Lincoln National Corporation (LNC) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and thank you for joining Lincoln Financial Group's Fourth Quarter 2014 Earnings Conference Call. [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.

Thank you, Karen. 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, share repurchases and liquidity and capital resources, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8-K, 10-Q and 10-K filed with the SEC. We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in this call, including income from operations and return on equity, to their most comparable GAAP measures. So presenting on today's call are Dennis Glass, President and CEO; and Randy Freitag, CFO. After their prepared remarks, we will move to the question-and-answer portion of the call. And with that, I'd like to turn things over to Dennis.

Thank you, Chris. And good morning, everyone. Fourth quarter results capped another very good year for Lincoln. Operating EPS was up nearly 20% for the full year, which enabled our operating return on equity to exceed 13%, a 100 basis point increase over the prior year. The ROE expansion is impressive considering book value per share, excluding AOIC, also grew 9%. The majority of our business segments are performing well. The 1 area where remain disappointed is Group Protection earnings, but we are taking the necessary actions to restore profitability. We recognize low interest rates remain topical, given further declines in long-term rates, and Randy will discuss this later. However, we remain confident that we have the internal levers and inherent product demand that will enable our positive momentum to continue even if low interest rates persist. Specific to the fourth quarter, results included a bit more noise than prior periods. That said, our actions were opportunistic and resulted in more favorable earnings and positioned us to deploy additional capital in 2015. Importantly, our strategic initiatives, risk management rigor and the way we approach the marketplace and key constituents is unchanged. Bottom line, we remain a very clean story as we enter 2015, and we'll leverage our strengths to advance Lincoln even further. Notable among them are consistent presence in key markets. This affords us the opportunity to expand distribution partners and methodically grow sales in higher growth markets at attractive returns. Robust capital management. Buybacks totaled $650 million for the full year, a 44% increase over the prior year. Our active capital management strategy also included a 25% increase in our common stock dividend. Broad balance sheet and risk management strength. This was once again exhibited as we completed our annual goodwill and statutory cash flow testing with no material impact from either review. Lincoln is well positioned with a healthy RBC ratio, a high-quality and diversified investment portfolio, ample liquidity and robust risk management programs. Turning to the business lines. Individual Life had another solid year, particularly coming off very strong sales in 2013 and further product introductions. Individual Life sales increased 5% for the full year and were flat in the fourth quarter. Our diversified sales mix remains a hallmark of Lincoln and is driven by a broad product portfolio and disciplined risk management as no single product represented more than 25% of our total production this quarter. Indexed Universal Life and Variable Universal Life sales continue to show good momentum as IUL posted a record sales quarter. We're encouraged that our new MoneyGuard product continues to gain traction as sales increased sequentially throughout 2014 and totaled $47 million in the fourth quarter. We expect this momentum to continue in 2015 as the product gets approved in a few more key states. It is worth a reminder that our focus on sales is not just to grow but to grow profitably. It is grounded in our goal to price our entire Life portfolio to achieve 12% to 15% returns. Looking forward, Life is well positioned for sales growth, given the depth and breadth of our distribution relationships and product diversity. Equally important, we have a proven ability to capture new market opportunities and adapt to changing macroeconomic and regulatory conditions. Before I shift to Individual Annuities, I briefly want to mention that in December we entered into an agreement with a key reinsurer partner. The agreement allows us to opportunistically recapture several life insurance treaties. Randy will provide more details, but we view the transaction very favorably given the positive economic benefits. In the Individual Annuity business. Positive operating leverage continued in the fourth quarter, which led to another outstanding quarter. Looking at the full year, disciplined pricing contributed to steady earnings growth and strong returns, and our comprehensive annual review validated policyholder behavior assumptions. Our stable market presence once again resulted in over $3.3 billion of deposits in the fourth quarter and more than $0.5 billion of positive net flows. For the full year, total deposits of about $14 billion led to positive net flows of $2.6 billion. Lincoln's consistent approach to the annuity market, combined with product introductions designed to meet consumer needs, has resulted in $16 billion of positive net flows over the past 5 years, all on our terms. One of the most recent product introductions was Investor Advantage, our investment-focused product. We continue to gain significant traction, with fourth quarter sales up 74% from our very successful launch in the third quarter. This has further accelerated a key strategic initiative, which is to push our variable annuity sales mix to 30% nonliving benefit and 70% living benefit. In the fourth quarter, this still continued as nonliving benefit sales were 26% of total VA sales, up from 18% in the prior year quarter. Including the impact on sales covered by our reinsurance treaty, nonguaranteed products comprised 58% of total VA sales in the quarter. We