Good morning, and thank you for joining Lincoln Financial Group Third Quarter 2012 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for questions, and instructions will be given at that time. If you should need assistance at any time during the call, please press star then 0 on your touchtone telephone, and someone will assist you. At this time, I would like to turn the conference over to Senior Vice President of Investor Relations, Jim Schorren. Please go ahead, sir.
Thank you, operator. Good morning, and welcome to Lincoln's third 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 and income from operations, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday, and our reports on Forms 8-K, 10-Q, and 10-K filed with the SEC.
We appreciate your participation today and invite you to visit Lincoln's website, 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. Presenting on today's call are Dennis Glass, President and Chief Executive Officer, and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question and answer portion of the call. At this time, I would like to turn the call over to Dennis.
Thank you, Jim. Good morning, everyone. Knowing many of you on the phone live or work in the Northeast, let me first say Lincoln hopes your families, friends, and colleagues are safe following the storm. Now turning to our results. Lincoln had another overall good quarter, with our performance driven by many of the actions we have talked about during the course of the year. On a normalized basis, we ended the third quarter with operating return on equity at 11%. Compared to the prior year quarter, income from operations per share is up 14%, operating revenue growth up a little better than 3.5%. Actions that contributed to these results include significant share buybacks driven by strong earnings, redundant reserve financings, and the allocation of capital from the life line as we raised prices and saw somewhat lower sales.
Distribution expansion and reorganization that resulted in improved sales in group and retirement plan services. Product repricing that helped maintain a good return on capital associated with new sales, as well as a pivot to products that are good consumer solutions and priced better given low interest rates. Finally, crediting rate actions that help mitigate the interest margin impact of low investment yields. Our investment portfolio maintains an overall A-minus rating, and we continue to invest in high-quality fixed income securities. Our net unrealized gain on our investment portfolio has increased to $9.4 billion or 13% of assets. This is a record level of unrealized gains, the amount reflecting the long duration of our invested assets, which is driven by our asset liability management practices.
We also continue to pursue incremental yield opportunities that provide attractive risk-adjusted returns, such as expanding our sourcing for private placements, middle market loans, and increasing the overall commitment to our alternative asset program. We expect that tough macro conditions will persist, but so will the actions we are taking to keep us on track to meet all of our goals and objectives. Let me now share more on the underlying businesses. Life insurance sales for the quarter were $112 million, down from the prior year. Again, this decline was related to our ongoing efforts to aggressively reprice guaranteed universal life. We are beginning to see competitors reprice their GUL products, somewhat improving the opportunity for growth going forward. Our pivot to the sale of higher return products like variable universal life, index universal life, and term insurance grew 23% from a year ago.
These products now comprise 32% of our total life sales, while GUL accounts for just 22%. We remain focused on improving the overall attractiveness of our pivot products, as evidenced in the third quarter by the launch of the latest generation of our VUL product. The breadth, depth, and proficiency of our distribution teams will help us continue to drive the right mix of life product sales. Our annuity business also had a good quarter overall. On the product side, we continue to emphasize our Protected Strategies. These risk-managed funds embed volatility management inside the client accounts, benefiting the client and reducing costs associated with the hedging of living benefit riders. In the third quarter, more than 70% of variable annuity deposits went into these products. Once again, moving this much production to new products underscores distribution strength and quality.
Variable annuity sales were steady in the third quarter at $2.2 billion, up 2% over last year. On the distribution side, our partnership with Primerica remains a source of growth and diversification. In October, sales through this network surpassed the year-end goal of $250 million. More broadly, despite an expected bump in fixed annuity lapses, the positive net flows we saw in the third quarter helped drive annuity account balances of $94 billion, up 16% from a year ago. As in life, many competitors are tightening up their annuity features and pricing. We are encouraged by the firming of product pricing, either through price increase or somewhat lower benefit in both the life and annuity businesses. This is a very good trend for Lincoln as well as the industry. Turning to retirement plan services.
