May 3, 2010
Executives
Jim Sjoreen – VP, IR Dennis Glass – President and CEO Fred Crawford – CFO Jeff Kutz – Advisor, Ameriprise Financial
Analysts
Suneet Kamath – Sanford Bernstein Ed Spehar – Bank of America Jimmy Bhullar – JP Morgan Randy Binner – FBR Capital Markets Thomas Gallagher – Credit Suisse John Nadel – Sterne, Agee Bob Glasspiegel – Langen McAlenney Mark Finkelstein – Macquarie
Operator
Good morning and thank you for joining Lincoln Financial Group’s first quarter 2010 earnings conference call. At this time all participants are in a listen-only mode.
Later we will conduct a question and answer session and instructions will be given at that time. (Operator instructions) As a reminder, this conference call is being recorded.
At this time I would now like to turn the conference over to Vice President of Investor Relations, Mr. Jim Sjoreen.
Please go ahead sir.
Jim Sjoreen
Thank you, operator. Good morning and welcome to Lincoln Financial’s First Quarter Earnings Call.
Before we begin I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about liquidity and capital resources, premiums, deposits, expenses, and income from ops 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 Web site, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity, to their most comparable GAAP measures. A general account supplement is again available on the Web site as well.
Presenting on today’s call are Dennis Glass, President and Chief Executive Officer, and Fred Crawford, Chief Financial Officer. After their prepared remarks we will move to the question-and-answer portion of the call.
I would now like to turn the call over to Dennis.
Dennis Glass
Thanks, Jim and good morning to everyone on the call. The early part of the year mostly showed signs of an improving economy, more robust capital markets and growing sense of stability.
Our view is that advisors and consumers attitudes are improving but both remain cautious as evidenced by significant amount of cash still on the sideline. Lincoln’s first quarter operating results were very good in view of these conditions.
Consistent with recent quarters our fundamentals were strong. We had good production in all businesses and high and sustainable levels of sales in several products.
We reported net flows in our life, annuities and defined contribution businesses and our already strong capital position was strengthened further with improved general account conditions, recovering net income and strong overall statutory earnings, leading to higher levels of risk-based capital. More specifically, we generated total gross deposit of 4.7 billion and positive net flows of 1.3 billion benefiting from our top ten or better market position in all of our core product lines and our strategy of maintaining consistent presence in the market with a full suite of competitive products and continued strong distribution support.
Net flows in our life, annuities and DC businesses, capped nine straight quarters of positive net flows in these businesses with a single quarter exception in Defined Contribution. Looking at annuities we expect solid demand for annuities to continue given good consumer interests in guaranteed sources income.
Providers who are committed to the opportunity stay in the market over cycles are disciplined with product features and risk management and have multiple distribution channels like Lincoln will be the winners. Lincoln capitalized on this approaching the quarter generated 18% sales growth in our variable products, with average account values of 40% over the prior year period.
Fixed annuities are essentially at the interest rates and in the wake of lower rates our fixed annuity deposits were down over the first quarter of last year. Looking forward our distribution strategy of having wholesalers carry both fixed and variable annuity products allows us to pivot between our annuity solutions with market conditions and consumer demand.
In Defined Contribution we continue to hold a strong market position in the 403(b) business, and particularly, in healthcare and K through 12 education plans. First year sales in the mid-large 403(b) market are inherently lumpy driven by the timing of on boarding new plans.
So while first quarter deposits were weak when compared to the year ago quarter which benefited from a few large cases, the second quarter is developing nicely in terms of new cases and deposits. We are also seeing some improvement in terms of ongoing contributions for larger plans as the recovering economy begins to spur employers to increase salaries and reinstate matches.
Our strategy to build on strategic partner relationships to introduce DC solutions to intermediaries was small business clients is gaining traction with an increase of 68% in first year sales over last year. Our core individual life insurance business continues to perform well, with earnings drivers in the 5% growth range.
We reported a 68% sales increase for MoneyGuard where we are the clear product category leader and saw continued high demand for term life which generated an 81% sale increase. We expect strong growth rates to continue in these products.
Our core Universal Life business continued to reflect higher numbers of policy sold of 37% over last year at this time, but extending the trend of lower average pace amounts. As consumer wealth rebuilds I expect case size to increase.
In Group Protection, momentum from high fourth quarter sales continued into the first quarter with annualized sales of 16% over the year ago period. Year-over-year net earned premium growth was 6%, which I expect to climb to the high single digits over the course of the year as sales increase.
We are growing our reputation as a voluntary benefits provider and continued to invest in distribution, worksite enrolment, administrative capabilities and product development to enable us to capitalize on growth prospects offered in this market. We saw strong market share gains in this business over the course of 2009.
And based on (inaudible) data is now the sixth largest provider of voluntary group benefits in the country. 41% of the sales this quarter came from our voluntary business up 38% over last year.
We are continuing our product development efforts across business lines to enhanced sales, increase profitability and lower risk. Our core variable annuity and secondary guarantee universal life products were good illustrations of these efforts last year.
This year, we intend to further refine our product portfolios to ensure we keep pace with evolving consumer needs and to help spur sales growth. We’re introducing long-term care annuity hybrid, group accident insurance and a new life product designed to meet term like needs through a universal life design.
Distribution remains a competitive advantage for Lincoln and our ability to tailor our distribution models to the evolving needs of our partners and clients will be a catalyst for market share gains. Across Lincoln Financial distributors Lincoln Financial Network and our work site sales and service organizations, LFD remains one of the largest wholesale distribution organizations in the industry and our ability to leverage our competitive advantage in wholesale distribution helped us to add or expand relationships with seven firms this quarter.