remain optimistic and are confident we are positioned for growth in the Annuity business. Demographic tailwinds still support product demand, while the reemergence of several key competitors and continued macro uncertainty further validate the need for our diverse annuity product portfolio. Our disciplined approach to risk management, combined with product innovation, will enable us to write attractive new business to add to our existing block of high-quality business. Turning to Group Protection. Weak earnings in the fourth quarter and throughout 2014 were primarily the result of poor long-term disability loss ratios. As I have discussed in the past, to improve profitability we are taking aggressive pricing actions, primarily aimed at our employee-paid -- employer-paid businesses. We also think most of the recent earnings pressure and volatility is related to our move to a new claim system in July and associated process changes. As a result, we see an opportunity to improve profitability as we refine the integration. While I'm disappointed we did not show another quarter of sequential earnings improvement, it is important to remember that our earnings recovery will not be linear and when margins are this low does not take much for earnings to bounce around quarter-to-quarter. Fourth quarter sales of $250 million were down 7% for the same period last year, and full-year sales were down 11%. As a result of our pricing actions, the employer-paid portion of our sales were down more meaningfully, 18% in the fourth quarter and 19% for the full year. Higher-margin employee-paid product sales were up 5% in the fourth quarter and represented 54% of quarterly sales compared to 48% in the prior year quarter. Looking forward, we'd expect sales growth to remain pressured as we take the necessary steps to return Group Protection margins over time to our 5% to 7% after-tax margin target. Turning to Retirement Plan Services. The earnings profile remains steady throughout 2014. Total deposits for the quarter of $2.3 billion were up 42% from a year ago. Full-year's results were a very good story, with total deposits up 11% to a record $7.5 billion, with strength in both the small and mid-to-large markets. Recurring deposits contributed $4.8 billion in 2014, up 7%. Favorable equity market performance resulted in a sequential increase in account values, which now stand at just under $54 billion, a 4% increase from a year ago. Lumpiness in net flows is being driven by the natural ebb and flow in the mid-to-large case market. This quarter deposits benefited from one large case. But the large case termination we referenced on our third quarter conference call led to negative flows of around $900 million in the quarter and $880 million for the full year. We remain optimistic in the growth outlook for our Retirement business. Our core products are poised to grow faster than the industry, while continued expansion into segments like the government and small market bode well for Lincoln. In fact, we are seeing several notable wins as we start the year, and the pipeline looks strong. Based on current visibility, which goes out about a half a year, we expect to see positive net flows in the first half of the year. Turning to Distribution. The depth and breadth of our retail, wholesale and work site teams remain a competitive advantage for Lincoln. Each channel continues to deliver outstanding results and create financial and strategic flexibility by properly balancing growth, product diversification and profitability. Lincoln's producer base stands at over 63,000 strong. We've continued to gain traction on producer productivity, with 1/4 of our fixed annuities and 1/3 of both RPS and MoneyGuard sales coming from our cross-sell strategies. Client-facing distribution headcount increased 6% at both LFD and across LFG. Importantly, headcount grew even faster in key growth areas. Notably, small-market RPS was up 29%, and Individual Life increased 10%. At LFN, our nearly 8,500 affiliated advisers is unchanged year-over-year. However, our registered reps are up 2% due to investments in our broker-dealer clearing platform and recruiting. Looking ahead, we'll continue to invest in Distribution as we seek to expand our extensive footprint to grow sales further in 2015. And finally, in Investment Management. Our new money purchases of $2.2 billion in the fourth quarter were invested at an average yield of 4.3%, which was 210 basis points over the average 10-year treasury. This strong result was primarily attributable to investment-grade spread widening where underlying credit fundamentals remain strong. As we discussed at our recent Investor Day conference, we continue to utilize our yield-enhancing debt program, which added 22 basis points to our new money yield this quarter. The majority of our yield-enhancing debt purchases were in investment-grade assets, which actually helped reduce our overall portfolios below investment-grade exposure from the prior year quarter. Our business model is supporting our yield-enhancing debt program. Our retail-focused product mix results in long-duration liabilities with predictable payment patterns. This enables us to invest in less liquid assets, an area where we have found incremental value and have additional capacity. With recent volatility in the energy market, it is worth noting that our energy exposure is consistent with our broader portfolio, high quality and diversified; 95% of our energy holdings are investment grade, with diversification across subsectors and issuers. In fact, our primary fixed income energy exposure had a net unrealized gain of over $700 million or 8% of book value at the end of January, up from the year -- end of the year. So in closing, Lincoln had a very good quarter. As I noted at our Investor Day, I don't recall a time where our relative strength and industry position has been this strong, which affords us the opportunity to grow and grow profitably. This should enable us to remain a steady EPS growth story. With that, let me turn it over to Randy.