We continue to see advancement in sales and net flows, highlighting our ability to win new business and retain existing clients. Total deposits were $1.7 billion in the third quarter as our investments in distribution expansion and enhanced web presence and conversion to a new record-keeping platform contributed to an 18% increase in first-year sales across both the small and mid to large case markets. We experienced year-to-date growth in recurring premiums of 7.4%, evidence that our high-touch model continues to be valued in the marketplace. We currently have 100 relationship managers who work closely with our plan sponsors to retain business, while our 300 on-site retirement consultants and advisors help educate participants and drive increased participation and renewal deposits. Collectively, these efforts contributed to net flows in the quarter of $232 million.
This marked the fifth straight quarter we have seen positive flows, which for the year are two times greater than a year ago. In group protection, third quarter sales were $97 million, representing an approximately 30% increase from the year-ago quarter, and driven largely this quarter by a 78% increase in voluntary sales. Sales growth this quarter versus a year ago was also driven by the strategic actions we are taking in this business, including a 25% increase in Lincoln sales force and a 20% increase in productivity. More feet on the street have led to a 15% increase in brokers selling the segment's products. In addition, we rounded out our voluntary solutions with the third quarter rollout of a vision product. Net premium growth of 8% was about half attributable to net sales growth and the balance to in-force management, renewal pricing, and in-plan employee growth.
It is our view that a deepened distribution network, combined with the actions we are taking on product and services, will continue to position Lincoln well for near and long-term opportunities in the space. Turning to distribution. Retail and wholesale remain core to driving our pivot to the higher return products that continue to yield good results this quarter, as well as enable us to sell products on our terms. We'll continue to tap these deep resources, which reaches 60,000-70,000 advisors each year who choose our solutions for their clients. Our recent realignment that brought the two systems into a single structure means that we can now better tap two powerful franchises that remain sources of our competitive strength.
Let me close by saying that low interest rates remain a challenge, but we are clearly not sitting on the sidelines and have taken swift and aggressive actions to respond. We took another step in September, restructuring the organization to improve efficiencies and lower core operating costs. Although not large in itself, it adds to the cumulative actions we are implementing to improve earnings growth and ROEs. With that, I'll turn things over to Randy.
Thank you, Dennis. Last night, we reported income from operations of $335 million or $1.18 per share for the third quarter, while normalized operating EPS grew 14% to $1.06 per share. I'll get to the by-segment results in a bit, let me start by talking about some of the larger items that impacted the quarter's results, starting with the annual review of actuarial assumptions, which we completed during the quarter. The net impact of the assumption review on operating income was a small positive, with an additional positive impact on net income. Notable assumption changes included a reduction in our interest rate assumption, or what we refer to as the J-curve. The change included resetting the new money rate to current levels and then grading to the ultimate new money rate, which was reduced by 50 basis points over a period of seven years.
While that's a perfectly good description of what went into the change, it might be more illuminating to talk about the outcome. Which is that for the first three to four years, the new money rates essentially follow the forward curve. After that, the forward curve flattens out a bit relative to our assumptions. We will obviously continue to assess and review this assumption, for now, I feel very good about where we are. The total impact of this change was negative $120 million, with the majority of the impact in the life business. A change in our life mortality assumption to reflect mortality performing better than that assumed in our DAC models. This had a positive impact of $105 million. Finally, refinements to variable annuity policyholder behavior assumptions that had a small impact on the annuity results and accounted for all of the positive net income impact.
Additionally, during the quarter, we had a net benefit on the income tax line, primarily from the closing out of several tax audit years. This resulted in a favorable operating earnings impact of $60 million, with $54 million appearing in the other operations segment and $6 million in the life business. Finally, in the other operations segment, we recorded $25 million of negative items associated with a legal accrual and a restructuring that we undertook during the quarter. Between the review of actuarial assumptions, the closing of open tax years, and the other items that I noted, there were obviously a number of moving parts in this quarter's operating results. I am very pleased and believe that it speaks to the underlying quality of the balance sheet and business fundamentals, that the net impact of all of the changes had a positive impact on the quarter's results.
Turning to operating revenue and expenses. Operating revenue growth of 6.5% was impacted by the assumption review. I'd put normalized revenue growth at 3.5%-4%, driven by strong equity markets and positive net flows. G&A grew $38 million or 10% from the third quarter of 2011. G&A growth was primarily attributable to the restructuring charge and continuing investments in distribution and technology. With that as a backdrop and looking at key value drivers on a normalized basis, operating return on equity of 11% and book value per share growth in excess of 7% continue the trend of strong performance. Turning to net income. We reported income of $402 million or $1.41 per share. There were a number of items that impacted net income.