One measure of wholesaling effectiveness is a number of advisors who sell at least one Lincoln product in the period. In the first quarter, that number is up 20% over a year ago.
We view this as an indicator of our ability to influence advisors across products and channels. Also, a 23% increase in wholesaler productivity is another sign of how well we’re capitalizing on the strength and reach of LFD.
Lincoln Financial Network continues to leverage its model to attract season advisors who value affiliation choice. Adding more than 150 new net advisors in the first quarter to approximately 7,850 total with favorable retention rates of top advisors across the network.
LFN reliably outpaces the industry in overall life insurance sales making it both a valuable distribution channel for proprietary life products as well as an important source of information about trends in the life marketplace. We continue to build worksite sales and service platforms, primarily found in our Group Protection and Defined Contribution businesses, which will expand our opportunities in these critical growth businesses.
From an earnings perspective, I’m pleased with the performance and positive momentum in core drivers such as account values, in-force space amounts and net earned premium levels. And we continue to hold the line on expenses despite expanding numbers of distribution partners, clients and accounts.
We’re mindful however that ROE is needed to improve and we’re focusing on efforts across all ROE drivers to support this goal. Turning to financial strength, capital level are stronger at the end of the first quarter with an estimated risk based capital ratio above 475% and more than 1 billion in cash at the Holding company.
We continue to see a more positive trend in investment losses and gains as the markets recover. In fact, moving to a net unrealized gain position of1.2 billion at the end of the quarter.
And we believe our investment portfolio is well balanced across issuers and asset types and well positioned for a slow economic recovery. With regard to our participation in the capital purchase program, we are increasingly comfortable with the recent improvements in the outlook for this economy, strength of the capital markets are strong, operating performance and capital adequacy.
Assuming no disruption to this generally favorable pattern we are likely to accelerate our repayment timeframe. As I look at the quarter and outlook for Lincoln I’m pleased with the underlying strength, positive momentum and capital generating capacities of our core businesses.
The investments we’re making in talent, technology, brand and risk management are important components of our goal to be a top quartile performer. And I believe the life insurance industry is stronger and Lincoln in particular is well positioned to deliver long-term value to clients and shareholders.
Now let me turn the call over to Fred for additional detail on the quarter.
Fred Crawford
Thank you, Dennis. We reported income from operations of $276 million or $0.83 per share for the first quarter.
I would characterize the quarter as on par with our expectations when normalizing for unusual items and higher than expected mortality impacting both our Group Life and Individual Life earnings. Combined mortality across our Group and Individual Life businesses impacted earnings by $18 million.
We expect mortality in both businesses to recover in future periods. Setting aside mortality, we reported a positive DAC adjustment of $21 million in our annuity segment reflecting a refinement to our estimates.
This positive annuity earnings item was partially offset by various balance sheet adjustments in our life segment and our other operations that combined impact earnings in the quarter by about $10 million. Net income of $283 million or $0.85 per share recovered considerably from recent quarters as net investment losses were modest and we’re offset by final gains recorded on the sale of Lincoln UK and the closing of Delaware Investments.
Our variable annuity hedge performance came in as expected with very little impact to earnings. We reported a net realized loss on invested assets of 28 million after-tax, down significantly from what we’ve been experiencing throughout 2009.
Gross realized losses and impairments on general account invested assets were $108 million pretax. Also much improved over 2009 where we averaged over $200 million a quarter.
Gross losses were offset by $50 million in gains as we took advantage of recovering credit markets to reduce our holdings in riskier assets, some of which have been previously impaired. RMBS represented about half of the impairments in the period as housing stabilizes we would expect these losses to moderate.
We took about $21 million in write-downs in our direct commercial real estate portfolio including real estate equity. Our overall mortgage lending portfolio remains solid with only 13 loans either delinquent or in for closure, representing about 1% of the $7 billion portfolio and adequately reserved for.
Given the ratings actions in Greece, Portugal and Spain, let me pause here to address our exposure. We have very little sovereign debt exposure to the five primary countries under question.
Portfolio, Ireland, Italy, Greece and Spain. Less than 3 million of exposure in total.
We have zero banking exposure to Greece and Portugal and only$36 million of exposure to banks domicile in the five countries in question. We will be expanding our 10Q disclosures on this topic but feel comfortable with our sovereign debt exposure.
Aside from the positive DAC adjustment in the period, annuity earnings continued to benefit from increase average account values and positive trends in asset base revenue. Average account values increased approximately $2 billion in the quarter driving expense assessment revenue up 6% sequentially with stable fixed margins.
We ended the first quarter with total average annuity account values of $75 billion, an increase of roughly $19 billion over the year ago values. Our DAC model uses a corridor approach to estimating account values for the purposes of amortizing debt.
We reset our corridor in the fourth quarter of 2008 growth in account value since that time of inched us closer to a positive unlocking. We estimate an unlocking to the midpoint of the corridor would result in a 200 million to 250 million positive earnings impact.
As of the quarter end we estimate markets would have to appreciate approximately 20% before contemplating an adjustment. Turning to our Defined Contribution business, a steady quarter overall with key earnings drivers of flows, markets and spreads, cooperating in the period.
We ended the first quarter with total DC account values nearing $37 billion, an increase of $8 billion over year ago. Average account values were up $1 billion sequentially.
Revenues from asset-based fees followed growth in account values with expense assessment revenue up 2% sequentially and over 27% year-over-year. An individual life, elevated mortality and various true-ups serve to mask otherwise stable sequential growth rates in both in-force and account values.