Thank you, Dennis. Last night, we reported income from operations of $439 million or $1.67 per share for the fourth quarter, up 19% from the prior year. The quarter's excellent results capped off a strong year, which saw full year operating EPS increase 20% to $6.03, another record for Lincoln. As noted in the press release, we had normalizing items of $53 million or $0.20 per share in the quarter, primarily related to the recapture of previously reinsured life insurance business. Excluding normalizing items, EPS increased 12% in the quarter and 18% for the full year. Looking at key performance metrics. Top-line growth remains strong, even excluding the reinsurance recapture, with operating revenue up 6% for the quarter and 8% for the full year, driven by positive net flows in every quarter of the year and the benefit of favorable equity markets. Continued focus on managing expenses created further margin expansion as the 5% growth in annual G&A, net of capitalized expenses, trailed revenue growth and improved our expense ratio by 40 basis points. Book value per share, excluding AOCI, grew 9% to $49.29. Operating return on equity came in at 13.1% for the full year. Excluding normalizing items, ROE was 12.3% in the quarter and 12.5% in 2014, an 80 basis point increase versus 2013. The strength of our balance sheet is highlighted by record statutory capital of $8.8 billion and an RBC ratio of approximately 540%, which gives us significant financial flexibility. A couple other items of note specific to the fourth quarter. G&A was above our normalized level due to seasonality we typically see during the fourth quarter along with higher incentive comp expenses. Higher G&A was offset by favorable tax true-ups and the prepayment-related investment income that came in above our expectations. As I noted in prior calls, that is expected in this environment. Net income results for the quarter were negatively impacted by the agreement to sell our media business and modest breakage in the VA hedge program. Full-year net income was a strong story, with realized losses coming in at just $47 million for the year, while VA head results were very good, with just $4 million of variable annuity net derivative losses. This resulted in net income equaling 94% of operating income for the year. Before shifting to segment highlights, I would like to comment on the persistently low interest rate environment. At our November Investor Day, we noted that interest rates remain just an earnings headwind, and we reiterate that view today, even as rates have moved lower. A couple of points. Our 2014 year-end cash flow testing continues to point to significant statutory reserve adequacy. In fact, we have seen our reserve sufficiency increase from 2013 in both our base case and stress scenarios. We showed at Investor Day that spread compression is abating, even if we assumed rates remain flat at current levels. Recall that we estimated flat rates with depressed EPS growth by 2% to 3% versus 4% to 5% in prior years but still enable us to achieve our targeted EPS growth rate of 8% to 10%. Given the decline in interest rates since our November Investor Day, we estimate we are likely to be at the top end of this 2% to 3% range, but that capital management actions will provide a more favorable offset. Now I will turn to segment results and start with Annuities. Reported earnings for the quarter were $237 million, a 19% increase over last year. Operating revenues increased to 9% from the fourth quarter of 2013 as positive net flows continued, and we benefited from further tailwinds in equity markets, which combined drove an 8% increase in average account values that reached $122 billion at year end. Returns in the Annuity business continued to be very strong and highlight the quality of our Annuity book. ROI once again increased sequentially, and ROE came in at 25% for the quarter and 26% for the year. With record assets, earnings and returns, it was another outstanding year for the Annuity business. As we enter 2015, our strong market position, success with our relatively new investment-focused product, our hedge program and recent product refinements should support further profitable growth in deposits and net flows. In Retirement Plan Services, we recorded earnings of $42 million. Fourth quarter revenue growth was up 2% year-over-year and sequentially, consistent with our annual revenue growth. Account values ended the year at $54 billion, up 4% versus the prior year, as positive fund performance was partially offset by the net outflows that Dennis mentioned earlier. The impact on interest margins from low rates has been most pronounced in RPS. Normalized spreads compressed 11 basis points for the year. This is at the low end of our prior guidance. And looking forward, we continue to expect spreads to decline by 10 to 15 basis points annually in the retirement business. Return on assets of 31 basis points for the fourth quarter and 30 basis points for the full year were both at the top end of our long-term targeted range of 25 to 30 basis points. While in total across the company the net impact of G&A prepayment income and taxes was 0, the RPS segment did benefit from the sum total of those items by approximately $5 million. Pretax net margin increased 250 basis points in 2014 to 34.1%. Overall, 2014 was a good year for the Retirement business, despite consistent declines in interest rates. Revenue growth outpaced expense growth, resulting in a 13% increase in earnings and a 16.4% return on equity. The Life Insurance segment reported fourth quarter earnings of $193 million or $140 million after