I will not repeat the detail that we provided in the press release, but I will note the very strong performance of our VA hedge program, which contributed $15 million of positive income to the bottom line. Turning to segment results and starting with annuities. Reported earnings for the quarter were $139 million or $148 million when normalized. On a normalized basis, ROE in the annuity business was 19%, and return on assets came in at 64 basis points, while normalized interest spreads remained stable in the 180 basis point range. All in, another great quarter for the annuity business. In the retirement business, earnings were $29 million or $32 million when normalized. On a normalized basis, ROE came in at 12.5%, while ROA was 30 basis points.
Consistent with previous guidance, we did see some impact on interest spreads in the retirement business, with spreads down 8 basis points from the prior period or 5 basis points when you adjust for the impact of alternative investments and prepayment income. Benefiting from continued positive net cash flows, the retirement business saw strong asset growth in the quarter, with average account values up nearly 9%, which helped offset the headwind of spread compression. Investments in distribution and our technology platform continue to be key drivers behind asset and earnings growth in the retirement business. Turning to life insurance. We reported earnings of $154 million or $137 million when normalized. Reported interest spreads were negatively impacted by a number of items. I put normalized spreads at a little above 1.95%, down 3 basis points from the prior quarter.
This is consistent with the 10 to 15 basis points of spread compression per year that we expect to emerge. Average account values grew in excess of 5%, while face amount grew a little less than 2%. Of note, the life business continues to be a strong contributor to our capital management strategy as pricing increases have caused new business levels to decline, freeing up capital for other uses. The group protection business had a challenging quarter from a bottom-line standpoint, reporting income from operations of $16 million. Top-line performance remained strong, with operating revenues up nearly 8% over the prior year quarter. While the non-medical loss ratio of 75.7% was elevated by both mortality and morbidity, with a total impact of $10 million. Obviously a tough quarter for the group business.
After analyzing the quarter's results, we do expect that the loss ratio should migrate down into our targeted range in the fourth quarter. While I do believe that the current economic environment is creating more volatility than we are used to seeing, I'm encouraged that when you look at the results averaged over a number of quarters That we do see loss ratios more in line with expectations. Turning to the balance sheet and capital management. As we approach the end of the year, we are getting more clarity on what our risk-based capital ratio will look like. My best estimate is that all else being equal, we should end the year a little below 500%, call it 490% or so. This is 10 to 15 points below where we started the year and is in line with our expectations.
Cash at the holding company was just north of $600 million, about $100 million above our targeted level of holding 18 to 24 months of debt service coverage. We repurchased 4.2 million shares for a total cost of $100 million, bringing the year-to-date total to $400 million. Based on where we are today, we will exceed our initial guidance for $400 million of capital deployment in 2012. In closing, I'm encouraged by our performance in the first three quarters of the year. Double-digit EPS growth in book value per share, continued strong ROE performance, and aggressive capital management all speak to our focus on those items that, over time, should drive shareholder value. With that, let me turn the call over to the operator for questions.
Thank you. Ladies and gentlemen, if you have a question, please press star then one on your touch-tone telephone. If your question has been answered and you wish to remove yourself from the queue, please press the pound key. We ask that you limit yourself to one question and one follow-up. Our first question comes from Suneet Kamath from UBS. Your line is open.
Thanks, good morning. First question is on the DAC review. I guess, Randy, you didn't unlock for the positive equity markets, I'm assuming, given your commentary. That sort of remains a, I'll call it, a cushion out there. First, is that correct? Second, if you did unlock that mean reversion, how much of a positive unlock would that have been?
Yeah, Suneet, you're absolutely correct. We did not unlock that assumption. It remains in that range of $200 million-$250 million.
Is that pre-tax or after-tax?
That's a pre-tax number.
