Lincoln Financial Group Reports Second Quarter 2007 Earnings
Record Variable Annuity Deposits of $3 Billion Highlight Strong Quarter
| Consolidated Domestic Deposits and Net Flows
| Individual Markets
| Employer Markets
| Investment Management
| Lincoln UK
| Lincoln Financial Media
| Other Operations
| Capital and Share Repurchase
| 2007 Outlook
| Reconciliation Table
| Digest of Earnings
| Sub-prime Exposure |
PHILADELPHIA, July 31, 2007 Lincoln Financial Group (NYSE:LNC) today reported net income of $376.0 million, or $1.37 per diluted share, for the second quarter of 2007. By comparison, net income for the second quarter of 2006 was $349.0 million, or $1.23 per diluted share.
Income from operations for the second quarter of 2007 was $386.7 million, or $1.41 per diluted share, compared to second quarter 2006 income from operations of $351.4 million, or $1.25 per diluted share. The year-ago quarter reflects combined results from the Jefferson-Pilot merger that closed on April 3, 2006. Return on equity (ROE), based on income from operations, was 13.4%. The attached table defines and reconciles income from operations and ROE, non-GAAP measures, to net income and ROE calculated in accordance with GAAP.
Consolidated Domestic Deposits and Net Flows
Consolidated retail deposits, which include individual annuities, mutual funds, life insurance and other personal wealth accumulation products together with retirement products sold into the employer-sponsored marketplace, were $8.0 billion, driven by a second consecutive quarter of double-digit increases in retail mutual funds, individual variable annuities, defined contribution mutual fund sales, and individual life insurance sales as compared to the second quarter of 2006. Investment management institutional deposits were $2.9 billion, up $113 million versus the prior-year period. Consolidated domestic net flows were $1.7 billion. At June 30, 2007, consolidated assets under management reached $245 billion, up 15% from the end of the second quarter of 2006.
"Lincoln has delivered four quarters of strong results since the merger, demonstrating our ability to execute on key strategies and positioning the company for future growth," said Dennis R. Glass, president and chief executive officer of Lincoln Financial Group.
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Income from operations for the Individual Annuities segment was $130.1 million in the second quarter of 2007 versus $89.0 million in the year-ago period. The current quarter included approximately $8 million, after tax, of net positive items, primarily related to better than expected investment income and the impact of fair value accounting on liabilities required under FAS 133 related to indexed annuity products.
In the quarter, gross deposits of $3.3 billion boosted net flows for the segment to $1.1 billion, up 63% versus the year-ago period. Deposits into variable annuity products reached a record $3.0 billion, with May and June each having sales in excess of $1 billion. Elections of Lincoln's i4LIFE® Advantage, a patented retirement income management tool, reached a record of $592 million, up 51% over the prior-year period and surpassed the $1 billion dollar mark in the first half of the year.
"Lincoln ChoicePlusSM and American Legacy® had record deposits in the quarter, as sales were strong across all channels and included a year-over-year increase of 33% in the independent planner channel, which benefited from targeted wholesaler expansion," said Glass.
Individual Life Insurance
Individual Life Insurance income from operations was $176.4 million, compared to $147.1 million in the second quarter of 2006. The current quarter included approximately $16 million, after tax, of net positive items, which included better than expected investment income and favorable DAC unlocking partially offset by other negative items impacting universal life results.
Individual life insurance sales, reported as paid annualized premium, were $180.0 million in the second quarter, up 36% versus last year, driven by strong universal life sales, including a 32% increase in MoneyGuard® sales, a linked-benefit universal life insurance policy with a long term care rider.
"In the quarter, we completed the launch of our unified universal life product portfolio, which positions us well from both a competitive and profitability standpoint," said Glass.
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Second quarter income from operations for Defined Contribution was $47.3 million, versus $54.3 million for the same period a year ago. The current quarter included approximately $2 million, after tax, of net negative expense items primarily related to investments into distribution and other strategic initiatives.
In the quarter, gross deposits reached $1.3 billion and net flows were $74 million. The Lincoln Alliance® Program, a medium to large case employer-sponsored retirement plan solution, posted another strong quarter as deposits nearly doubled and account balances grew 43% versus second quarter of 2006.
"Distribution expansion is progressing on schedule, contributing to the success of the Lincoln Alliance® Program this quarter. Recent successes in hiring new wholesalers and increasing shelf space are expected to drive future growth in the Lincoln DirectorSM and Lincoln American Legacy RetirementSM products," said Glass.
