Lincoln National's (LNC) CEO Dennis Glass on Q4 2015 Results - Earnings Call Transcript

| About: Lincoln National (LNC)

Lincoln National Corporation (NYSE:LNC)

Q4 2015 Earnings Conference Call

February 4, 2016 10:00 AM ET

Executives

Chris Giovanni - Senior Vice President of Investor Relations

Dennis Glass - President, Chief Executive Officer

Randy Freitag - Chief Financial Officer

Analysts

Randy Binner - FBR

Nigel Dally - Morgan Stanley

Suneet Kamath - UBS

Yaron Kinar - Deutsche Bank

Sean Dargan - Macquarie

John Nadel - Piper Jaffray

Steven Schwartz - Raymond James

Bob Glasspiegel - Janney

Tom Gallagher - Credit Suisse

Eric Berg - RBC

Operator

Good morning. And thank you for joining Lincoln Financial Group's Fourth Quarter 2015 Earnings Conference Call. At this time, all lines are in listen-only mode. Later, we will announce the opportunity for questions and instructions will be giving at that time. [Operator Instructions]

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

Chris Giovanni

Thank you, Michelle. Good morning and welcome to Lincoln Financial’s fourth 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 sales and deposits, expenses, income from operations, and liquidity and capital resources are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday and 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 Financial’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. One finally that I want to remind you that Lincoln will hold an Investor Day in New York City on June 9. We hope that many of you will be able to join us there.

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.

With that I would now like to turn things over to Dennis.

Dennis Glass

Thank you, Chris and good morning everyone. Fourth quarter results once again demonstrated the resilience of Lincoln’s franchise, as we had a solid finish in what proved to be a volatile year for capital markets. Our EPS excluding notable items increased 5% in the fourth quarter. Under the same measure for the full year our EPS also increased 5%, which resulted in a ROE of just over 12%.

As we begin 2016, we recognize that there are number of questions around the impact of weak capital markets on our businesses and Randy will discuss this later. However, it’s important note, we have placid momentum in key business drivers and our strategic initiatives are enabling us to execute on our growth, profitability and capital management initiatives.

Some of that - examples of these include consolidated net flows of 1.4 billion in the quarter, nearly doubled to prior year quarter and up 9% for the full year. Individual life insurance sales increased 11% in the fourth quarter, while total life insurance sales were up 8% in 2015.

Our book value per share excluding AOIC is now over $52, a record and up 6% from the prior area. Balance sheet strength combined with solid capital generation enabled us to deploy another 250 million towards buybacks and dividends in the fourth quarter, increasing our total capital return to shareholders in 2015 to $1.1 billion.

Now, turning to our business lines starting with individual life, as I noted up front, individual life insurance sales were very strong this quarter, up 11% of total life insurance sales of 725 million in 2015 or up more than 8%. It is worth spending a few minutes digging into some product stories as sales from many of our products increased double digits in the fourth quarter.

MoneyGuard sales increased 15%, as we continued to benefit from market acceptance of our MoneyGuard II product and traction in recently approved states growths. For the full year MoneyGuard had record sales.

Indexed Universal Life sales increased 13%, as we were helped by a new product launch and regulation that began in September that required many competitors to make significant reductions in maximum illustration rates. This resulted in an improvement in our competitive position. Finally, Term up 19% and VUL up 12%, also benefited from product enhancements.

As a reminder our focus on sales is not just to grow, but to grow profitably with a diversified mix of products and the tilt away from long-term guarantees. In the fourth quarter, we once again achieved these objectives. With expected new business returns within our targeted range of 12% to 15% and those single products represented more than 30% of our total production.

Also, 65% of our sales did not have long-term guarantees. Our outlook for life insurance business remains positive as our diversified product portfolio combined with the depth and breadth of our distribution distinguishes Lincoln in the market place.

Turning to group protection, we’re pleased with continued progress we are making with our re-pricing efforts and the improvement of our claims management effectiveness. Earnings once again increased from depressed results in the prior year quarter.

Fourth quarter sales of 223 million were down 11% from the same period last year and full year sales were down 16%. With our pricing actions on the poor performing employer paid slot [ph] largely behind us, our renewal actions have moderated. So we continue to build additional margins into our book of business.

As our pricing actions are stabilized, the degree of market disruption has been reduced and we see the pace of the sales activity improving. For example, our disability sales decreased just 9% in the quarter after being down 30% through the first nine months of 2015.

We expect continued improvement in sales activity and growth to reemerge during 2016 after two straight years of declining sales. This will be important as we look to drive future margin improvement by growing premiums and sustaining our pricing discipline.

Turning to annuities, our annuity business remains a high quality source of earnings, as we posted strong operating results and minimal hedge breakage in the quarter. Total annuity sales were 3 billion and we continued to consistently generate positive organic growth with 435 million of net flows in the quarter and 1.6 billion for the full year.