Okay. Then I guess my second question is just on the interest rate sensitivity. Almost a year ago, I think you gave us your reserve redundancy of, I think, $8 billion, then moving to $6 billion if we stayed in a 2% 10-year Treasury world for 10 years. I guess since then, a couple things have changed. Obviously, yields have come in a little bit. I think corporate spreads are a little tighter, then we have AG 38, get some clarity. Sort of factoring in those three things and anything else that would influence that, how are you thinking about that $6 billion number now?
Well, Suneet, first, it's a fourth quarter analysis. The appointed actuary and the team are focused on doing that work as we approach the end of the year. We sit here today, based upon the environment that's existed over the last year, I think we've performed pretty much in line with our expectations. I don't expect material changes, the work's being done here in the fourth quarter.
We'll get an update on that analysis when you guys report fourth quarter earnings?
I would assume we'll eventually give an update on that.
All right. I would certainly encourage that. Thanks.
Our next question comes from Chris Giovanni from Goldman Sachs. Your line is open.
Good morning. Can you maybe just provide an update in terms of kind of continued philosophy around capital management actions related to buybacks, the dividends, as well as further debt paydown?
Sure, Chris. Well, as always, we're approaching our November board meeting, which is typically when we discuss dividends with the board. I'll hold off on that assumption. At a macro level, we remain very well capitalized. We have a very strong capital position, strong cash flow, strong ability to push cash to the holding company. The number on a normalized basis continues in that $400 million range. Obviously, we're leveraging a bit our strong capital position this year. As I mentioned in my notes, I expect to go over that $400 million number this year. We're not going to give you specific guidance, we're not done for the year. We remain well capitalized. We have a lot of cash at the holding company, strong position in life companies, we'll remain very proactive.
Okay, you made some additional comments in terms of asset classes you're expanding to within the investment portfolio. I think last quarter you talked about maybe 15-20 points of RBC drag from taking on incremental risk. I guess, has that changed? As you increase exposure to alternatives, just managing kind of the volatility within the investment income line.
Well, Chris, let me first say that broadly speaking our program, which includes increasing alternatives, sourcing additional private placements, sourcing additional middle market loans, not all of those activities are a call on RBC. We did about $425 million of that so far this year. We expect that the return on it would be 250 basis points above over time what we'd get on investment-grade corporates. We are pushing that as one of our yield enhancement strategies.
Very cautious about getting the right risk-adjusted returns. I don't think that we see this as a dramatic change in our RBC, Randy may want to expand on that.
Dennis, I'd absolutely agree. Chris, as I said in the past, when we look forward, distributing capital the way we're distributing it, expect my RBC ratio to drift down 10 to 15, 20 points a year or so, just as we project forward and the risk in the organization grows, et cetera. We'll look at these programs. They do use a little more incremental capital, I don't expect that they'll fundamentally change that analysis, Chris.
Okay, thanks. I'll get back in the queue.
Our next question comes from Ryan Krueger from Dowling. Your line is open.
How should we think about the impact of the mortality adjustment to the life DAC assumptions? I guess my question relates to the go-forward operating earnings impact. Should we think about there being some sort of negative go-forward implications since you've now assumed a better mortality assumption that's already baked in?
Ryan, thanks for the question. No. Looking forward, I'd expect no negative impact relative to the assumption. How I'd think of the assumption change is no different than I'd think of any other assumption change. Ryan, as with all these things, when we get credible information, we reflect it in our models. We did that on the J-curve side, that was also the case on the mortality side. We had a lot of credible information. Obviously, we're a large player in the life insurance business, so we have a lot of data that we can use. We were running better looking at our DAC models, we reflected that in the models and had a positive benefit, no impact on go-forward earnings.
Okay. A broader question. It's pretty clear that you guys have been frustrated with your stock valuation. Over the last year, I guess we've seen Genworth monetize a couple life insurance blocks that freed up capital at 20 times the last GAAP earnings. We also have seen Hartford sell their individual life business that freed up capital at 12 times GAAP earnings. Your stock trades at six times earnings, I think it's fair to assume that a lot of that relates to the individual life business. I understand there's differences between the businesses, why not look to monetize at least some portion of your individual life block to capitalize on the apparent valuation discrepancy? Any thoughts there would be appreciated.