In the quarter, income from operations for Executive Benefits was $13.9 million, compared to $16.2 million in the second quarter of 2006. The prior-year quarter benefited from favorable mortality results.
For the second quarter, Group Protection's income from operations was $29.0 million, versus $37.0 million in the prior-year period. Favorable non-medical loss ratios of 70.8% contributed approximately $3 million, after tax, to the current quarter's results when comparing to the midpoint of the expected range of 7174%.
In the quarter, annualized premiums for new business were $62.0 million, up 37% versus a challenging 2006 quarter.
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The Investment Management segment reported income from operations of $11.3 million in the second quarter of 2007, which compares to $12.0 million in the prior-year period. The quarter's results included net negative items of approximately $7 million, after tax, primarily attributable to the expenses for the closed-end fund announced at the end of June and an increase in litigation expenses.
Total deposits for the quarter were $6.2 billion, driven by continued strength in retail mutual fund sales of $1.9 billion, a 38% increase as compared to the second quarter of 2006. Both retail and institutional deposits were solid in the quarter while net flows were pressured by retail managed accounts and institutional product lines.
"In the quarter, Delaware launched its first closed-end fund in over a decade, raising $235 million in assets. The income orientation of this fund aligns well with our retirement income focus as a company," said Glass.
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For the second quarter, the UK segment's income from operations was $11.7 million, versus $9.9 million in the same year-ago period. The foreign currency exchange rate continued to favorably impact the current quarter's results.
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Lincoln Financial Media
Lincoln Financial Media income from operations was $13.6 million in the second quarter of 2007, compared to $11.9 million in the prior-year period. The 2006 results were impacted by the amortization of intangible assets related to purchase accounting.
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The operating loss in Other Operations was $46.6 million in the quarter. Results included merger-related expenses of $30 million, pre tax, and a $9 million, pre tax, curtailment gain related to the company's decision to freeze its traditional pension plans, consistent with last quarter's announcement. In addition, the quarter included approximately $2 million, after tax, of unfavorable expense items.
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Capital and Share Repurchase
As of June 30, 2007, the book value per share of Lincoln National Corporation common stock, excluding accumulated other comprehensive income, was $43.02, compared with $40.60 a year ago. Book value per share, including accumulated other comprehensive income, was $43.57, compared with $40.48 a year ago. Lincoln did not repurchase shares in the second quarter, but retired an additional 182,000 on July 10, 2007, upon the close of the previously announced accelerated stock repurchase program.
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Lincoln does not expect material changes to its guidance provided in the first quarter of 2007 earnings materials except for those items noted below.
For the UK segment, the company anticipates earnings for the full year in the lower $40 million range, the expected increase driven primarily by the favorable exchange rate environment experienced in the first six months of the year.
Merger-related expenses are expected to be in the range of $3540 million, pre tax, in the third quarter and expected to reach the high end of the $90110 million, pre tax, estimate for the full year of 2007.
For Individual Annuities, investment spreads are expected to stabilize in the 210 basis points range. The company anticipates spreads in the Individual Life business to be in the 180 basis points range for the remainder of the year. For Employer Markets, spreads are expected to stabilize in the 230 basis points range.
Lincoln currently expects to repurchase approximately $100 million of stock during the third quarter of 2007. The actual amount of stock repurchase could be less than or exceed this amount depending on market conditions and alternative uses of capital. The company has $2.1 billion of security buyback authorization remaining.
This outlook contains estimates that are forward-looking, and actual results may differ materially. Lincoln's actual experience in 2007 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, such as changes that may result from our annual comprehensive review of the assumptions underlying DAC, VOBA, and DFEL that will occur during the third quarter. 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 National Corporation will discuss the company's second quarter results and outlook for 2007 with investors in a conference call beginning at 11:00 a.m. (ET) on Wednesday, August 1, 2007. Interested persons may also listen to the call by dialing the following numbers and asking for the Lincoln National conference call:
||800 289-0533 (Domestic)
||913 981-5525 (International)
The company will post its second quarter 2007 statistical supplement and supplemental information detailing its sub-prime mortgage related investments on its Web site, www.LFG.com.
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 $245 billion as of June 30, 2007. 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; Lincoln Financial Media, which owns and operates three television stations, 18 radio stations, and the Lincoln Financial Sports production and syndication business; and Lincoln UK. For more information please visit www.LFG.com.
Financial data will be posted at www.LFG.com/investor