normalizing items, primarily related to the recapture of life insurance treaties. Let me first speak to the recapture. We reached an agreement in December with a key reinsurance partner in which we recaptured business within our current retention limits related to several life insurance treaties. The recapture includes an established block of mortality risk written in the 1990s to early 2000s and increases our total face amount retained by 5%. As we have noted in the past, this is a period where reinsurers were particularly aggressive in their pricing assumptions. With this transaction, we capitalize on a mutually beneficial resolution with the reinsurer in which they paid us $500 million to recapture the business. A few key points about the transaction. The mortality assumption that we employed in assessing the deal is based upon current assumptions that reflect actual experience on the business. Additionally, we employed an outside actuarial consultant with significant mortality expertise. The underlying experience on the recapture business is right in line with our current retained experience. This is a book of business where we were often paying out less in reinsurance premiums than we were receiving backing claims from the reinsurer. What we were able to do with this transaction is capitalize those future profits at a very attractive discount rate. After establishing reserves and paying taxes, we expect to take the $200 million of net proceeds and use it to fund incremental share repurchases. When combined with the earnings impact of the recaptured business, we expect the transaction to be accretive to annual EPS. Turning back to underlying results in our Life business. Earnings drivers remained steady for the quarter and year, with average account balances up 6% to 7%, and Life Insurance in force up 4%. Normalized spreads in the fourth quarter were flat quarter-over-quarter and down 11 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 in the Life business, consistent with comments at our Investor Day. Overall, a solid year for our Life Insurance business, capped by a very favorable economic transaction that we expect to be accretive to annual EPS. The Group Protection segment results continue to fall short of expectations as we reported a loss from operations of $7 million in the fourth quarter compared to a gain of $11 million in the prior year. Earnings remained negatively impacted by poor results in the LTD business, driven by higher-than-expected incidence and lower-than-expected recoveries. Let me put some numbers around those 2 items. We typically do see higher incidence rates in the fourth quarter. Over the fourth quarter 2014, incidence rate was 10% higher than the prior year. Incidences more in line with historical seasonality patterns but have improved results by approximately $8 million for the quarter. Claim recoveries were down significantly in the fourth quarter, coming in about 20% below our expectations based on historical levels. Although some movement in this number can be expected, that sort of deviation is definitely out of the norm. I'd estimate that the lower recoveries negatively impacted the quarter by $9 million. Given our analysis of the higher incidence rates and lower recoveries, we believe the introduction of our new claims management system and its associated process changes explain most of the deterioration and increased volatility we have seen over the last 3 quarters. As we better integrate the new claims system into our operation, we believe that we will see improved claim management effectiveness and, thus, improved morbidity and profitability. Looking forward, our outlook for the group business is consistent with prior comments, including those from our November Investor Day. Notably, we expect earnings to improve, but the improvement will not be linear. The realization of benefits from our new claims system and continued focus on strengthening the group leadership team, combined with significant price increases, will be positive levers to Lincoln's long-term earnings growth and enable us to ultimately achieve our margin targets. Let me discuss our capital position and capital management before we turn to Q&A. 2014 was another great year from a capital generation and deployment standpoint. Strong statutory performance with operating earnings of $1.4 billion allowed us to upstream nearly $1 billion to the holding company, which led us to deploy over $800 million in 2014, up 42%. This included $650 million in share buybacks and $168 million in shareholder dividends. Holding company cash ended the year at $554 million. Statutory surplus grew by $800 million to a record level of $8.8 billion. And as noted earlier, we estimate our RBC ratio will end the year at approximately 540%. The increases are driven by the strong statutory earnings combined with the reinsurance recapture and other tactical activities in the fourth quarter. As you may be aware, we have $250 million of debt due in June. We are comfortable with our current leverage and capital structure and do not see a need to delever further. Finally, let me comment on capital deployment expectations for 2015. Given the strength of the balance sheet and strong capital generation trends, I would expect share buybacks to exceed the $650 million we put to work in 2014. We continue to view buybacks as an excellent use of capital but anticipate growing and maintaining a competitive dividend as well. Bottom line, returning capital to shareholders remains a priority for Lincoln. With that, let me turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Sean Dargan from Macquarie.