Yeah, this is Dennis. Let me say, like you, we're very aware of all of the capital management opportunities that are in the marketplace. We'll select the ones that we think translate into the best shareholder value over the long term. Right now, share buybacks is the best place to put excess capital, we'll continue to look at the trade-offs.
Ryan, let me also mention that every time we do a reserve financing, we're generating capital from the life business. I can't think of anybody in the industry who's done more reserve financings than us. We have capability there. We've used that capability in the past. It's helped us do things like accelerate the share buyback. We're not standing still. We're generating capital. We talked very openly about the price increases we put through on the life side, which lower sales, which frees up capital. I think we are being very proactive on that front.
Our next question comes from Steven Schwartz from Raymond James & Associates. Your line is open.
Thanks. A couple here. First, I think for Randy, the discussion of the J-curve, if I understood you correctly, tell me if I'm wrong, that you're assuming that for three to five years, rates kind of follow the forward yield curve, then you move from there to assuming some type of parallel shift in the curve. Is that the way to think about this?
Let me go through this again. First off, you mentioned the absolute, the key point, which is that for the next three to four years, we're very tight to the forward curve. Now, just factually, if you look at the forward curve after that, it really does sort of flatten out, even though I think it truly is anybody's guess what rates will be five years from now. Just the forward curve itself flattens out after that three-to-four-year period, while our assumption continues to move up. We moved down that ultimate rate by 50 basis points, but we go from current rates to that ultimate rate over a period of seven years. In the last half or so of that seven-year period, we're going to deviate a little. I feel very good about where we are today. Obviously, we'll continue to assess this.
We've done this a couple times. We're very proactive. I think we get in front of these assumptions as good as anybody. We'll continue to assess, but we're happy with where we are today.
Okay. Relative to AG 38, how are you feeling about the reserves on the in-force block?
Yeah, I'll handle that. Let me first say that the resolution that was approved, I guess, in the last 60 day was a very satisfactory one for the regulators, for the companies. We know it has two pieces. One is retroactive, and one is new business. To specifically answer your question, although we have a little more work to do as we get toward the year-end, we don't expect any significant increase in our aggregate reserves as a result of the adoption of the retroactive change. On a new business basis, reserves are a little higher. We've anticipated that in some of our repricings that we've already done. As we get into the new year, whether or not we'll have to take further action will depend on all of the considerations that go into pricing new business.
Okay, that was actually going to be my next question. New business, you're basically using, at least right now, the same types of products, the same design of products, just lifting rate a little bit?
Yes. My point was that independent of the design, the new AG 38 requirements across different designs for new business, the reserve requirements are higher. My point was that we anticipated some of that in the pricing that we did this year, and that next year we'll look at if we have to do more.
Okay. All right. Thank you, guys.
Our next question comes from Mark Finkelstein from Evercore Partners. Your line is open.
Good morning. I guess my first question, just going back to the DAC revision is, if you were to actually go down to the curve in terms of the long-term assumptions, the forward curve, what would the DAC impact have been on that basis?
Hey, Mark. Let me guide you back to the sensitivities we've been giving for a long time, because they haven't changed. Which is each 50 basis points is roughly $125 million. I think our curve relative to that flattening of the forward curve, roughly 80 to 85 basis points of difference, I think out there at the ultimate point. You can do the interpolation. Once again, key point for those first three to four years, tight on that forward curve. I feel very good about where we are today.
I'd just add to that on a present value basis, it would be hard for you actually to do that calculation because on a present value basis it's the early years that make the big difference, just as we all know that what happens when you're doing discounted cash flows. Fair point.
I guess in the fourth quarter you'll go through your goodwill review and share that with us. I guess I'm just theoretically, do you go through that study any differently this year than you did in the past? I guess I'm kind of thinking about MetLife a little bit in terms of the charge that they took yesterday, which was very much related to a fair value test. You guys historically have kind of used that as a first step and then in step two kind of looked at the future value of new business, et cetera, to justify that goodwill. I'm just curious if you look at the study any differently this year, just kind of knowing how valuations have continued to be very depressed.