Rates consistent with our earnings growth rate outlook in the 5% range. It’s not uncommon to have higher levels of mortality in the first quarter but in this case we had a large single death claim that was not fully covered by reinsurance.
This claim alone accounted for roughly half the adverse mortality impact in the quarter. When looking at the trends in our Life results it’s important to take into account two meaningful transactions completed in 2009.
Reinsurance transaction in the first quarter and the year-end life reserve financing. The latter of which reduced Life earnings by about $6 million in the current quarter.
We suggest adjusting this quarter’s reported Life earnings were about $14 million of an unfavorable mortality and true-ups when modeling our forward earnings. In Group Protection the loss ratio came in at 75% considerably higher than what we have experienced in the last several quarters and outside our expected range.
The increase was primarily due to high mortality in our Group Life blocks. Disability loss ratios remain solid in the quarter with dental loss ratios running a bit higher than our planned levels.
We have reviewed conditions in our Group Life block for any notable concentrations including new business and believe this quarter to be an aberration. We expect overall non-medical loss ratios well above the (inaudible) times to fall back towards the low 70% range on average in future periods.
The elevated loss ratios impacted Group earnings in the period by about $10 million. Net earned premium increased 3% sequentially and up about 6% over last year’s quarter.
As Dennis noted earlier premium growth rates benefited from consecutive periods of strong sales growth. We expect continued progress in year-over-year premium growth rates up towards the high single digit area at the close of 2010.
Turning to capital our insurance subsidiaries remain in a strong position with an RBC ratio estimate in excess of 475%. Statutory results came in as expected with normalized statutory income running at about 60% of GAAP earnings and our risk-based capital requirement has come down as markets recover and credit quality improves.
We have total adjusted capital of about $7 billion and risk-based capital improving from approximately 1.5 billion recorded at year-end. We have pulled dividends out of the life companies throughout the year, likely managing our RBC closer to the 450% range while maintaining a strong excess liquidity position at the holding company.
Our holding company liquidity position at the end of the quarter stood at roughly $1 billion during the quarter we paid up senior debt of $250 million with cash on hand having prefunded with an offering late in 2009. Overall, a strong capital position when contemplating futures stress testing with the agencies and regulators and giving us flexibility when addressing life reserve financing solutions.
While net income recovered sharply, book value was up only modestly in the period. The result of adopting a new accounting guidance which changes how we account for our $600 million in credit linked note investments.
The effect of the new accounting is to consolidate the underlying collateral on our balance sheet and in the process marking to market securities the equities. All told this reduced our book value by about $169 million in the period.
This adoption does not represent an impairment of the securities. Going forward, any change in market valuation of our credit linked notes will run through net income.
Enterprise wide, operating expenses were essentially flat with last year while revenues improved with positive net flows and recovery in the markets. As noted last quarter, we expect investments back into our business to impact earnings per share by roughly $0.10 for the year.
These investments will build slowly and impacted first quarter EPS by only $0.01. It is possibly strategic expenses will come in a little better than our full year estimate.
Overall, we’re pleased with the health of our core earnings drivers in the quarter. Positive flows and strong account value growth, a steady build and life insurance in-force were the more diversified mix of business.
We defended spreads overall despite new money rates and net earned premium growth rates are building in our Group businesses. We would have expected strong reported earnings but recognize mortality will fluctuate from quarter to quarter.
Our capital position has only improved since year-end. We think the turnaround in our general account to an unrealized gain position and reduced realized losses and impairments bode well for future capital conditions.
Now let me turn it back to Dennis for some closing comments.
Dennis Glass
Thank you, Fred. Before we move to your questions I’d like to take a moment to reflect on the landscape post prices.
We have a clear strategy and one I’m confident into grow our four core businesses and accelerate growth in Group Protection and Defined Contribution. At the same time, our competitors are reexamining assumptions for long-term growth and profitability and in any cases rethinking business models and key lines of business.
This is a time that I think demanded very strong focus on longer-term strategy and proactively seeking emerging opportunities, which is a key factor in the decision to create a new senior management committee role dedicated to exploring strategic opportunities and actions that can take Lincoln to the next level. And also to ask spread to take on the challenge once the successor CEO is identified.
With that let me turn the call over to the operator for questions.
Operator
(Operator instructions). The first question comes from Suneet Kamath from Sanford Bernstein.
Suneet Kamath – Sanford Bernstein
Thanks and good morning. I guess a couple quick ones.
First for, Fred, when you talked about your sovereign exposure was that a consolidated view of Lincoln, meaning did that look into the credit linked notes as well as whatever direct exposure you have?
Fred Crawford
Yes, it’s a consolidated view of our exposure. We really don’t have any sovereign debt or specific bank debt exposures within these countries, within our credit linked note structure, so it is a consolidated view of our exposure.
Suneet Kamath – Sanford Bernstein
Great. And then I guess for, Dennis, on the acceleration or potential acceleration of the TARP repayment.
I think in the past, you’ve said that you would likely not use any of your excess RBC to repay TARP, but you rather leave it in the life sub to deal with some other issues is that still your view? And has your view of the mix of capital that you might raise to repay TARP changed at all?
Dennis Glass
Suneet, what I was focusing on was that with respect to the subsidiaries was that I thought they had enough capital generating capacity to handle their own capital requirements. As Fred mentioned, that still is the case and we’ll be pushing some dividends up to the holding company.
So that’s that. With respect to the mix, I don’t know exactly what the mix is going to be, but from a philosophical standpoint what I want we assert we do is to get a balance sheet that is properly structured in terms of its capital component.