I'm just wondering if you could quantify the incremental amount of premium that will be coming back with the treaty recapture.

The 2 items, as I mentioned, on this book of business is that historically and oftentimes we had been receiving back more in claims than we were paying out in premiums. The approximate premium number that we are paying out on an annual basis was roughly $150 million.

Okay. And are there opportunities for more treaty recaptures out there with other counterparties?

I don't think of these as opportunities. We're in constant negotiations with our reinsurers over any number of items. So I wouldn't say that there are opportunities as much as these things come up from time to time.

Great. And then one about the investment portfolio. You screen on the high side with exposure to energy. Can you give us any updates on your exposure to energy, the sector, both investment grade and below investment grade?

Yes. We have about $9.5 billion in energy exposure. And that's very diversified, as I mentioned. So by category, in the independent category, maybe 29%; midstream, 28%; oilfield services, 21%; integrated energy companies, 19%; refining, 2%. So you can see it's very diversified by the type of energy company. Specifically, to answer your question, 95% of our exposure or $9 billion of the $9.5 billion is in investment grade. $0.5 billion is in below investment grade. We have spent the last 2 to 3 weeks -- well, actually, the last couple of months, going company by company at the $50 oil price. And we don't see significant credit issues at $50. And so we're quite comfortable with the overall energy portfolio.

And our next question comes from the line of Randy Binner from FBR Capital Markets. Randy Binner - FBR Capital Markets & Co., Research Division: I'm going to try and ask you a question around the group segment, and appreciate the data you gave there about being below planned. But I guess I'm trying to understand a little bit better how the implementation of the new claims systems, and I assume more staff, hurt results, if I heard that correctly, or maybe hindered processes. If you could walk us through that more, I'd be interested. Obviously, and I don't think they would affect incidence, but maybe how that affected recoveries and other elements of the claims process. And also, how far through that process we are before those things stabilize?

Yes. Thanks for the question, Randy. I think anytime you make changes in the claims area you're going to see some dissonance. So specifically, we were introducing, making one of the largest changes, again, and we were introducing a whole new claims system. The whole process around doing something that means that you are going to be spending a lot of time -- or your claims examiners are going to be spending a lot of time on training. They're going to be spending -- that's both before the introduction of the system and after. They're going to be spending time on understanding new processes that come with the new system. They're going to be spending time understanding the new technology overall that they have in place. So what happens is that your claims examiners need to spend more time doing those things. And what happens as a result is that caseloads tend to tick up a little bit around the introduction of something like this. There's a direct link between increased caseloads and increased loss ratios. And that's what we've seen. I think that we could've done a better job of managing the whole process around the introduction of the claims system, and that's partly why we've seen some changes in management in the group business. But it's that whole process that involves -- that is involved with introducing a new claims system, the training, the processes, everything, that causes caseloads to tick up, which causes loss ratios to go up. We're in the process of -- training should be ramping down. The claims examiners should be fully trained on the new system. We'll get the processes straightened out. So I don't think this is a very long-term item. But it's going to take us a little bit, and you'll see a little more volatility along the way. Randy Binner - FBR Capital Markets & Co., Research Division: Okay, that's helpful. So you're about a year into the launch of the new claims system, and are you -- have you staffed up to keep the caseload more manageable for the adjusters?

I think part of the fix is making sure that you're staffing up to appropriate level to handle any near-term volatility. And we're doing some of that. Randy Binner - FBR Capital Markets & Co., Research Division: And is it year -- Randy, at the year end, is that -- how far are we into this process?

Hard to give an exact measure. But we're -- I think we'll be fully done with all these things we need to do, the training, the process and everything in about roughly the middle of the year.