As I noted last quarter, market volatility dampened demand for most equity sense of products, including variable annuities and it was hard to tell if the Department of Labor proposal was also having an impact on industry sales. Given continued interest on the DOL combined obvious overhang on our stock we wanted to give you more specifics how we are internally approaching the DOL proposal.

First, it is important to note that there are a number of possible outcomes which we’re planning for, including some I have mentioned in the past that would be less owners on these than the original proposal. This morning I was specifically focused on this scenario where no changes are made to the current proposal, as that is the situation we get asked about most frequently. While this is the most adverse scenario, it is manageable for Lincoln.

So I would note a few things. One, in the fourth quarter we had nearly $0.5 million of positive net flows, only 30% of our sales came from products that would be impacted by the DOL proposal, namely variable annuities within qualified plans. This compares to nearly 60% for the top 10 VA riders.

Point two, it is also important to note, the DOL proposal does not impact the nonqualified market where our patented i4LIFE has long been known as the income product of choice and has resulted in Lincoln being the market leader in nonqualified VA sales.

Point three, a few years back we decided to focus on diversifying our mix of annuity sales, tilting away from VAs with living benefits and lowering our risk profile, without having a meaningful impact on returns.

As part of this pivot our sales of our sales of products that are not impacted by the DOL proposal has increased to 70% of total sales, up from 50% pre-pivot. Importantly, given our focus and momentum on diversification, we would expect this percentage to continue to increase, further reducing our dependence on sales impacted by the DOL proposal.

My next point, sales of VA in qualified plans will not entirely go away as the current proposal allows some products to be sold on a commissionable basis and many distributors will continue to offer the important guarantees that VAs provide. In addition, we would expect to see accelerated growth in our fee-based VA products, as we have been approached by many of our largest distribution partners about the fee-based opportunity. We’re also increasing our focus on fixed and indexed annuities, which still have the PTE 8424 exemption.

Finally, recall we have said that if there is a sales disruption, we would be able to reallocate capital to share buybacks to block much of the EPS impact over the next several years as we pivot to the extent required, a skill and capability we have successfully demonstrated in the past. So, I believe companies like Lincoln with market leader positions and F-scale that have a broad portfolio of products along with leading distribution, will continue to succeed.

Let me turn to retirement plan services. In retirement plan services, earnings and net flows were consistent with our outlook. Total deposits for the quarter of 2.1 billion, were down 10%, however, excluding one large case from the prior year, deposit increased nearly 40%.

Full-year results for a very good story with a record total deposits of $7.5 billion, supported by strength in both small and mid to large markets. Notably, small market deposits were up 18% to a record 2.1 billion and mid to large market one, two times as many plants as compared to the prior year.

Total outflows for the quarter were negative 220 million and included a large-case termination we referenced on our third quarter call. Full-year net flows increased to 452 million, compared to outflows of 881 million in the prior year. The increase was driven by our strong deposits and improvement in our retention rate, as we benefit from our strategic investments.

Looking ahead to 2016, we would not be surprised to see lumpiness quarter-to-quarter in net flows. However, we expect our net flows will exceed 2015 levels. This confidence is driven by our strategy, which aligns the fastest growing market with customers that value our high-touch service model. This combination enables us to better defend profitability and achieve our target returns. Bottom line, we remain optimistic in the growth outlook for our retirement business.

Lastly on investment management, we put new money to work in the fourth quarter at an average yield of 4.3%, which was consistent with recent quarters and 210 basis points over the average ten-year treasury. Following strong results in our alternatives portfolio in the third quarter, alternatives did not contribute to earnings this quarter, which makes our EPS growth even more impressive. Over the last four years, our alternatives portfolio has returned more than 10% annually at a level we target over the long run.

Our investment portfolio is high quality and diversified by industry, geography, and insurance. We ended the year with a net unrealized gain of approximately 3 billion and our below investment grade exposure is just 5.1% of invested assets, a slight improvement from the prior year.

With the recent volatility and weakness in the energy market, I want to update you on our exposure. First, it is worth noting that we stopped investing in the energy sector a year ago. And since the end of 2014, we have reduced our fixed income energy exposure by nearly $1 billion. This included approximately 400 million in maturities and roughly 600 million of asset sales based on an assessment of our exposures with our external asset managers. Importantly, these sales produced fewer losses than what was in our capital plan.

At year-end, the market value of our 8.6 billion energy portfolio was 95% of book value. Our high-yield energy exposure was about 600 million up modestly from the prior-year due to ratings migration and represented just 7.5% of our energy exposure. We continued to proactively monitor and manage our energy exposure.

So in closing, I’m very pleased we were able to grow EPS mid-single digits in 2015, despite equity market declines, persistently low interest rates, and mortality fluctuations. We showed great progress on several strategic initiatives, including restoring profitability and group protection, growth in RPS highlighted by significant improvement in net flows, continued momentum in our annuity ticket, which positions us well for the DOL and strong life new business returns. Bottom line, we remain confident in our franchise and our ability to grow earnings.