Well Mark, first off, it's an accounting-based test. It's a two-step test, so I don't think the way one company does it is any different than another company. Let's talk about us specifically. You're right, absolutely right. We do this analysis in the fourth quarter, so I'm not going to get in front of that analysis. Let's talk a little bit about the facts that we do know. It was about four years ago when we got ahead of this issue and wrote down our annuity goodwill by $600 million. I would note that impact was driven by an increase in the discount rate to the annuity business. Over the last four years, we've written off 100% of the goodwill behind our media business. Last year-end, I think we got in front of the life issue with a $650 million write-down.
We're doing the analysis as we speak. We have been very proactive. I think we've been out in front of these issues for the last four to five years, and I feel very good about where we are today.
Okay. All right. Thank you.
Our next question comes from Jeff Schuman from KBW. Your line is open.
Morning. I was wondering if you could talk a little bit more about mortality. It was just a few years ago, there was a lot of concern about industry pricing and underwriting for higher ages and big face amounts and concerns about life settlement folks kind of picking off the industry. Now we see you making a favorable adjustment to your mortality assumptions behind DAC. Can we interpret from that you feel pretty good about how that older age underwriting and pricing is holding up?
Jeff, we have always felt good about our underwriting and our mortality experience. Mortality for as long as I've been alive has been getting better, and our underwriters have done a great job of reflecting these trends and changes over time. We have always felt good. I feel great that this quarter we had the credibility, enough information to reflect that in the models. We're in a great place and we've never really had a hiccup in mortality if you go back over the decades.
Jeff, might I just add, just stepping back and looking at the overall adjustments, we've talked about all the issues in the variable annuity business as to why we're getting good results. We talk about the life business. A part of all of this is that as we're pricing products, and this is inside baseball and hard to compare to other companies, we simply just don't push every one of the assumptions to the corner of the envelope. We try to take a very practical and reasonable approach to what might evolve over time, and here's an example of where it's actually, even though mortality is improving, it's still better than what we had anticipated.
Okay. That's very helpful there. If I could just ask one other area I haven't looked at for a while. I'm just surprised that the media revenues don't seem to be up that much this year. I would have thought with some of the heavy political advertising in some of your markets in Florida and Colorado, et cetera, that we'd see more lift there. Should we look forward to a little more pickup in the fourth quarter?
Jeff, I can't speak to the specifics there. I think the political advertising's been a little late to the game this year. I think you're probably right. We haven't seen much in the third quarter. We'll see if any comes in the fourth quarter. Remember that not all of our stations are in what are called the swing states, where all the advertising's going on.
Yeah. A lot of it, Jeff, is as we all have seen on TV rather than radio. The last point Randy made is the best point, which is it's very location specific.
Yeah, which is what I thought. I think you're in Florida and Colorado still, which I think are pretty active, but maybe it varies within those markets as well. Okay. Thank you.
Our next question comes from Eric Berg from RBC Capital Markets. Your line is open.
Thank you. Good morning. I hope this connection is clear. I'm one of many people, I suppose, who are operating on a cell phone and with limited internet and so forth. In any case, I wanted to get a sense for sort of where you stand in terms of the competitiveness of your variable annuity. Dennis, in your prepared remarks, you rightly indicated that many companies have been pulling back. Historically, Lincoln has been a follower, probably a good thing, rather than a leader in terms of offering rich guarantees. As the landscape has shifted, where do you now stand?
Well, Eric, I think I'm going to stick with the general comment that we, both in a life and annuity line, we're seeing competitors announce changes. You'd have to get into a lot of detail to say where in each product line and what cell, for example, in life, where we stand. Generally, in the life line, prices are going up on GUL. People are making changes that hadn't made changes in the early part of the year. In the annuity business, we're seeing people lower payout benefits. We're seeing them increase premiums. At this point in time, although the competitors have come closer to where we are already, the combination of the strength of our distribution and the overall positioning that we have is still pretty good. We've picked up a little bit of market share, might pick up a little bit more.
As you know, we don't look at market share as a driver here. We look at putting well-priced products, well-hedged products into the market that are good consumer values and a good return and risk profile for our shareholders.
My second question relates to what would appear to be a growing, maybe a trend. It's not clear whether it's a trend, but developments in the marketplace regarding some of your competitors, Principal, Prudential, entering into these pension closeout transactions. My question is one that I haven't had a chance to ask before of others, so I'd like to ask it of you and your colleagues at Lincoln.