Let me comment one more time on my view on the group business. First start by saying, the market is in large part accepting our renewal increases. We're getting them on the business that we want to get them. We're driving away the more unprofitable businesses where we've been asking for higher rate. And I'm speaking specifically to the employer paid. So management is in control of turning this business around. There's nothing in the market that's going to stand in our way. And candidly, as Randy just mentioned, management in part made some missteps to put us in this position. But I'm confident that we're getting the price increases on our employer-paid business that we need. I'm confident that the work to be done around improving the claims management process will be done. And so I do see us getting back to our 5% to 7% margins in the 2015, 2016 time frame. And again, I'm going to reemphasize, I believe it's in management's control to get back to those numbers because the market is competitive, but pricing is pretty firm in the marketplace.

Our next question comes from the line of Tom Gallagher from Crédit Suisse. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Randy, I wanted to circle back on the reinsurance recapture. The way you explained it I think clears things up for me. But I just want to make sure I got this. So essentially, what was the case was you had a, I would say, very favorable terms on terms of the treaties that you had, just in terms of the premiums that you were paying out versus the claims you were paying out. And so in order to unwind that favorable deal, you're getting paid a lot essentially. So what should happen here is your life earnings would go down. But then, said another way, you're giving up some of those earnings by getting the cash and the stock gain. But the buyback amount you're able to do with that incremental cash will more than offset the lost earnings in the life book. Is that -- am I understanding that correctly, just mechanically, the way this is going to work?

Yes. That's a very good summary of the overall transaction, Tom. If you think about -- just a little more on this deal. If you go back to the '90s and early 2000s when we repriced this business, we expected to have reinsurance gains. It was part of the pricing process. At that time, as I mentioned, reinsurers were particularly aggressive, it seems, with their pricing assumptions that we -- that's what we anticipated. So the profits we were experiencing on the reinsurance are not surprising. And in fact, they were part of our pricing. But what we were able to do with this is look at that stream of expected reinsurance profits in the future, discount them at a very attractive rate, mid-single-digit sort of rate, and that represents the $200 million that I talked about. That's the statutory gain. Now separate from that, there's GAAP accounting. So we bring this book of business onto our GAAP balance sheet. We adjust our assumptions around cost of reinsurance, et cetera. And you saw -- so you see a slightly smaller gain on the GAAP side. As I mentioned, the life business benefited by roughly $53 million during the quarter, primarily related to this transaction, so lower than the $200 million. So you'll have some -- essentially, you've strengthened your GAAP balance sheet. So you have a smaller impact on the GAAP basis. So what I expect on the GAAP basis is a little more volatility, not a whole lot of volatility, because at the end of the day we didn't increase our retained amount by all that much. In fact, I think this deal took our average retained face amount from $175,000 to $185,000, so about a 5% increase. So I expect a little more volatility, not a huge amount of volatility. And I don't expect a material impact on the overall life insurance earnings at the end of the day. And as you said, we'll then take the $200 million, put it into incremental share buybacks. Net-net overall, I expect it to be accretive to EPS. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Yes, that's helpful. So you wouldn't expect life earnings power to go down? You just expect a little more volatility around it?

When viewed on an annual basis, I mean, they may go down a little bit. But I don't expect a material impact. Remember that this is roughly a 5% increase in their retained face amount. So it's not a huge impact inside of what is a very large business. So there may be some small impact. But nothing that I would call material, none that would spike out. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Got you. And then just my last question. So I totally get why you're doing it. If -- the main question I'm getting is, it would seem to be not a great economic transaction for your counterparty. And is it fair to assume that they would have a difference of views in terms of how they would expect this book to develop than you? I assume that has to be the question unless there's something regulatory or otherwise that is causing them to enter into this transaction with you.

All's I can say, Tom, as I mentioned in my script, I think it was a mutually beneficial arrangement. I don't know how they would characterize it on their side other than I think the negotiations were amicable, and we reached a mutually beneficial resolution.

And our next question comes from the line of Suneet Kamath from UBS.

Just a question on interest rates. Randy, you said in your prepared remarks, much like at Investor Day that the current level of interest rates is not going to create a balance sheet issue; it's more of an earnings headwind. I guess the question is, at what rate level, whether current or forward curve, would we really start to see the balance sheet impact? Because it just seems like every time interest rates fall, you focus us on earnings, which I get. But there has to be at some point where the pressure builds and we start to see something in terms of the balance sheet.