With that, let me turn the call over to Randy.

Randy Freitag

Thank you, Dennis. Last night, we reported income from operations of 382 million or $1.54 per share for the fourth quarter. The current quarter did not include any notable items and as Dennis mentioned, EPS increased 5% year-over-year excluding $0.20 of favorable items in the prior year quarter, primarily related to our reinsurance recapture. Under the same measure, full-year EPS increased 5% to $6.04.

One other item to point to specific to the fourth quarter, alternative investment income was 18 million below our plan or $0.07 per share. Moving to the performance of key financial metrics, all of which normalized for notable items, top line growth remained strong with operating revenue up 6% for the quarter and for the full-year driven by positive net flows in every quarter of the year and product mix shift.

Continued focus on managing the expenses created further margin expansion as the 4% growth in annual G&A net of capitalized expenses trailed revenue growth. Book value per share excluding AOCI was 6% to $52.38.

Operating return on equity came in at 12% for the quarter and 12.2% for the full year. Our balance sheet remains an important source of strength with strong capital and liquidity metrics, which gives us significant financial flexibility.

And finally, our year-end cash flow testing continues to point to significant statutory reserve adequacy and we do not anticipate reserve deficiencies in any of our entities. And we completed our good will review and did not have any impairment’s.

Net income results for the quarter were negatively impacted by a few items, the largest of which was a noneconomic charge of 43 million related to nonperformance risk, which is the result of our own credit spread narrowing in the quarter. Hedge breakage was modest at just 13 million.

Before moving to segment results, I wanted to provide some perspective on the current market environment. First, on the recent activity market weakness, this obviously presents a headwind to earnings growth and we’ve been very clear on the sensitivity, roughly $9 million for every 1% move in equity markets. Also, it is worth reminding you that we have a reverse into the mean approach within our DAC models and as of year-end, it’s provided a cushion against weak equity markets.

Next, the interest rate environment, we know that our interest rates remain topical, but it's important to recognize that we have effectively managed through persistently low rates and we’ll continue to do so. Importantly, our product portfolio has been re-priced over the past several years to reflect a low interest rate environment. And last quarter, we lowered our long-term earned rate, which leaves us very well positioned with this particular assumption.

Bottom line, low rates remain just an earnings headwind and the impact is consistent with the 2% to 3% we have noticed in the past. So, despite the current capital market environment, we remain confident in our ability to grow EPS.

Now, I will turn to segment results and starting with annuities. Reported earnings for the quarter were 243 million, a 3% increase over the last year. Operating revenues increased to 12% from the fourth quarter of 2014, as premiums benefited from an increase in fixed annuity deposits. Positive net flows in every quarter of 2015 resulted in average account balances reaching the 124 billion, up 4%.

Return metrics remained strong and consistent with recent periods. For the full year ROA increased three basis points, while ROE came in at 24%. Notably, return on equity has exceeded 20% for the past three years and has averaged 20% for nearly a decade. Outstanding results that highlight the returns that are high-quality annuity book can deliver.

In retirement plan services, we reported earnings of $33 million. Fourth-quarter revenue growth was unchanged year-over-year without annual revenue growth up 1%. Average account values ended the year at $54 billion, up 3% compared to 2014, driven by positive net flows. Normalized spreads compressed 11 basis points for the year. This is at the low end of our guidance and looking forward we continue to expect spreads to decline by 10 to 15 basis points.

Return on assets was 25 basis points for the fourth quarter and 26 basis points for the full year. 2015 was a good year for the retirement business, highlighted by record deposits, nearly $0.5 billion dollars of net flows and returns that fell within our targeted range. While earnings will fight the headwinds of low interest rates in weak equity markets start of the year, we expect to see continued growth in net flows.

The life insurance segment reported fourth-quarter earnings of $119 million, compared to a $140 million last year after normalizing items primarily related to the reinsurance recapture. Of the 18 million of below plan alternative investments that I noted upfront, 12 million of it is the life business.

Mortality results were consistent with the third quarter following elevated experience in the first half of 2015. But I would notice the mix of claims was a little different, so the financial impact was slightly worse than we would have hoped. An example of this would be a higher proportion of Term plans that have less reserve offsets than a typical interest sensitive claim.

Normalized spreads in the fourth quarter were down two basis points quarter-over-quarter and down six basis points for the full year. Looking forward, we continue to expect spreads to decline by 5 to 10 basis points on an annual basis. Earnings drivers remain steady for the quarter and year with the average account balances up 3% to 4% and life insurance in force, up 3%.

Overall, this year’s earnings were dragged down by elevated mortality, which overshadowed strong sales results. While we continue to assume first-quarter results will be negatively impacted by typical seasonality, we do not expect 2015’s elevated mortality to persist in the coming year. Group protection earnings of 13 million compared to a loss of 7 million with the prior year quarter.

