Lincoln National : Lincoln Financial Group Reports First Quarter 2008 Results
04/29/2008| 04:30pm US/Eastern
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PHILADELPHIA, April 29 /PRNewswire-FirstCall/ -- Lincoln Financial Group
(NYSE: LNC) today reported net income of $289 million, or $1.11 per diluted
share, for the first quarter of 2008, versus $396 million, or $1.42 per
diluted share in the prior-year quarter. Net income for the current quarter
included net realized losses on investments and derivatives of $27 million,
after tax, or $0.10 per diluted share, versus net realized gains on
investments and derivatives of $17 million, after tax, or $0.06 per diluted
share in the first quarter of 2007. Additionally, net income included a one-
time cumulative charge from the adoption of accounting standard SFAS 157 of
$16 million, after tax and deferred acquisition costs (DAC), in the first
quarter of 2008.
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Income from operations for the first quarter of 2008 was $333 million, or
$1.28 per diluted share, compared to first quarter 2007 income from operations
of $371 million, or $1.33 per diluted share. Return on equity (ROE), based on
income from operations, was 11.6% for the first quarter of 2008.
The table attached to this release defines and reconciles income from
operations, ROE, and book value per share excluding accumulated other
comprehensive income (AOCI), non-GAAP measures, to net income, ROE, and book
value per share including AOCI calculated in accordance with GAAP.
Income from operations in the first quarter of 2008 was negatively
impacted by approximately $9 million, after tax, on a consolidated basis, due
to adverse equity market returns. This estimate isolates the impact of the
equity markets on account values and assets under management and represents
only the related asset based fees earned and expenses incurred, after the
associated DAC amortization.
The company recorded a loss of $5 million, pre tax, on alternative
investments in the quarter, falling below long-term expectations of 10-12%
returns on the nearly $800 million portfolio. In the 2007 quarter, income on
alternative investments was $20 million, pre tax.
Dennis R. Glass, president and CEO, said, "Despite the impact of the
capital markets on the current quarter's results, our focused execution has
delivered strong results in our underlying long-term earnings drivers.
Individual annuity and defined contribution account balances benefited from
strong net flows, reflecting our continued progress in wholesaler expansion
and increased shelf space. Fundamentals were solid in both our individual life
and group protection businesses with stable growth in universal life in-force
and double-digit growth in group protection net earned premiums. While we are
watching expenses closely, we continue to invest in our core strategic
initiatives, including product development and distribution, to ensure
continued growth in the business."
Glass added, "Lincoln Financial's capital position and investment
portfolio remain solid, with a strong overall credit quality and manageable
exposures to risky asset classes. We continue to closely monitor our portfolio
and market conditions and remain comfortable with the positioning of our
balance sheet. Despite the difficult market conditions, we returned $393
million to shareholders through stock repurchase and dividend payments in the
first quarter of the year."
Notable Items Affecting 1Q 2008 Income from Operations*
($ in millions except per share data) After-tax EPS
Amount
Individual Life Insurance (DAC Unlocking,
Mortality) $(9) $(0.03)
Other Operations (Expense Items) (4) (0.02)
Investment Management (Seed Capital) (3) (0.01)
Defined Contribution (DAC Unlocking) (2) (0.01)
Individual Annuities (Hedge Performance,
DAC Unlocking, SFAS 157, 133) 10 0.04
Notable Items Referenced in the 1Q 2007 Press Release Affecting Income
from Operations*
($ in millions except per share data) After-tax EPS
Amount
Individual Annuities (Hedge Performance) $4 $0.01
Individual Life (DAC Unlocking, Mortality) 3 0.01
* Excludes the equity market and alternative investment impacts referenced
above.
First Quarter 2008 Segment Results
Individual Markets
Individual Annuities
Income from operations for the Individual Annuities segment was $129
million in the first quarter of 2008 versus $121 million in the year-ago
period. Earnings were impacted by a decline in average variable account
balances of $3.3 billion in the current period, a result of negative market
returns partially offset by positive net flows. In addition, the current
quarter benefited by approximately $10 million, after tax, from net notable
items. Favorable hedge program performance related to the adoption of SFAS 157
and positive DAC unlocking were partially offset by the negative impact of
SFAS 133 fair value accounting on liabilities related to indexed annuity
products.