As I mentioned in my script, I pointed out 2 specific items. First, I talked to our year-end reserve sufficiency emerging from the cash flow testing results, and that remains very strong. In fact, it increased over 2013. And I talked about the earnings headwind component. There are -- outside of that, you have some subset tests on the life insurance business that I think get pressured over time in a very low rate environment. But as I mentioned, that's over time. I think it's easily manageable given the overall size of our capital position and balance sheet. And separate from that, of course, we typically, in the third quarter, do an annual review of all of our assumptions. So we'll have to look at our long-term interest rate assumptions. And as I mentioned in the past, the impact of lowering our long-term rate assumption 50 basis points is a roughly $125 million. So we have those other things we have to think about. I don't think there's anything that I would consider to be dramatic out there.

Okay. And then there were some comments in the prepared remarks about goodwill testing, and, obviously, there was no impairment this time. Can you give any color, like you typically do in the K, around where there may have been some pressure in terms of goodwill and where we might have seen or may see some impairments down the road?

There -- and these will be similar comments that I've made every year at this time. There are 3 main drivers of goodwill. There's the amount of new business you're selling. In the life insurance business, we've seen our sales grow. In the group business, we continue to have very strong sales. There's the profitability of that new business you're selling. As Dennis mentioned, we're targeting 12% to 15% in the life insurance business. That's very strong profitability. And we're also looking at strong price increases on the group side. So we're looking at profitable new business that we're selling today. And the third item is the discount rate, what's the rate you're discounting those things. I don't think that rates on acquired life insurance business and group business have really ever been lower in the marketplace. So discount rates are very attractive. So all 3 items that are the main drivers of goodwill are in very good shape today. And so it didn't surprise me at all that when we went through the analysis there was no goodwill impairment.

Did any of the segments move to step 2 of your process?

I think typically a couple of the segments have moved to step 2 almost every single year. And I think that was the same.

Assuming it's life and group?

Yes.

Our next question comes from the line of Seth Weiss from Bank of America Merrill Lynch.

Randy, I wanted to focus on your comments on prepayments. And I understand that in this low rate environment they're going to remain elevated. If I look at your disclosures, I think prepayments range from a 30 to 35 basis point contribution of spread in this quarter, which is significantly higher than the 10 basis points of spread contribution from prepay if you look over the average of the last 3 years. I understand that this stays elevated. But this is a material delta. Can you give us a sense of how you think about prepays going forward relative to this quarter and relative to the average of the last 3 years?

As I mentioned, it was a strong quarter for prepays. Let me speak to the sum total of prepays and alternative investment incomes for the quarter, because alternative investment income was lower than we'd expected during the quarter. I mentioned 3 items in my script, not normalized items, but just 3 items that offset each other. I mentioned prepayment, the sum total of prepayment alternative investment income. I'd estimate that was roughly a $50 million benefit across all the businesses for the quarter. I also mentioned that we had some favorable tax items during the quarter. That was roughly $50 million across the -- across all the businesses. And then I mentioned that it was offset by G&A. And G&A was driven by higher incentive comp expenses in the quarter. We always have seasonality around projects getting done, those sorts of things, in the fourth quarter. So there were a number of items that drove G&A up to about $30 million after tax across the businesses, completely offsetting those 2 particular items. But focus in just on the investment income component, it was roughly $50 million across the businesses.

Okay. And then just to clarify that G&A. When you say $30 million higher, that is above and beyond the normal seasonality of the fourth quarter, is that correct?

Yes. I think if you look at the G&A net of amounts capitalized in the fourth quarter and compare it to an average for the full year, you'd see what I'm talking about. Just on the pre-DAC basis, I think the fourth quarter is roughly $58 million higher than the average for the full year.

Okay. And just a follow-up on the prepays. And I understand the positive GAAP earnings element of prepays. But from an economic standpoint, why shouldn't we be thinking about these prepays as negative? Presumably, you need to reinvest these funds back into the portfolio. So wouldn't accelerated prepays lead to, ultimately, faster spread compression in the long term?

Yes. And it's been embedded in our spread compression now for the 4 years you've talked about, especially in the last couple of years. So there isn't a change in the trajectory or spread compression because of prepays. It's just been in the results and in our guidance for some time now. All else being equal, I prefer that people didn't prepay. I mean, I would love the asset staying around. But we're dealing with it. It's in the spread compression, expectations that I'd given you for the 2 main impact of businesses, which is life and retirement.

Our next question comes from the line of Erik Bass from Citigroup.