Our non-medical loss ratio improved to 75.3% from 81% in the prior year quarter driven by our life and disability product lines, which benefited from pricing actions and improvements in disability claims management. For the full year, our loss ratio improved by 300 basis points and we expect further progress in 2016.

Our renewal pricing actions continue to have a favorable impact on margins, but they have negatively impacted persistency in sales. The result of the non-medical earned premiums decreased 5% compared to the prior year quarter. Our extensive re-pricing of policy renewals also has an impact on DAC amortization. With the first quarter of heaviest renewal period, the amortization impact is greatest in this period.

In the first quarter, we expect this acceleration of DAC to pressure earnings relative for the most recent run rate. So overall, another quarter that validates, we are on a path to earnings recovery and we expect further improvement in our underwriting profitability in 2016. As with the sales momentum Dennis mentioned starts to build and emerges into premium, we believe margins will continue to improve.

Let me discuss capital management and our capital position before we turn to Q&A. This quarter we repurchased 200 million of Lincoln shares. For the full year, we repurchased 900 million of stock, which is a 38% increase from the prior year. When combined with a 25% increase in our dividend per share, total deployment to shareholders increased to $1.1 billion.

We have a proven ability to generate free cash flow and as importantly, we have actually returned to that cash to shareholders, with share buybacks totally $3.1 billion over the last five years and dividends more than tripling over the same period.

Historically, I have pointed to 45% to 50% of operating earnings as a good proxy for free cash flow. But what is available for buybacks and dividends? Based on the shift in our product mix, notably the successful pivots within our life and annuity businesses, I’m increasing our outlook to 50% to 55%.

This positions us well to remain active returning capital to shareholders and the recent weakness in the share price enables us to acquire stock below book value, an excellent use of capital. It is also worth noting our revised free cash flow estimate does not include the reallocation of capital under the adverse DOL scenario Dennis spoke to earlier.

Quickly, on capital and liquidity where we are extremely well positioned with statutory surplus at 8.4 billion and an estimated RBC ratio of 490%, holding company cash at 608 million is well above our target of 500 million and we remain comfortable with our current leveraging capital structure and you would know our next debt maturity is not until 2018.

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

Chris Giovanni

Thank you, Dennis and Randy. We will now begin the Q&A portion of the call. As a reminder, we ask you to please limit yourself to one question and just one follow-up, then re-queue if you have additional questions. So, with that, let me turn things over to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Randy Binner of FBR. Your line is open.

Randy Binner

Great, good morning, thanks. Lots of things to touch on, but I guess I’ll start with Randy at the end there, in the buybacks, so you have some positive commentary around free cash flow and generally good comments are on the business, the stocks down quite a bit as you mentioned below book value. So, is there any way that you can kind of guess the buyback here and accelerate what you might do to take advantage of the low share price?

Randy Freitag

Hey, Randy, thanks for the question. When you look at our buyback practices over the last four or five years, we’d pointed you to 45% to 50% of free cash flow. In actuality, we exceeded that. We averaged about 51% of the normalized - the extra 200 million we did last year related to the reinsurance recapture.

So, we have been leveraging our balance sheet to take advantage. At times we felt the stock price was depressed and we did that in the third and fourth quarter as we stepped in and elevated our share repurchase of 200 million. So, we're definitely cognizant of share price and we will definitely step in when we think that the share price is depressed, which definitely we see today.

All that being said, we are going to be cognizant of the environment that exists today and the environment appears to be a little riskier than it was three to six months ago. So, we are going to take that into account. But we're definitely going to be active in the share repurchase market and step in and reflect the fact that we're generating strong free cash flows to increase our guidance and we will access the strength of our balance sheet when we see it reasonable.

Randy Binner

When you see the macro environment has been more risky, is it for you - from where you said for Lincoln, is it more of a credit risk issue or is it more of kind of a continued low for a long interested environment issue?

Dennis Glass

Yeah, I think for us if you think about the risks, the risk associated with declining equity markets are covered by our hedge program, which continues to perform at a very high level. So, you really don't see a balance sheet issue from there, you see earnings that went up stock [ph] to about a $9 million per 1% decrease. You have interest-rate risk and I talked about that not really being a balance sheet issue at this point in time and it's still just an earnings headwind issue and so we continue to manage that. So, from a balance sheet standpoint, it becomes credit risk. We haven’t been through a credit cyclone a while and we may be entering or we may not be. Now, as we enter [Indiscernible] - I feel very comfortable with our overall position and very strong balance sheet, a balance sheet that, arguably is in a position to handle any stress that comes its way. So, we feel very comfortable with where we are. But I would agree with you that overall this is primarily a stress that will feature credit.

Randy Binner

All right. Thanks a lot.

Dennis Glass

You bet.

Operator

Our next question comes from Nigel Dally of Morgan Stanley. Your line is open.