It's my sense that from talking to consulting actuaries that everybody, not just the insurance industry, but pension plan sponsors have sort of not gotten it right with respect to longevity risk, have repeatedly underestimated the pace of progress in lifespans, and that therefore, we should have some concerns perhaps about the ability of life insurance companies, such as your competitors and Lincoln, should it pursue this business to price these pension closeouts correctly because of the risk of getting longevity risk wrong given the industry's history. Is my assessment of the history correct, that there has been a problem in pricing longevity risk? What is Lincoln's appetite for this business? That's it for today. Thank you.
Eric, I'm going to leave the specifics of the answer to that question to the people who are in the business, because we're not in the business. Let me tell you why we're not in the business.
Sure.
We're not in the business because we are almost 100% focused on the manufacture and distribution of retail products, which requires a distribution network. It requires product manufacturing capability. It requires good service across the board. It's a holistic view as to how to get good returns on your money. We've never been in wholesale businesses where somebody's on a phone calling up for funding dollars overnight and then trying to take some type of either ALM risk or credit risk. I mean, that's not anything that we've ever been in or do we plan to go into. We like what we do, which is building a holistic approach to making money on real retail product.
All right, Dennis. Thank you.
Again, to ask a question, please press star then one on your touch-tone telephone. Our next question comes from Jimmy Bhullar from JPMorgan. Your line is open.
Hey, good morning. I had a question first on just your disability business and overall, obviously pretty strong results this quarter, but the disability margins did weaken a lot. I remember a couple of years ago you had an issue where margins compressed, they had been improving. Just wondering what drove the uptick in the loss ratios in both disability and maybe to a lesser extent, the group life business. Secondly, just on capital deployment, you've been buying back stock at a steady pace. Just wanted to see what your appetite would be for acquisitions or block transactions, because there's certainly several of them in the market. If you are interested in those, what areas would you be interested in terms of business?
Jimmy, let me take the first one and Dennis take the second one. First off, back to my remarks. I do believe that the economic environment we're in is giving you a little more quarter-to-quarter volatility than we're used to. When you look at it over time, I think you're seeing results that on average are within our targeted range. Factually this quarter, what hit the group business was severity that was a little higher than we priced for or expect. We dug through the business, we've done a ton of analysis and don't see anything systemic about that other than sort of an ordinary blip. In fact, I think if you look at the LTD loss ratios, this quarter really stands out compared to the four or five before it, which were all very reasonable loss ratio.
We don't see a systemic nature in what occurred this quarter, but it was a little bit of severity.
Okay.
With respect to M&A, we've been straightforward with, I think, our comments on this, which is, one, we've got a very good history with this team of pricing and integrating acquisitions and have used that as a tool to grow shareholder value for a long time. We're quite comfortable trying to find deals that do that. The areas that we're most interested are the group protection business and retirement plan services. As opportunities in those areas come along, we will be taking a look at them. As we've also said, at least for our excess capital that could otherwise be used for share repurchases, the litmus test for return on those acquisitions is higher than it's been in the past. That would capture-
That's just given the low stock price and use of buybacks as an alternative?
Excuse me?
That's just the hurdle rate's higher just because the stock price is low and you could use the money for buybacks otherwise?
Let me state the way we think about it, which is we look at what we think we can get as a return on buying our stock, and that becomes sort of the best indicator of what we would expect from an investment return perspective.
Overall, it seems like in the benefits and the pension market, there are actually more interested buyers than there are sellers. At least that's been my impression. What's your view?
Again, we've been doing this for 10 years, there's always some company that has more enthusiasm for a property than another company has or at a moment in time, a particular business. Maybe right now there's a little more interest in one business versus the other. These things change over time and I think a consistent approach to sourcing, pricing deals and eventually something will happen.
Thank you.
I'm showing no further questions at this time. I will turn the call back over to Jim Sjoreen for closing comments.
Thank you, operator. We want to thank all of you for joining us this morning. As always, if you have any additional questions, you can contact me directly at 484-583-1420 or via our investor relations line at 1-800-237-2920. Again, thank you for your time this morning and have a good weekend.
Thank you, ladies and gentlemen