And I’m confident that we can achieve that result and at the same time get a repayment structure in place that won’t be diluted to the shareholders.
Suneet Kamath – Sanford Bernstein
Got it. And then just the last one up for Fred, any progress on dealing with the LOCs that are maturing in early 2012?
Fred Crawford
We continue to look at long-term solutions what I would say, Suneet, is that market conditions have really improved quite significantly over the year but even in recent periods it’s really what you’re seeing in the various general account, credit markets conditions across the industry, spreads have come in, there’s a lot of money on the sidelines, looking for opportunity for yield and all of that has resulted in better conditions both in the bank debt markets and bank credit markets when it comes to extending letters of credit and pricing and also when looking at longer-term funded solutions for LOC replacement. So right now what we’re really doing is it’s less a matter of capacity and more a matter of dialing in the most efficient structures we can.
Suneet Kamath – Sanford Bernstein
And then just shifting over to the other question, the Defined Contribution business really had a pretty light net flow of, I think, $109 million and I appreciate that sales can be lumpy. I had always thought the seasonally, DC was the biggest in 1Q by a long shot.
The net flows in that business really seem to be weak and that’s been going on for quite a while. And I was glad to hear Dennis say that second quarter showed a pick up but maybe elaborate on what you are doing and maybe where you can get to in terms of flows maybe a year or two from now, net flows.
Dennis Glass
Yes, I think it would be hard to predict what the net flows are going forward because it’s still dependant on the market. As I said we do think that because of the lumpiness in this mid-to-large market and sales that we actually made in the first quarter that will show up in the second quarter that we will see some good deposit growth in the second quarter.
We are investing significantly in several areas to improve our organic results. That includes, as an example, in our retirement consultant worksite group, we’re investing in that, upgrading to people, change in their focus from service to asset gathering, that will help.
We will probably be because of added shelf space we’ll probably be expanding our support inside of Lincoln Financial distributors by adding co-sellers to increase opportunity with our advisors there, so we’re making investments there. I think we’ve been fairly clear that we have administrative investments that need to be made in order for us to be in the game all the time when we’re in a competitive situation and we think we will have that result in the next 12 months.
So we’re doing that as well. So I would say the momentum is strong, it’s taking us a little bit longer than we had hoped, I think we had some missteps couple of years back where how to do things, but I’m pretty confident that this business will begin to show some earnings growth, perhaps better than what we’ve been seeing in 2011.
Suneet Kamath – Sanford Bernstein
Thanks a lot.
Dennis Glass
Just to add to that, of course, although difficult to find when I talk about focusing on what’s happening in the industry there may very well be properties coming available, hard to get probably, lot of competition for them, but this is one of those areas, where we can advance the ball with an acquisition if we can find it or we want to advance the ball with an acquisition to find it. So to summarize I’m confident that we’re taking the right steps and that momentum will begin to build faster than it has over the last 12 months or so.
Suneet Kamath – Sanford Bernstein
Thanks, Dennis.
Dennis Glass
Okay.
Operator
Our next question comes from Ed Spehar from Bank of America.
Ed Spehar – Bank of America
Thank you. Good morning.
I had two questions. I guess first, Fred, on the annuity business, it seems that if you adjust for the DAC, it was a little bit less than I was estimating.
But I guess what I’m trying to figure out is you have a lower return in-force business because of when the stuff was put on the books. You also have I think some near-term drag related to that business that will go away, I think you've talked about at some point here in the next couple of years.
And then you have the new business that’s coming on, which I would assume the ROA on that stuff could be as much as – I don’t know 40% higher than where we are today, just to pick a number. First of all, do you disagree with what I’m saying?
And secondly, can you just help us understand how much of the drag that we see today could go away 12 months, 24 months from now? Assuming the market just goes up 8% a year?
Fred Crawford
Yes, I think in general, Ed, your dialog is reasonable, but let me just give you my perspective. First, we’re seeing the revenue drivers that you would expect to build with building account values happening or seeing it happening come through our numbers, but what is holding back or being a little bit of a headwind on earnings growth rates relative to market growth rate, is the fact that, we’re really amortizing DAC at a larger level than we have historically.
It’s really the K factor using a technical term on the factor used to amortize your DAC and that’s really simply a result of expected gross profits having been impacted throughout the crisis so you would have expected to be the case that you’re amortizing a more DAC. You’re right, in that that sort of an environment will overtime start to moderate if your markets remain stable and building.
We’re also somewhat amortizing death benefits that were taken when the market was at its low point and we were paying our claims under our guaranteed minimum death benefits. The SOP benefit ratio practice of amortizing those claims are cost into your P&L, will hang with you also for a while, as the company, but eventually, we would find that to moderate overtime certainly as a percentage of our revenue should account values continue to build.
The other elements is, of course, the DAC court, or recognize that when you unlock your DAC negative, you also impact that K factor and you end up amortizing your DAC at a higher rate going forward and that’s in part what’s arisen the amortization rates. The reverse is true as well.
If you are to unlock positively i.e., not use a corridor approach, you would impact positively your lower your K factor and help those amortization rates going forward. So to some degree we’re sort of housing, if you will, potential future earnings growth rates in that corridor and we still think it’s the right thing to do.
We think the concept of having a more assured permanency to market moves before you unlock is a good thing. We think it’s the right direction to go as a company.
But for these periods of time where the market has responded very quickly and recovered it’s going to be a little bit of a hold back to our earnings growth rates relative to what you would expect with the account value growth.
Ed Spehar – Bank of America
Fred, can I ask you, is it possible to just help us here in terms of putting some numbers on? For example, the amortization of the death benefit costs, how much is that hurting you today?