Nigel Dally

Great. Thanks, good morning. So, first question was on the DOL. You mentioned the fee-based VAs an alternative to get around some of the DOL restrictions. Can you comment on the average ten profile of fee-based versus commission-based VAs, and just on that point, the distributors they haven’t had the systems in place to offer annuities on their fee-based platform towards that some more of an intermediate solution?

Dennis Glass

Nigel, this is Dennis. I'm sorry; you broke up a little bit there. Could you repeat the question?

Nigel Dally

Sure. Just on the Department of Labor, potentially introducing fee-based VAs as a way to get around some of those restrictions, just hoping to get some differential as to how the returns favor on fee-based versus commission-based and also where the distributors had the systems in place to battle the sell fee-based VA?

Dennis Glass

Yeah, on the returns, they would be roughly equivalent between a front end commission and a trailer type fee-based product; I mean that's the way that we would price the product. The second point, again I'm not quite sure on. But as I said in my remarks, I think I heard it correctly, there are people who are looking for ways to get valuable living benefits to their customers and looking at our fee-based products, which we’ve already developed. We don't do a lot of that today. But with the DOL, it pushes some of the distributors in that direction. We have the product portfolio to respond positively.

Nigel Dally

Okay, and then just second one, Randy, this question to you, do you have the unrealized loss on the high-yield portion of those exposures?

Randy Freitag

Yeah, let me answer to that question. I think - but I know at the end of the fourth quarter, the unrealized loss was about $500 million and with spreads widening in the energy portfolio grew a couple of 100 million.

Nigel Dally

Okay, thank you.

Operator

Our next question comes from Suneet Kamath of UBS. Your line is open.

Suneet Kamath

Thanks, I wanted to start with the life business in the outlook for alternative investments, given that some of this is reported on a lag, Randy, do you have a sense of how 1Q is shaping up and have you changed your view in terms of alternatives for full-year ‘16?

Randy Freitag

Suneet, thanks for the question. No, we really haven't changed our view, as you know - as we report alternative returns, you have the private equity piece, which makes up roughly two-thirds of our portfolio, which is reported on a one-quarter lag and so that will be linked to the third quarter of 2015, which was a pretty good quarter in the equity markets. So, I think you will see that in the results. Separate from that, you have hedge funds, which reported on a one-month lag, so you will see some of the first quarter impact inside of the hedge fund returns. But overall, it hasn’t causes to change our overall guidance or thoughts on what alternatives will return over a more extended period of time. But also note that when you think about alternatives, especially portfolio of ours, which is not that big at $1.2 billion, you can get that one-off situation where a particular investment in our size return, one also lost in a [ph] particular period, so you also have to think about those sorts of things.

Suneet Kamath

Okay and then just pivoting to the DOL, Dennis, in your opening comments, which were helpful, I think you spent some time talking about qualified versus nonqualified, and I guess the question is as we talk to some of our industry contacts, there is a view in the industry that whatever happens to the qualified market will ultimately in some ways you perform happen to the nonqualified market as the SEC opines on fiduciary standards. That's what we're hearing from industry contacts. I wanted to get a sense of what your thoughts are on that?

Dennis Glass

Well, my thoughts? We don't even know what the DOL rules are going to be yet and there is a lot of speculation about what they might become. Some people more positive, some people more negative. So I thank it's even harder to speculate about what the SEC might do with respect to any outcome that comes out of the DOL’s proposal. So, I just think it's very hard to speculate and I would say with some confidence that anything you hear is just pure speculation, could be right or it could be wrong.

Chris Giovanni

This is Chris. I just want to clean up one item just on the comment around the unrealized losses, the $500 million was, as of the end of the third quarter, the other additional 200 was through the fourth quarter. And operator if we could move to the next question.

Operator

Our next question comes from Yaron Kinar of Deutsche Bank. Your line is open.

Yaron Kinar

Good morning, everybody. First question is more strategic, I guess, strategic thinking. Given that the market does not seem to be giving Lincoln shares the credit for the diversification of the business and the high returns and given what we’ve seen announce from one of your competitors about potential split up, does that kind of thought - is there room for such thought in the Lincoln’s board room today or is it something like that you consider?

Dennis Glass

Consider? It's a pretty open question. The big picture answer to, I think - are you asking if we would change the makeup of our company and the way MET is changing the makeup of their company?

Yaron Kinar

Yeah.

Dennis Glass

Yeah. I'm just going to answer that by saying we believe in the businesses that we are in, subject to all the comments that we’ve made about them today. We're making progress overall, some things to do better. But at the end of the day, obviously and we’ve demonstrated this from the past, whatever is in the best long-term interest of our shareholders and I say long-term interest of our shareholders, I think reactions to ups and downs in the stock price in a short period of time is not the way we think about things. It’s just over the long-term we are building value for our shareholders.