Just first want to ask a asset question to see if you could clarify the expected timing of the incremental buyback. Is this something we should expect to be sort of front-loaded given that you have the cash on hand now?

As I mentioned, we expect to exceed the $650 million we did in the -- in 2014. And I expect we'll go strong early in the year also.

Got it. And that -- exceeding that includes the benefit of the $200 million, correct?

Yes.

Okay. And then just one question on retirement. Can you just talk about the dynamics you're seeing in the market right now around competition and declining activity levels?

Yes. The marketplace is competitive. And I think I'll broadened the question to all of our products. We participate in competitive markets. Specifically in the group business, we haven't seen an uptick in competitiveness over the prior years. But it continues there continues to be a lot of good providers that we're competing with. We're seeing good results on our presentations and the number of presentations that we're winning. So I'd just characterize it as a competitive market. And across our businesses, we have to stay relevant. We have to focus on product distribution and technology to keep our competitive position solid, and we're doing that. So all businesses are competitive. We don't see any extremes in any of the 4 businesses. Again, I felt for the last couple of years that it's a pretty solid market, and in large part, the competition is sensible and reasonable. And we're competing just as we need to.

Our next question comes from the line of Jimmy Bhullar from JPMorgan. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: You spoke about like the changes in the claim management system for the disability business. Can you also discuss what you're doing on the pricing side and how much of the books been repriced? When do you expect that process to be completed?

In terms of how much has come through the pipeline and the repricing process, from a financial merger standpoint, it's roughly 30% as of the end of the year has come through in terms of the price increases.

Let me answer that. In 2014, again, we're talking about employer paid. We're driving mid- to single-digit increases at targets in aggregate. Renewal pricing in 2014, that's for new business, is up middle -- mid-single digits. But importantly, we are running off unprofitable business where we pushed for higher rate increases. As a result of continued pricing actions, fourth quarter persistency was down a little bit, not dramatically. So middle single-digit for the business that's staying, again, predominantly employer paid. And in the first quarter of 2015, we're going to drive that expectation a little bit higher, sort of asking for low double-digit increases. It's hard to predict what we will get. But these are solid increases on the business that's staying and the renewal, solid new business pricing. And as Randy said, it will continue to roll through the income stream. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And then lastly, you've had some large lapses in the retirement business. Do you have any visibility into more lower potential large case of withdrawals or lapses as you -- over the next couple of quarters in Retirement?

Yes. In aggregate, our visibility right now is the expectation that we have positive cash flow in the first half of 2015. And the goal further than that, we just don't have enough actual information to give you a thought on that or an estimation on that.

And we have time for one more question today. Our final question comes from the line of Yaron Kinar from Deutsche Bank.

Quick follow-up on the reinsurance recapture. Was any of the cash received already deployed in 2014?

No. 2014 buybacks did not include any impact from the reinsurance recapture.

We're in closed period. We can't be buying until a couple of days after today's meeting.

Right. And then could you maybe add a little color as to how it is that the spread compression outlook from November hasn't -- sorry, let me start over. How is it that spread compression today -- of your outlook today hasn't really changed beyond the guidance levels offered in November given the fact that we have seen the 50 basis point decline since November? Are you able to offset the compression by additional enhancements? Or is there something else that's driving kind of your ability to keep within the range?

Yaron, I'd say, I think we have changed. Remember, at Investor Day, we provided a range of 2% to 3%. I think at the time we were at the low end of it, the very low end of that range. And as I mentioned in my script, I'd say, we're more at the upper end of that range right now but that, that increase in the impact of spread compression will be more than offset by the capital actions that we've talked about. So I think we are experiencing a little more spread compression. It's just not up to the level it was a couple of years ago.

So put differently, when you came up with the 2% to 3% range back in November, you already contemplated a scenario yields would be at this level?

No. As I mentioned, at the Investor Day we provided a range of 2% to 3%. And we were at the low end. In actuality with rates at that level, we were at the low end of that range. Rates are a little lower now. There's been some offset from spread widening, I would note. But overall, all-in new money yields are a little lower now. And that means that the compression impact has now moved to the upper end of that range, so from 2% to 3%.

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Chris Giovanni for any closing comments.

Thank you, Karen. And thank you, all, for joining us this morning. As always, we're around to take your questions on the Investor Relations line at (800) 237-2920 or e-mail at InvestorRelations@LFG.com. Thank you, all, and have a good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day. Speakers, please hold your lines.