And is that something that goes away a year from now, two years? And similarly –
Fred Crawford
Yes, it stays with you for a while. I want to remember the pretax amortization rates to be around a $25 million range pre-tax.
Ed Spehar – Bank of America
Per year?
Fred Crawford
No, that’s in the quarter.
Ed Spehar – Bank of America
For just for death benefits?
Fred Crawford
That’s right. Just the benefit ratio amortization approach to amortizing the debt benefits that were paid out when the NOR if you will, on death benefits was really at its low point we were paying out claims.
What happens is that stays relatively stable overtime but, of course, as your account values pick up and revenues pick up, it becomes a diminishing piece of the overall expense ratio on the business.
Ed Spehar – Bank of America
But how much was the total amount? You say so basically it’s amortizing what you’ve already paid out, correct?
Fred Crawford
That’s right. That’s the fact (inaudible) ratio works.
Ed Spehar – Bank of America
What was the amount that you paid out?
Fred Crawford
I don’t on my fingertips have that because I think you’re probably asking during the market crisis period of time what was that pay out, when these guarantees were in the money. I don’t have that on my fingertips, I don’t.
Ed Spehar – Bank of America
Because I guess what I’m getting at that would seem to be a –
Fred Crawford
Yes, let me ask Jeff Kutz is with us and he may have some ideas.
Jeff Kutz
Couple of things, Ed. If you look at the high water mark (inaudible) we wouldn’t be paying out in excess of 50 million quarter at the high in terms of death benefits.
And the other thing to keep in mind is just we are more in the money even today than we were like in 2007 and so you will have an elevated level of expected claims. Going forward as well so it’s not just the claims that we paid over the last year that we need to amortize and that part of it but you also have an elevated level of future expected claims as compared to a couple of years ago.
That will be a drag for sometime depending on how markets go.
Ed Spehar – Bank of America
Yes, but I guess this is $25 million a quarter is a big number, right? And $100 million a year would seem like that’s something that we could put sort of a life on as to at least relate it to what’s already happened.
We know what’s already happened in terms of what’s you’re paying it right? At least we can address that piece.
Jeff Kutz
We would have expected to be at relatively consistent levels throughout the rest of this year so that helps it all. Otherwise we haven’t given a more formal projections on it, but we can certainly dig into that detail.
Ed Spehar – Bank of America
All right. I’m sorry.
Just one last question. Different topic.
On this LOC issue I think when times were great it might have cost people 25, 20, 40 basis points for this kind of a reserve support. And then more recently you hear companies talk about 200 basis points to 300 basis points.
With everything that’s happening with credit spreads and the markets becoming better, are we potentially in a position where, when a deal gets done, a long-term solution, we could all be very surprised in terms of what the actual cost is?
Jeff Kutz
You can actually somewhat see this publicly in the marketplace for Lincoln because costs on the long-term funded solutions are more or less going to be around our spreads, our bonds that trade out in the public market. They may fluctuate a little bit after that depending on the structure, but they’re not going to be too far off CDS type spreads or dollar-based spreads on our bonds.
When it comes to the bank market pricing it has come in from certainly the last several quarters, but it is not back at the levels that the marketplace was experiencing pre-crisis where there’s just a tremendous amount of supply or capacity in very low pricing. I would say if a company like Lincoln was paying 25 basis points to 35 basis points and letters of credit coming into the crisis the pricing these days is probably between 100 basis points and 150 basis points probably more on the upper end of that range, but again market conditions continue to change pretty quickly and that’s in part why we’re being patient.
So certainly has come in from those 300 basis point levels, for sure, I would say at least at the 200 basis point level for a long-term solution, but you can actually see the pricing by just tracking spreads in the marketplace for the life industry.
Ed Spehar – Bank of America
Okay, thank you.
Operator
Our next question comes from Jimmy Bhullar from JP Morgan.
Jimmy Bhullar – JP Morgan
Hi, thank you. Dennis, I just wanted to get into the change with Fred’s position and the creation of a new role.
You mentioned you’re seeking strategic opportunities. It seems like you’re interested in making acquisitions.
I’m not sure if you’re looking at selling some businesses also. And it seems like from your comments you are more interested in group benefits, maybe Defined Contribution.
But have you identified any deals out there that seem likely? Because in the group benefits business it just seems like there are more buyers than sellers out there.
And also are you looking to sell certain businesses? And then secondly, I had a question on variable annuity sales.
This quarter I think sequentially, your sales were down about 10%. Industry sales seem like they will be up around 1%.
So not sure what’s going on. Seems like you’ve lost share.
You had been gaining share over the last few quarters.
Dennis Glass
Jim, on the first question, we’re quite happy with the portfolio of product and businesses that we have right now so we are not planning on selling anything. What I said was I firmly believe is that there are going to be opportunities in the market as other companies spin off properties that aren’t core to them and that we can’t wait until we get a book, we have to be proactive out in the marketplace looking for these opportunities.
I’ve done this once before at a point in time where I thought it was most important to have somebody who’s Fred’s qualifications that simply focused on these opportunities. If you have something that you want to get done, the best way to do it is put somebody who is really talented, and charge of it.
And no matter how difficult the markets might be, we will be in a better position to be successful I think with this change. So that’s the answer to that question.
With respect to variable annuity sales, every quarter can be effective by different competitive actions. Last year, a couple of our competitors were closing out products that had high features, which gave them a temporary lift in their sales.
So each quarter I think stands on its own and you have to look at the entire competitive environment to see what plus or minus in the quarter. I would also say that importantly, at Lincoln, where we have relied more heavily on the warehouses and the banks that the warehouses and the banks for all of last year was still trying to find their equilibrium, if you will, with all of the integration and purchases that were going on.