And with respect to MET, let me just make a couple of comments. One, Steve is a great guy and he has got strong management team and I’m sure whatever they end up doing is going to benefit the shareholders. When I come back to their individual life business and I think about it from a competitive perspective, us competing against them, is I understand what - the attempt to achieve or the split up is to get the US life business out from underneath the SIFI regulations and what that would do importantly for them from a capital perspective, put them on the same footing as Lincoln and the rest of the industry.

So from that perspective, they are just sort of getting back on a level playing field from a capital perspective and we don’t compete against companies on the basis of uneven capital regime. So that [Indiscernible] doesn’t bother us. And so, when I think about that, US versus Lincoln, first of all, we have much more diversification in our business than what I understand they’ll end up with. And from back to competition, we have such a strong distribution franchise. We have such a strong breadth of product portfolio. Just comparatively we sell twice as much life and annuity as MET does. So I think they will be a good competitor. They have a solid base in the United States. But the strength of Lincoln to competition, to capability from a competitive stance, I think our capabilities are strong and are going to continue to grow.

Suneet Kamath

Thank you for the pretty thoughtful answer. One quick follow-up, can you tell us how much remains in the reversions in the quarter today.

Randy Freitag

Hey Ron, we are at above $165 million in total for the annuity in retirement business, with the vast majority of that in the annuity business.

Suneet Kamath

And that’s as of end of the fourth quarter.

Randy Freitag

Yeah, the end of fourth quarter.

Suneet Kamath

Okay thank you

Operator

Our next question comes from Sean Dargan of Macquarie. Your line is open.

Sean Dargan

Good morning, I have a question about a potential adverse DOL scenario, so you talked about the pivot to other products, if you couldn’t sell as much VA in the qualified market, but as I through that it might take a while to complete that pivot and even if a stock is trading below book value, is it safe to say that you would make up for any potential loss EPS from VA sales by buying back your stock in the meantime.

Dennis Glass

Yes, I made that comment in my remarks and I’ll just confirm it. Yes, absolutely we will do that. We did that if you recall a couple of years ago when we were reprising our life insurance portfolio and we slowed sales down because we were not getting the appropriate returns when interest rates dropped and I think that created about 200 million of capital that would otherwise gone into new product sales instead it went to share buyback. So if that were to happen, it being DOL more disruptive than we expect, absolutely we’ll take that capital and buy our shares back and we as we’ve said that would mitigate any earnings per share impact from lower VA sales.

Sean Dargan

Got it, thanks and when I think about your RBC at almost 500%. I was wondering if you have any - if you done any sensitivity analysis, thinking if we’re going to credit cycle and I’m not saying we are, but at any point 6 billion energy portfolio, if the securities in there were downgraded in average of one notch, do you have any idea what that would do to your RBC?

Randy Freitag

Yes, Sean, this is Randy. Yeah, one notch downgrade across the entire $8.6 billion portfolio, roughly 15 to 20 points of RBC.

Sean Dargan

Great, thank you.

Randy Freitag

You are welcome.

Operator

Our next question comes from John Nadel of Piper Jaffray. Your line is open.

John Nadel

Hi, good morning everybody, Randy maybe just a question. I think this is just more about trying to understand the seasonality pattern for mortality I am thinking about the life insurance segment, obviously 1Q of 2015 was weaker than you guys would typically expect just the seasonality would produce. Can you walk us through what you expect in the more normalized environment seasonality look like?

Randy Freitag

Sure, at the highest level we expect the first business in individualized mortality, we expect the first quarter to be elevated and the middle two quarters of the year to be somewhat in line with expectations and then in the fourth quarter you get back what you are over in the first quarter, that’s at a high level what you would expect. Of course you’re going to get some movement around there. If you remember last year in the first quarter, you’re going to test my memory but I believe we were 28 million of the number we talked about over our expectations and I think we talked about that maybe being a little high from a seasonality standpoint, but not that out of way but what a typical seasonality would see in the first quarter. So that’s what I would say.

John Nadel

Okay, that’s helpful and then I guess my second question is just thinking about the 50% to 55% and I think as we moved into 2015 a year ago, you talked about expecting buybacks to be roughly similar to the level in 2014 obviously 2015 benefited from the capital freed up from the reinsurance recapture. Should we expect '16 level of buybacks to look similar to '15, excluding that $200 million of what I guess we would characterize as more one-time in nature.

Randy Freitag

So what I actually said coming into 2015 was that we would exceed what we did in 2014 and what we did in 2014 was 650 million. So we actually exceeded that by $250 million. This year we did 900 million and it did include 200 million associated with the reinsurance recapture. I would also say that over the last two quarters of the year you saw us step in and do an incremental $50 million a quarter really leveraging the balance sheet. So when I think about the year the 900 million and the 200 million and I think about stepping in and doing about additional 100 million for the full year over and above what we might have thought otherwise.

John Nadel

Got it. Perfectly helpful. Thank you very much.

Randy Freitag

You are welcome.

Operator

Our next question comes from Steven Schwartz of Raymond James. Your line is open.

