, the expenses estimate line was artificially lowered by around $30 million pretax. The benefit line was lowered by approximately $45 million pretax -- or raised, excuse me, by $45 million pretax, and the acquisition expense line would have been lowered by about $75 million. So you add those impacts up, you get to 0. But those 3 lines did have some impact as we adjusted some books and moved some books on to the new accounting platform.

Operator

Our next question is from Eric Berg of RBC Capital Markets.

Eric Berg - Lehman Brothers

Just one question. In your prepared remarks, you cited repeatedly and highlighted divisional return on equity, a disclosure that is not unique but I would say is more the exception rather than what most companies do. My question is this. Since investors cannot invest in any of the divisions of Lincoln, they either buy the whole company or they don't buy it at all. And since the allocation of capital to divisions is, by its very nature, subjective, I may look at your allocation of capital to a division and decide that it's either conservative or not conservative. Why is this a helpful disclosure? And for that matter, why does it matter? Why shouldn't I be looking only at the company-wide return on equity?

Dennis Glass

Yes. Eric, I guess I don't completely agree with your point. First of all, the return that you're getting on the products that you're selling is a very important issue, so we talked about that. The return that you're getting in the line is very important. And added up, start with what your overall bottom line ROE is going to be. So that's why we talked about it. But at the same time, your point is well taken with respect to total ROE, and that is what shows up on our books and that's what we talk about all the time in terms of improvement over the next 3 years. So I think the inside, the line of business conversation about ROEs is very important. And as you point out, the bottom line is also very important. The company is important.

Eric Berg - Lehman Brothers

Would you agree, though, I mean, certainly, I agree with you. I didn't want to give the impression that returns on a given product basis don't matter, of course, they do. But would you agree with me that it presupposes, if you're going to look at that number and assign weight to it and importance to it, that it presupposes a proper allocation of capital to the division?

Dennis Glass

Yes. But I think we do that pretty vigorously. And I don't think that -- I mean, there is judgment involved in it, but it's based on a great deal of analysis and experience in the business. So I think from company-to-company, you might have some differences in who allocates how much to what line. But certainly, within Lincoln and comparatively from line-to-line, there's quite a bit of rigor used to establish what we think the appropriate level of capital is that we are calculating the ROEs up of.

Operator

Our last question is from Colin Devine of Citi.

Colin Devine - Citigroup Inc

Okay. Just a quick follow-up. Guys, could you compare for us what your commission rates are on the equity index product versus the variable? And then also, what percentage of your equity index sales would be made by registered reps?

Dennis Glass

The latter one is -- let me hold on that for a second and see if we can pull that information. What was the first question again, Colin?

Colin Devine - Citigroup Inc

Just understanding if there's a difference in your commission levels on an equity index product versus other variable.

Dennis Glass

Yes. We can get back to you on that specifically, but they're low on the equity indexed Annuity. And on the VA product, they're middle single digits. I think on the equity indexed Annuity, it's sort of in the same ballpark, Colin. But let us get back to you with specifics on that, please? And then, Will, do we have a number on registered rep selling?

Will Fuller

We don't have an exact number for the call today, Dennis. But the primary distribution channel for fixed index is our bank channel, which is a channel with registered reps and is a channel where we see expansion in. It is the registered rep channel as we enter the wirehouses and the regional broker-dealers with their B2B fees.

Dennis Glass

Yes. And just to tie that comment into your commission comment. One of the reasons that we're in institutions with this product is because our commission structures are quite modest relative to some of the other manufacturers of these products. Okay?

Operator

Thank you. This ends the Q&A portion of today's call. I'd like to turn the call over to Jim Sjoreen for any closing remarks.

Jim Sjoreen

Thank you. Again, we would like to thank all of you for joining us this morning. And as always, if you have any follow-up questions, you can contact me at our Investor Relations line at 1 (800) 237-2920 or via email at www.investorrelations@lfd.com. Again, thank you for joining us. We apologize for dropping off earlier, but we just can't control the weather. But again, have a great day and talk to you later.

Operator

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

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