We’re beginning to see some uptick in sales from the wares so we remain pretty confident that we will continue to hold share, hopefully, improve share over the course of the year. But in the first quarter results are what they are, I am disappointed at all in results, and I expect them to continue to improve.
Jimmy Bhullar – JP Morgan
And just on your rationale for seeking opportunities. Is that partly to get away from being as exposed to the variable annuity market or is there something else?
Dennis Glass
I’ve been pretty public in saying that I think I said it already in my notes today, I think the way we go at the variable annuity market it’s a good business, it’s a profitable business. Even though the profitability has come down, my recollection is that we’re still achieving ROEs in the 15% range or better on the current level of earnings you don’t see that too much in the insurance business, those kinds of return.
Again, the demand, there is no question in my mind that the demand to these income guarantee products are going to continue. So I am quite optimistic about the growth rate in that business.
At the same time for a variety of reasons I don’t want the individual annuity business to overwhelm the rest of the businesses in terms of its contributions to earnings. Right now, it’s about 30%; frankly, I like to keep it in that range.
And I say that because a lot of the earnings are generated inside the VA contract from the equity market. I rather be able to drive earnings in good equity markets and bad equity markets.
So I think diversifying into business is it’s not so dependent where so much of the earnings growth is driven by market reaction, is a good idea. So just to summarize like the annuity business we’re going to continue to invest and then we’re not holding back at all, but it requires us to look for faster growth inorganically, as well as organically, in our other businesses so that we’re not getting too reliant on for growth just on that one business.
Okay?
Jimmy Bhullar – JP Morgan
Okay, thanks.
Operator
Our next question comes from Randy Binner from FBR Capital Markets.
Randy Binner – FBR Capital Markets
Hi, thanks. Just wanted to follow-up on some RBC commentary from Fred.
You said that the industry might have to run more like 400% for a period of time. Just wondering how long that might be.
And to clarify that it’s the rating agencies that are asking that. If that’s the case, what is their main criteria for asking for that higher level of RBC?
Fred Crawford
It is predominantly, in my view, driven somewhat by rating agencies expectations; it’s certainly not a regulatory expectation to run that high, that’s obviously many multiples above what would be necessary there. I think I would tell you, Randy, that I am not so certain that CFOs in the industry don’t feel if it’s a period of time to be running at higher RVCs anywhere.
I would tell you that’s generally where my head is. And for the simple fact that we’re all patiently watching things unfold in the economy.
We’ve learnt here this past week with announcements out of Europe that things can still be choppy from time to time and so I don’t know that we’re altogether misaligned it all with rating agency views. I think once markets truly stabilize and feel more and more comfortable, which clearly, that’s taking place, you may gradually find risk-based capital levels moderating at a lower level.
I would also say that there has been adjustments in the approach to risk-based capital that have taken place throughout the crisis and continue to take place whether it’s a variable annuity reserving issues, there are discussions going on around the amount of capital clearly against mortgages, there has been several different changes that have moderated overtime and I think once those all settle in and once the rating agencies make their appropriate adjustments to their models then we could see some improvement in risk-based capital levels given that the reserving requirements and capital requirements overall have really risen, particularly on variable annuities. So we just simply have to see it play out, Randy, it’s difficult to predict.
I think the rating agencies are going through a lot of change and adjustments and they’re thinking and we need to let that settle down as well.
Randy Binner – FBR Capital Markets
Fair enough. And then just a quick follow-up there.
You’d mentioned that you may be having more like a 450% goal. And I was wondering if that would hold even post a potential TARP retirement.
And on the TARP retirement, if it would just be the principal amount or if it would include the warrants too.
Fred Crawford
Yes, the TARP retirement exercise really doesn’t adjust my comments or thinking around where we would settle into on an RVC basis. I think we have plans percent dividends up to the holding company that are in excess of our holding company cash needs.
That’s really done to just support further holding company financial flexibility for really alternative needs or opportunities including the repayment of CPP. So my view on the life insurance capital front is that we’ve gotten ourselves into a good position, both at the Lincoln National Life level as well as our captives, and that’s what I mean when I say they will hover around 450% is that’s a comfortable level to be in and gives us a plenty of room to maneuver through life reserve financing solutions as we go forward which is good.
Randy Binner – FBR Capital Markets
And just real quick on the warrants, would that potentially be part of the CPP retirement?
Fred Crawford
We’re not commenting on specifics around that topic. So I don’t really have any clarification on what maybe our direction on the warrants.
So we’re not really prepared at this time to comment on that with that level (inaudible).
Randy Binner – FBR Capital Markets
Okay, that's it. Thank you.
Operator
Our next question comes from Thomas Gallagher from Credit Suisse.
Thomas Gallagher – Credit Suisse
Good morning. Fred, first question is just a quick follow-up on when you’d mentioned 200 basis points cost of long-term LOC solution right now roughly.
Is that a pretax or after-tax cost? And what in particular are you referring to?
Is that a ten-year LOC? Is that a 20-year?
Fred Crawford
It would be really kind of a funded solution that would mirror our long-term debt spreads predominantly so that could be a 10 plus year type solution and it would be pretax rate that would be a yield we’re paying on a pretax basis.
Thomas Gallagher – Credit Suisse
So, I guess this maybe just more a comment than a question. If we’re talking about after-tax costs of in the low 1% range, approximately, what are you waiting for?
It seems like that’s reasonably attractive relative to what the hit to capital would be. Is it a capacity issue?