In the quarter, gross deposits were $3.0 billion, up 7% over the year-ago
period. Net flows for the segment were up 57% to $1.2 billion, reflecting
solid variable annuity product flows and lower fixed annuity product outflows.
Strong deposits and net flows over the past four quarters contributed to a 12%
increase in average variable account values over the prior-year period.
Variable annuity product sales were $2.7 billion, reflecting successful
launches in the Independent Planner channel and traction in the Bank channel,
which grew sales 19% as compared to the first quarter of 2007.
Individual Life Insurance
Individual Life Insurance income from operations was $145 million,
compared to $167 million in the first quarter of 2007. The current quarter's
results included a net negative impact of approximately $9 million, after tax,
primarily related to negative DAC unlocking and unfavorable mortality
experience. The segment was also impacted by negative returns on the
alternative investment portfolio, as compared to especially strong returns in
2007.
Individual life insurance sales, reported as paid annualized premiums,
were $145 million in the first quarter, down 29% from a strong first quarter
of production in 2007. Life insurance sales experienced some adverse effects
from the current economic conditions and a competitive pricing environment.
MoneyGuard(R), a universal life insurance policy with a long-term care rider,
continued to post solid gains as sales increased 50% from the prior-year
period.
Employer Markets
Defined Contribution
First quarter income from operations for Defined Contribution was $40
million, versus $50 million for the same period a year ago. Earnings were
impacted by a decline in average variable account balances of $1.7 billion in
the current period, a result of negative market returns partially offset by
positive net flows. The 2008 quarter also included approximately $2 million,
after tax, of negative DAC unlocking.
In the quarter, overall deposits were $1.6 billion, driving total net
flows to $281 million, a 27% increase over the first quarter of 2007. Deposits
in the mid-to-large market increased 8% to $769 million and net inflows were
$610 million. Deposits in the micro-to-small market increased 9% to $499
million and net outflows were $70 million. Productivity gains in the mid-to-
large and micro-to-small markets were partially offset by continued weakness
in the Lincoln Multi-Fund(R) Variable Annuity, an older small-to-medium case
retirement plan solution.
Executive Benefits
In the quarter, income from operations for Executive Benefits was $12
million, consistent with results in the first quarter of 2007.
Group Protection
For the first quarter, Group Protection's income from operations was $26
million, versus $23 million in the prior-year period. Non-medical loss ratios
in the 2008 quarter were 71.0% versus 72.7% in 2007.
Strong sales results in the fourth quarter of 2007 contributed to net
earned premiums of $370 million in the first quarter, up 12% over the prior-
year quarter. Annualized written premiums were $54 million, compared to $61
million in the 2007 quarter. The decline was driven by weak sales early in the
quarter, which rebounded throughout the rest of the quarter.
Investment Management
The Investment Management segment reported income from operations of $12
million in the first quarter of 2008, compared to $16 million in the prior
year period. The current quarter reflected the impact of volatile equity
markets and the sale of certain fixed income assets in late 2007, both of
which reduced asset levels and third-party investment advisory fees.
Additionally, the equity markets resulted in negative returns on seed capital
reducing income from operations by approximately $3 million, after tax in the
current quarter.
Total deposits for the quarter were $4.7 billion compared to $6.0 billion
a year ago. Retail sales were $3.5 billion, down modestly from the 2007
quarter, despite the challenging equity market environment. Total
institutional deposits and net outflows were $1.2 billion and $510 million,
respectively. Institutional equity inflows grew 13% to $986 million,
reflecting new client fundings and the normal lumpiness of flows in this
product line.
Lincoln UK
For the first quarter, the UK segment's income from operations was $11
million, consistent with results in the first quarter of 2007.
Other Operations
The operating loss in Other Operations was $42 million in the quarter,
versus $28 million in the prior-year quarter. The 2008 quarter was negatively
impacted by approximately $4 million, after tax, primarily related to expenses
and included approximately $15 million, pre tax, of merger-related expenses.