Steven Schwartz

Thank you, hey good morning everybody. Just one more Dennis could on the DOL maybe two more on the DOL. The colors that you made about share repurchase mitigating or someone mitigating the hit to variable annuities obviously nobody wants to think about this, but I would imagine that there would be cost savings as well.

Dennis Glass

I think the way to think about that is that if sales were reduced you’d have to associate and reduce the variable expenses associated with those sales but I don’t think there is much cost savings on top of the share buybacks that would come out of that kind of a scenario.

Steven Schwartz

All right, thank you Dennis and then just switching the emphasis, obviously VA has taken up most of people’s attention, but could you talk to me a little bit about retirement plan. I know a lot of that is teachers and I don’t think they get affected, but I’m not sure how much.

Dennis Glass

By the DOL.

Steven Schwartz

Yeah.

Dennis Glass

Roughly as it stands today, there’s not a best interest contract exemption or participant plans of less than a hundred and that’s about 30% of our business. And so it is roughly the same.

Steven Schwartz

Okay, so yeah - so that would have to go entirely fee-based and be under fiduciary rules without the fact that I would think that would be a negative but I don’t know.

Dennis Glass

All right let’s make sure that we are on the same page, for some reason I am having a hard time hearing some of these questions. So your question was how much of our current business in retirement is affected by the DOL.

Steven Schwartz

Right and you said 30%.

Dennis Glass

I missed both [ph] it’s about 10%.

Steven Schwartz

Okay, that’s much lower, okay. All right, okay thank you Dennis.

Dennis Glass

Okay. I would like to come back to one question and I apologize, not sure what the connection problem here is, but I was asked about - I thought I was asked about the unrealized loss increase in our total energy portfolio which I answered went from 500 million at the end of the third quarter up a couple of hundred million. But I am - I think actually the specific question was the unrealized loss in BIG portfolio below investment grade portfolio, which is only a fractional amount, so for clarification a fraction of the total amount.

Randy Freitag

Thank you operator, we can go to the next question.

Operator

Our next question comes from Bob Glasspiegel of Janney. Your line is open.

Bob Glasspiegel

Good morning Lincoln. I think Randy this maybe a little bit stale, but a few quarters ago you said 10% yield on partnership alternatives is normal and 20 million a quarter is the run rate, is that still sort of your base case assumption and was that - I think you said 7 million low in Q4 was that off a 20 million sort of run rate.

Randy Freitag

Yeah, Bob thanks for the question and I think as Dennis mentioned 10% is still our expectations. Over time the portfolio as we said here today has about a billion two. So you can do the math, pretax of $30 million a quarter. As I mentioned this quarter, as Dennis mentioned we had no alternative investment income and I size that about 18 million after DAC and tax in my script.

Bob Glasspiegel

That’s very helpful, thank you.

Randy Freitag

Thank you, Bob.

Operator

Our next question comes from Tom Gallagher of Credit Suisse. Your line is open.

Tom Gallagher

Good morning. Hey, I want to ask what your thoughts are on anything you are hearing on the regulatory front for VA captives. I think we’ve had another company out there prudential announce they are going to fold in their captive and I’ve heard varying stories about companies views of how this is likely to unfold, but - and any comments can you give on that and do you - are you planning on recapturing your captive? I think you’ve mentioned in the past what the impact would be if you could update us on that as well in terms of whether it’s neutral or positive or negative for RBC.

Dennis Glass

Hi, Tom I don’t know what you are hearing from other people, but I’ve personally been negotiating at least discussing this with the executive committee of NAIC and so I think I have a pretty good handle on the direction that it’s going. So let me make a couple of comments. The high level objective of the review is to eliminate the statutory and GAAP reserve issue that has to do simply with market value versus book value accounting. And the regulators understand that there should be a regulation in place where you can’t protect yourself against both potential challenges which you have to pick one or the other, okay. So what they are doing to is eliminate this negative arbitrage between - sometimes it’s called economics, sometimes it’s called book value, but the intent is to try to find a way to eliminate that having to choose one versus the other.

The proposal that has come out very definitely goes in that direction, and so there is an intent again to improve the regulation, both for the benefit of the regulators as well as the benefit of the companies. So that’s the direction it’s moving, [indiscernible] is about to start studying and sort of try to measure this problem from all of the different companies data, so that’s substitute what is going on. Specifically with respect to captives, the need for the captives, if this goes in the direction it seems to be going is lessened and the current thinking at the NAIC is that even though it is lessened, whatever captives are in place will be grandfathered [ph]. So I generally see this as moving in a very positive direction for the entire VA industry and the regulators, having said that there is a long way to go before we get to final regulations.