Like could you not do the full $1.5 million? I’m just curious like where you’re headed at on that?
Fred Crawford
No, patience has being paying off thus far. And so we’ve all along said that we want to move forward on these solutions as markets dictate and when we think we can lock in the most advantageous cost of capital for the company in support of these businesses.
Recognizing that the excess capital we’re carrying right now affords us to luxury of timing, things when markets are at their most attractive point. Now I will grant this to you Tom.
We’re certainly not naïve, we understand that the markets are very attractive and as you could expect the energy level of looking for solutions and exploring our options has picked up considerably with the markets improving.
Thomas Gallagher – Credit Suisse
Understood. And then just a follow-up.
Can you comment on whether you think there’s going to be any potential impact for Lincoln as it relates to the potential change in derivatives legislation? Whether that’s cost on variable annuity hedges, whether that’s capacity for longer dated options?
And realizing it you don’t still know the full terms and details, but how do you see that affecting you in terms of –?
Fred Crawford
Tom, we really don’t have at this point of time having formulated a concise point of view on it. We’re sort of watching it move through the system just as everybody else is.
On one hand there is a suggestion of there being greater capital carry behind derivatives presumably that cost passed on to the users of derivatives. On the other hand the notion of moving into an exchange environment and transparency and pricing may bring about greater liquidity and transparency and pricing.
It’s really hard to judge what it may mean for our business, other than we’re watching it certainly. And importantly, these regulatory standards are not really being targeted at our industry.
We’re simply watching it unfold in the banking industry and then have to make an assessment on what it means for us. So right now we really just don’t have concrete points of view on it, we’re just watching it unfold.
Thomas Gallagher – Credit Suisse
Okay, thanks.
Operator
Our next question comes from John Nadel from Sterne, Agee.
John Nadel – Sterne, Agee
Hi, everybody. A couple quick ones.
On TARP repayment, could you tell us have you received approval from the treasury to do that yet? Or did you even request approval yet?
Dennis Glass
John, we’re not going to comment about the process at all.
John Nadel – Sterne, Agee
Okay.
Dennis Glass
I don’t think it sounds good.
John Nadel – Sterne, Agee
You have to try. The comment on the $1 billion of cash at the holding company, is that the total cash there?
I’m not sure if I missed something as it relates to some kind of cushion or dollar amount that you want to keep there? And maybe this $1 billion is over and above that.
Could you just clarify that?
Fred Crawford
That’s actually what we characterize as our net cash position and the only thing that’s net off is we’ve got about $100 million of commercial paper outstanding. And what we have talked about publicly which I think is wise to do and a good lesson learnt to the crisis is we’re probably going to carry 12 months to 18 months worth of holding company liquidity and cash flow needs, as a contingency at the holding company level.
That is about a $0.5 billion or so depending on the year for Lincoln and so that gives you a little bit of an idea of what we’re holding over and above this policy of contingent liquidity at the holding company.
John Nadel – Sterne, Agee
Okay. And then just the last one for me is just to I wanted to think a little bit about the mortality results this quarter.
On the retail life side sort of that tends to bump around and we already saw from RGA earlier in the week, another seasonally weak quarter. But on the group side, I’m more interested there.
If I look at your group life and your group dental benefit ratios this quarter they were pretty elevated, especially on the life side. Is there anything there that as you guys evaluated the experience this quarter, that you say, maybe we’re a little aggressive on the pace of our sales growth over the last couple of years?
You guys clearly took market share. I just wonder if that is not coming back to you a little bit on the benefit ratio now.
Fred Crawford
John, just a couple of comments I would make. First, on the individual life side just to be clear.
What we’re spiking out for you on mortality is over and above what we would otherwise see normally from a seasonal perspective. That’s something is very important for us to note.
If this was just a seasonal pattern that’s naturally up, we wouldn’t be isolating it for the purposes of understanding our run rate earnings –
John Nadel – Sterne, Agee
Got it, okay.
Fred Crawford
This really adverse mortality over and above that. On the group question we did what you would expect any company to do when you see elevated mortality, either individual or group and that is we dig into the issue, we look at the blocks of business, we scrub it for concentrations or at realities or anything that could cause us any concern with the behavior of the block, our pricing, approach, our structuring of the product.
We did a very thorough job about that on the group side and really came back with no major concentrations or issues that tell us that there is any weakness or challenges from an underwriting perspective or a pricing perspective in the marketplace. So we truly do believe it to be an aberration.
We would suggest that, yes, first quarter results in the group side will typically be elevated, but again, this is over and above our expectations and we would expect it to normalize down overtime.
John Nadel – Sterne, Agee
Okay. And just as a follow-up on the dental side.
Are you guys doing what we've heard from a bunch of other dental players in terms of, it seems like there’s an elevated level of incidents, it’s remaining elevated. Are you doing a little bit more pricing actions there on renewals to try to combat that?
Are you experiencing that as well?
Fred Crawford
The answer is yes, that we are experiencing some of that. We have been fairly diligent in addressing renewal rates on the dental side and with fairly good success so we continue to kind of work that, but the simple answer is yes, we are experiencing what you have seen across the industry.
John Nadel – Sterne, Agee
Okay. Thanks very much.
Operator
Our next question comes from Bob Glasspiegel from Langen McAlenney.
Bob Glasspiegel – Langen McAlenney
Just following up on John’s question. Is it possibly nothing you can do about it if this sub-position is right, but some have speculated that mortality may be elevated in 2010 related to the estate tax changes?
Maybe that’s already in your expectations and isn't in the delta, but could that possibly be an explanation?