Capital and Share Repurchase
As of March 31, 2008, the book value per share of Lincoln National
Corporation common stock, including AOCI, was $42.74, compared with $44.42 a
year ago. Book value per share, excluding AOCI, was $43.98, compared with
$41.98 a year ago. Lincoln Financial repurchased 5.45 million shares in the
first quarter at a total cost of $286 million.
Realized Gains and Losses/Impairment Charge
The company reported net realized losses on investments and derivatives of
$27 million, after tax and DAC, in the quarter. Gross realized losses from the
write downs for impairments were $92 million, pre tax and DAC, including write
downs of $43 million for declines in values on securities for which the
company is uncertain of its intent to hold until recovery.
2008 Outlook
Lincoln Financial does not expect material changes to its previous
guidance except for those items noted below. Equity market sensitivity will be
updated in the Form 10-Q for the quarter ended March 31, 2008, filed with the
SEC.
Individual Life
-- Sales are expected to increase throughout the year as compared to first
quarter results, benefiting from ongoing product enhancements and
normal seasonality trends.
Employer Markets
-- Fixed annuity spreads are expected in the 210-220 basis point range,
reflecting continued pressure on portfolio yields mitigated somewhat by
anticipated crediting rate action.
Investment Management
-- Investment Management income from operations is expected to be in the
low to mid $50 million range, reflecting the equity market declines in
the first quarter of the year.
-- Pre-tax operating margins are expected in the range of 15-17%,
recognizing results are sensitive to equity market movements.
Merger Integration
-- Merger-related expenses are expected to range from $15-20 million, pre
tax, in the second quarter.
Capital Management
-- Lincoln Financial intends to repurchase approximately $200-300 million
of stock during the remainder of 2008.
This outlook contains estimates that are forward-looking, and actual
results may differ materially. Lincoln Financial's actual experience in 2008
will almost certainly differ from many of the assumptions utilized in the
outlook and the company's expectations for these and a large number of other
factors will probably change, leading us to revise our estimates over time.
Please see the Forward-Looking Statements - Cautionary Language that follow
for additional factors that may cause actual results to differ materially from
our current expectations.
Lincoln Financial Group will discuss the company's first quarter results
and outlook for 2008 with investors in a conference call beginning at 11:00
a.m. (ET) on Wednesday, April 30, 2008. Interested persons are invited to
listen through the internet. Please go to www.LincolnFinancial.com/webcast at
least fifteen minutes prior to the event to register, download and install any
necessary streaming media software. Interested persons may also listen to the
call by dialing the following numbers:
-- Dial: (877)-627-6590 (Domestic)
(719)-325-4848 (International)
-- Ask for the Lincoln National Conference Call.
The company will also post its first quarter 2008 statistical supplement
and a general account supplement on its Web site,
www.LincolnFinancial.com/investor.
Lincoln Financial Group is the marketing name for Lincoln National
Corporation (NYSE: LNC) and its affiliates. With headquarters in Philadelphia,
the companies of Lincoln Financial Group had assets under management of $225
billion as of March 31, 2008. Through its affiliated companies, Lincoln
Financial Group offers: annuities; life, group life and disability insurance;
401(k) and 403(b) plans; savings plans; mutual funds; managed accounts;
institutional investments; and comprehensive financial planning and advisory
services. Affiliates also include: Delaware Investments, the marketing name
for Delaware Management Holdings, Inc. and its subsidiaries; and Lincoln UK.
For more information, including a copy of our most recent SEC reports
containing our balance sheets, please visit www.LincolnFinancial.com.
Definition of Income (Loss) from Operations and ROE
Income (loss) from operations and ROE, as used in the earnings release,
are non-GAAP financial measures and are not substitutes for net income (loss)
and ROE, calculated using GAAP measures. Income (loss) from operations
represents GAAP net income excluding, as applicable, realized gains and losses
on investments and derivatives, initial impact of the adoption of changes in
accounting principles, reserve changes on business sold through reinsurance,
gains and losses on the sale of subsidiaries and blocks of businesses, losses
on early retirement of debt and income (loss) from discontinued operations.