Randy Freitag

Tom, let me answer the second part of your question. No, we have I think no need to recapture our captive at this point in time. Over a long term as Dennis mentioned we are glad about the way the NAIC is moving and we will see what our thoughts are if and when those rules get change. But in the interim, no need or recent event [ph] - let me expand and explain a little bit why I think that is. Every company has its own facts and circumstances and I am not going to speak to why or why not other companies would or would not recapture the captives. But Lincoln’s facts and circumstance is around this issue are the following. The way we have operated our captive over the years with a hedge program linked to the economics has left us in a very desirable position and that we have a significant amount of hard assets that exceed above the economic based liability and at the end of the year, they exceeded them by 1.4 billion and significantly exceed these statutory reserve credit required. At the end of the year they exceeded statutory reserve credit by $900 million.

So the way we’ve operated our captive in the past from a reserving standpoint, from a hedging standpoint has left us in a very favorable position that - a position that I don’t believe all companies necessarily share. The second thing I would point out is that we have capitalized our VA business also contributes to that very favorable position. So we capitalize our variable annuity guarantee business is that we have a formula that has a great approach is that greater of CT98 [ph] and a floor percentage of account that is actually for a while now that floor is being controlling item inside of the capital formula, but the CT98 is a very high level, high threshold from a capital standpoint. Factually if we were to take that CT98 down to CT95 which is where I hear some of my peer companies talk about the capitalization at you would actually see a billion less of required capital against their VA business. So we are in a very good position, recapturing our captive would have very little impact at all on the parent company where we do that and that is directly linked to how we have operated this company in the past both from a hedging standpoint and from a capitalization standpoint.

Tom Gallagher

That’s really helpful Randy and then just one follow up and this is more a comment in my opinion as supposed to a question, but I think - given the position you are in, I think it would be a real positive if you all would consider in the interest of better transparency recapturing the captive particularly if it’s that strong. I think, right now I think, there is just generally speaking basically using captives there is confusion in terms of how do you compare versus others and sort of what it might mean, if it does move in the direction of where companies get pushed to move things to an up co, but anyways, so that’s - so I think just from a perception, from a transparency standpoint I think it would be positive if you moved in that direction. Anyway just wanted to make that comment.

Randy Freitag

We appreciate as always your insights Tom. As I mentioned I just don’t see that happening. The one benefit that you do get really from having a captive is that your spread from the volatility created by the difference between book value and market value accounting, that $900 million of assets in excess of statutory requirement, next quarter it maybe 1.1 billion a quarter, after that it may be 700 million, but I think that’s the real benefit. And we will do everything we can to continue to bring sunshine to the fact that our captive is operated in a very robust way just exactly consistent with the way we operate our - the parent, but thank you and always I appreciate your insights.

Tom Gallagher

Okay, thanks guys.

Operator

Our next question comes from Eric Berg of RBC Capital Markets. Your line is open.

Eric Berg

Thanks very much and good morning to Dennis and the rest of your team. Dennis you indicated at the beginning of the call that your percentage of sales in variable annuities in qualified plans I think you said is roughly half of that of your peers. My first question, with respect to the qualified business that you do right, can you remind us and I apologize if I missed this, of the split within the qualified between guaranteed product and non-guaranteed product and as part of your response could you answer the question, do you necessarily think that when you are selling annuities prospectively into qualified plans with no guarantee that those sales are necessarily in trouble or not necessarily.

Dennis Glass

Well, so I understand the question. We sell very little non-guaranteed business into qualified plans. I don’t know what the number is, but it’s very small. Actually some of our corporate viewers even restrict that concept. Is that…

Eric Berg

Yes, you’ve answered and so is it you basic idea that because of the guarantee and the value associated with the guarantee that you may be able to - that the sales - is the point plainly and simply that because of the guarantee and the associated value of the guarantee that the sales, you may be able to sell these products under the new regime?

Dennis Glass

Absolutely and as I said just to add to that, several distributors have already said that they’ll continue to sell VAs with living benefits on a commission basis with - if the rules don’t change at all and that’s because we’re trying to get the value of the guarantee to the customers.

Eric Berg

And if I could ask one follow up regarding your investment portfolio, I think I know we moved - the numbers have moved around a little bit in the course of this call. But I think that you said that at the end of the September quarter the unrealized loss on your energy portfolio was $500 million give or take and as the below investment grade loss was much less than that. If I have that right, the basic concept right of what you’re saying, that would suggest an out sized loss on your investment grade energy portfolio, something that surprises and you’ve seen so many of your competitors, the investment grade energy portfolio is basically trading at book. My question, why would you have a large unrealized loss on your investment grade energy portfolio?

Dennis Glass

Yeah, that’s going to be industry by industry and credit by credit analysis Eric and I don’t know what the other - the mix of the other competitors is.

Eric Berg

Okay, I’ll follow up with Chris and we can talk about it. Thanks, very much.

Operator

At this time I would like to turn the call back over to Chris Giovanni for any closing remarks.

Chris Giovanni

Yes, thank you and thank you all for joining us this morning. As always we will take your questions on our investor relations line at 800-237-2920 or via email at investorrelations@lfg.com. Thank you all for joining and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may disconnect. Everyone have a great day.

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