Dennis Glass
Bob, this is Dennis. We’ve asked ourselves that question and I think more likely the first quarter as a result across the industry on the individual side and perhaps on the group side is more likely.
If there is one factor the factor is called winter is probably, the biggest issue and it was a pretty brutal winter. It may weaken that people try to stay alive until 1st January, but again just two things.
One on the group side, and I have experienced over the ten years I’ve been watching this business from time to time you have a spike mortality, which is just as way things shake out in a quarter. Now, when you do that, again, as Fred said, you have to go back and make sure cohort by cohort new business, old business that there’s nothing that is related to stay over particular cohort, whether it’s new business or old business and we’ve done that and we can’t identify anything that will be systematic in the block of business.
The other thing I would point out, this was one of the few businesses where the earnings of the individual group (inaudible) the 143 people that are out in the marketplace selling this stuff, there is bad claims and a block of business that they sold they have to participate in that with lower economics, get back some of their commissions, so people are pretty good about paying attention to that. On the individual side, again, we’re carrying on this a little bit more.
The individual side really turn out to be one large claim which really wasn’t across the board and ended up being predominantly one large claim, which was a person, who had a significant amount of insurance and we’re not the only insurance company that will be suffering from that one large claim. I’m going into too much of detail here.
We think it’s random in both the individual and group protection. In group, sometimes randomness can carry on for 60 days or 90 days or so, so we will be watching it.
Bob Glasspiegel – Langen McAlenney
The follow-up is it seems like your parsing out a nibble out of information on TARP that you’ve pushed the timeframe up somewhat into an ambiguous time point. I think the midpoint of the range was year-end 2010, is that right?
Fred Crawford
Yes.
Bob Glasspiegel – Langen McAlenney
So you now think it will be sooner than year-end 2010? Is that what you meant to say?
Dennis Glass
I think if you listen to my comments you can draw your own conclusions. We’ve always said that when the conditions with respect to our own capital strength the conditions in the economy, the conditions in the capital markets have improved that would be an indicator of when we felt comfortable with proceeding on the idea of perhaps earlier repayment of CPP and those conditions are on place.
Now that may change in a week or it may not. So conditions are right.
And we just have to move along at a pace and watch all of these things again to make sure that we’re comfortable with making a move like that. By the way I’d also say the fact of this issue letters of credit that we apply the same philosophy.
I would say that the conditions in the marketplace are such that, as Fred said that we would be wanting to do two things, one renew some portion of letter of credit, to get that off the minds of the analysts and then what Fred and I, the team, are even more enthusiastic about just terming out significant portions of that letter of credit facility as quickly as we can. So that’s all I would add to it.
Bob Glasspiegel – Langen McAlenney
Thank you.
Operator
And our final question for today comes from Mark Finkelstein from Macquarie.
Mark Finkelstein – Macquarie
Hi, good morning. Just one more quick question on mortality generally.
I mean I was kind of intrigued by the single large claim with less reinsurance comment. And given that you kind of had that time period of '05 to '07 where you did see more large face older age type claims and the comment on reinsurance and again I have no idea what vintage that particular claim is from.
But should we start to see more volatility generally in mortality results or was this really an anomaly that kind of was very unique in and of itself?
Fred Crawford
We think this particular case was very unique. And not necessarily symbolic of the types of business we’re underwriting or trends in marketplace.
We have a very diligent reinsurance and retention standards from an underwriting perspective, typically, very low retention standards. We within our underwriting and new business development we will take more retentions at time when we think the risk reward is good for the company, but every once in a while you have a claim that spikes out in a particular quarter and that’s what happened this time.
But I would not characterize it as symbolic of sort of the trends in the underlying business. Mortality underwriting is mortality underwriting, no matter what the circumstances, the age, the sales, and so forth, we properly price and underwrite it as we always have.
Mark Finkelstein – Macquarie
Okay. And then just I guess one clarification on the LOCs.
I know we’re beating this one up, but you’ve kind of characterized a lot as the issue around costs and being patient. But I mean the other issue is always around structure and AXXX solutions were materially harder to get done than XXX solutions, which you did do.
If I’m hearing your comments correctly, the structural issues around this, have they all been worked out and it’s really just a matter of costs? And if you wanted to, could you get a deal done imminently inside of 300 basis points that essentially solve the issue?
Fred Crawford
AXXX, in general, is typically more difficult to structure around, takes more time and energy, but one way to address that is to retain more of that excess capital, our excess reserve, if you will, in your capital rate, to help with the structuring. And so we have done, this maybe a distant memory to all of you, but we actually have done a $400 million long-term AXXX funded solution.
We did this in 2007. And these are the types of transactions that remain available albeit you want to be again very wise about market pricing and when invested capital market for it.
So that’s really what we’re looking at. They are more difficult to structure, but when credit and capital conditions improve and there is money on the sidelines and when you are actuarial work suggest that the risk environment involved in it as low, we should be able to execute on this mix.
Mark Finkelstein – Macquarie
Okay, thank you.
Operator
This concludes our question and answer session. For any closing remarks, I like to hand the conference over to Mr.
Dennis Glass.
Dennis Glass
Thank you. Let me close by thanking you all again for participating on the call this morning.
As I said earlier, I view the quarter as very sound, good progress on key earnings drivers, high and sustainable growth rates in several products, a good pipeline of potential sales moving into the next quarter along with new product introductions late in the year, increasing distribution scale and shelf space, as well as productivity improvements, a strong capital position and good asset diversity. So as the external factors improve and advisors and consumer confidence and buying increases we are well-positioned I think for a strong – [Technical Difficulty]