The earnings used to calculate ROE, as used in the earnings release, are
income (loss) from operations. Income (loss) from operations is an internal
measure used by the company in the management of its operations. Management
believes that this performance measure explains the results of the company's
ongoing operations in a manner that allows for a better understanding of the
underlying trends in the company's current business because the excluded items
are either unpredictable and/or not related to decisions regarding the
underlying businesses.
For the Quarters Ended
($ in millions, except per share data) March 31,
------------------------
2008 2007
------------------------
Net Income $289 $396
Less:
Realized gain (loss) on investments
and derivatives (27) 17
Net gain on reinsurance derivatives/
trading account securities 1 -
Gain on sale of
subsidiaries/businesses 2 -
Income (loss) from discontinued
operations (4) 8
Initial impact of the adoption of
SFAS 157 (16) -
------------------------
Income from Operations $333 $371
========================
Earnings Per Share (diluted)
Net income $1.11 $1.42
Income from operations $1.28 $1.33
Average Equity
(Excluding AOCI) $11,451 $11,480
Return on Equity
Net income 10.1% 13.8%
Income from operations 11.6% 12.9%
Definition of Book Value per share excluding AOCI
Book value per share excluding AOCI is calculated based upon a non-GAAP
financial measure. It is calculated by dividing (a) stockholders' equity
excluding AOCI by (b) common shares outstanding. Management provides book
value per share excluding AOCI to enable investors to analyze the amount of
our net worth that is primarily attributable to the business operations.
Management believes book value per share excluding AOCI is useful to investors
because it eliminates the effect of items that can fluctuate significantly
from period to period, primarily based on changes in interest rates. Book
value per share is the most directly comparable GAAP measure. A reconciliation
of book value per share to book value per share excluding AOCI as of March 31,
2008 and 2007 is set forth below.
As of
March 31,
------------------------
2008 2007
------------------------
Book value per share, including AOCI $42.74 $44.42
Per share impact of AOCI (1.24) 2.44
Book value per share, excluding AOCI $43.98 $41.98
LINCOLN NATIONAL CORPORATION
DIGEST OF EARNINGS
For the Quarters Ended
($ in millions, except per share data) March 31,
------------------------
2008 2007
------------------------
Revenues $2,524 $2,628
Net Income 289 396
EPS - Basic $1.12 $1.44
EPS - Diluted 1.11 1.42
Average Shares - Basic 258,110,435 274,889,645
Average Shares - Diluted 259,914,453 279,476,814
Forward-Looking Statements-Cautionary Language
Certain statements made in this release and in other written or oral
statements made by Lincoln or on Lincoln's behalf are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). A forward-looking statement is a statement that is not a
historical fact and, without limitation, includes any statement that may
predict, forecast, indicate or imply future results, performance or
achievements, and may contain words like: "believe", "anticipate", "expect",
"estimate", "project", "will", "shall" and other words or phrases with similar
meaning in connection with a discussion of future operating or financial
performance. In particular, these include statements relating to future
actions, trends in our businesses, prospective services or products, future
performance or financial results, and the outcome of contingencies, such as
legal proceedings. Lincoln claims the protection afforded by the safe harbor
for forward-looking statements provided by the PSLRA.
Forward-looking statements involve risks and uncertainties that may cause
actual results to differ materially from the results contained in the forward-
looking statements. Risks and uncertainties that may cause actual results to
vary materially, some of which are described within the forward-looking
statements include, among others:
-- Legislative, regulatory or tax changes, both domestic and foreign, that
affect the cost of, or demand for, Lincoln's products, the required
amount of reserves and/or surplus, or otherwise affect our ability to
conduct business, including changes to statutory reserves and/or risk-
based capital requirements related to secondary guarantees under
universal life and variable annuity products such as Actuarial
Guideline VACARVM; restrictions on revenue sharing and 12b-1 payments;
and the potential for U.S. Federal tax reform;
-- The initiation of legal or regulatory proceedings against Lincoln or
its subsidiaries, and the outcome of any legal or regulatory
proceedings, such as: (a) adverse actions related to present or past
business practices common in businesses in which Lincoln and its
subsidiaries compete; (b) adverse decisions in significant actions
including, but not limited to, actions brought by federal and state
authorities and extra-contractual and class action damage cases; (c)
new decisions that result in changes in law; and (d) unexpected trial
court rulings;
-- Changes in interest rates causing a reduction of investment income, the
margins of Lincoln's fixed annuity and life insurance businesses and
demand for Lincoln's products;
-- A decline in the equity markets causing a reduction in the sales of
Lincoln's products, a reduction of asset-based fees that Lincoln
charges on various investment and insurance products, an acceleration
of amortization of deferred acquisition costs, value of business
acquired, deferred sales inducements and deferred front-end loads and
an increase in liabilities related to guaranteed benefit features of
Lincoln's variable annuity products;
-- Ineffectiveness of Lincoln's various hedging strategies used to offset
the impact of changes in the value of liabilities due to changes in the
level and volatility of the equity markets and interest rates;
-- A deviation in actual experience regarding future persistency,
mortality, morbidity, interest rates or equity market returns from
Lincoln's assumptions used in pricing its products, in establishing
related insurance reserves and in the amortization of intangibles that
may result in an increase in reserves and a decrease in net income,
including as a result of investor-owned life insurance business;
-- Changes in GAAP that may result in unanticipated changes to Lincoln's
net income, including the impact of Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements," and SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities;"
-- Lowering of one or more of Lincoln's debt ratings issued by nationally
recognized statistical rating organizations and the adverse impact such
action may have on Lincoln's ability to raise capital and on its
liquidity and financial condition;
-- Lowering of one or more of the insurer financial strength ratings of
Lincoln's insurance subsidiaries and the adverse impact such action may
have on the premium writings, policy retention and profitability of its
insurance subsidiaries;
-- Significant credit, accounting, fraud or corporate governance issues
that may adversely affect the value of certain investments in the
portfolios of Lincoln's companies requiring that Lincoln realize losses
on such investments;
-- The impact of acquisitions and divestitures, restructurings, product
withdrawals and other unusual items, including Lincoln's ability to
integrate acquisitions and to obtain the anticipated results and
synergies from acquisitions, including Lincoln's ability to
successfully integrate Jefferson-Pilot's businesses, to achieve the
expected synergies from the merger or to achieve such synergies within
our expected timeframe;
-- The adequacy and collectibility of reinsurance that Lincoln has
purchased;
-- Acts of terrorism, war or other man-made and natural catastrophes that
may adversely affect Lincoln's businesses and the cost and availability
of reinsurance;
-- Competitive conditions, including pricing pressures, new product
offerings and the emergence of new competitors, that may affect the
level of premiums and fees that Lincoln can charge for its products;
-- The unknown impact on Lincoln's business resulting from changes in the
demographics of Lincoln's client base, as aging baby-boomers move from
the asset-accumulation stage to the asset-distribution stage of life;
-- Loss of key management, portfolio managers in the Investment Management
segment, financial planners or wholesalers; and
-- Changes in general economic or business conditions, both domestic and
foreign, that may be less favorable than expected and may affect
foreign exchange rates, premium levels, claims experience, the level of
pension benefit costs and funding and investment results.
The risks included here are not exhaustive. Lincoln's annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
other documents filed with the SEC include additional factors which could
impact Lincoln's business and financial performance. Moreover, Lincoln
operates in a rapidly changing and competitive environment. New risk factors
emerge from time to time and it is not possible for management to predict all
such risk factors.
Further, it is not possible to assess the impact of all risk factors on
Lincoln's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Given these risks and uncertainties, investors
should not place undue reliance on forward-looking statements as a prediction
of actual results. In addition, Lincoln disclaims any obligation to update any
forward-looking statements to reflect events or circumstances that occur after
the date of the report.
SOURCE Lincoln Financial Group
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