Lincoln Financial Group Reports Third Quarter 2007 Earnings
Investments in Distribution Drive Growth in Production Across Segments
| Consolidated Domestic Deposits and Net Flows
| Individual Markets
| Employer Markets
| Investment Management
| Other Segments' Results
| Capital and Share Repurchase
| Realized Gains and Losses
| 2007 Outlook
| Reconciliation Table
| Digest of Earnings
PHILADELPHIA, October 30, 2007 Lincoln Financial Group (NYSE:LNC) today reported net income of $329.6 million, or $1.21 per diluted share, for the third quarter of 2007. By comparison, net income for the third quarter of 2006 was $364.1 million, or $1.29 per diluted share.
Income from operations for the third quarter of 2007 was $352.9 million, or $1.29 per diluted share, compared to third quarter 2006 income from operations of $371.1 million, or $1.31 per diluted share. Return on equity (ROE), based on income from operations, was 12.0%. The attached table 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.
Third quarter earnings include the results of Lincoln Financial's annual comprehensive review of prospective assumptions underlying certain assets and liabilities, primarily Deferred Acquisition Costs (DAC), Value of Business Acquired (VOBA), and Deferred Front End Loads (DFEL).
Consolidated Domestic Deposits and Net Flows
Consolidated domestic deposits, which include wealth accumulation and retirement planning products such as individual annuities, mutual funds, life insurance and employer-sponsored solutions together with institutional investment products, were $10.9 billion, up 28% over the third quarter of 2006. Strong deposits in the major retail segments, including record individual variable annuity and defined contribution mutual fund deposits, drove retail net flows to $1.8 billion, a threefold increase compared to the year-ago period. At September 30, 2007, consolidated assets under management reached $251 billion, up 14% from the end of the third quarter of 2006.
"This quarter's results reflect Lincoln Financial's strong underlying operating fundamentals. In the face of volatile markets, production was strong across the company, while our risk management programs held up under significant pressure," 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 $106.9 million in the third quarter of 2007 versus $129.4 million in the year-ago period. The current quarter included approximately $16 million, after tax, of net negative items primarily related to hedge program performance and the impact of fair value accounting on liabilities required under FAS 133 related to indexed annuity products. These unfavorable adjustments were partially offset by net positive DAC unlocking. The 2006 quarter included approximately $29 million, after tax, of net positive items primarily related to favorable tax adjustments.
In the quarter, record gross deposits of $3.5 billion increased by 28% versus the year-ago period, and net flows for the segment quadrupled to $1.3 billion as strong variable annuity deposits combined with declining fixed annuity withdrawals. Deposits into variable annuity products reached $3.0 billion for the second consecutive quarter and net flows increased by 49% to $1.5 billion.
"Quarter-over-quarter and year-over-year, we continue to exceed industry growth rates and our previous variable annuity milestones, due to product and wholesaling depth and breadth as well as the increasing demand for these products in retirement planning. These results have helped boost variable annuity account values by 30% since the end of the 2006 quarter," said Glass.
Individual Life Insurance
Individual Life Insurance income from operations was $173.6 million, compared to $122.8 million in the third quarter of 2006. The current quarter included approximately $16 million, after tax, of net positive items, primarily related to DAC unlocking and a favorable tax adjustment. The 2006 quarter's results were negatively impacted by approximately $17 million, after tax, primarily related to DAC unlocking adjustments.
Individual life insurance sales, reported as paid annualized premium, were $179.9 million in the third quarter, up 18% versus last year, driven by continued strength in universal life sales, including MoneyGuard®, a linked-benefit universal life insurance policy with a long term care rider, and a 36% increase in variable universal sales.
"Our comprehensive suite of life insurance products and expanded distribution efforts drove double-digit sales growth in multiple channels and top distribution partners, while inforce and account values continued to grow in the mid-to-high single digit range," said Glass.
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Third quarter income from operations for Defined Contribution was $41.2 million, versus $52.5 million for the same period a year ago. The current quarter included approximately $3 million, after tax, of net negative items primarily related to prospective and retrospective DAC unlocking. The 2006 quarter included approximately $4 million, after tax, of net positive items primarily related to the favorable tax adjustments.
In the quarter, gross deposits reached $1.5 billion, up 40% over the third quarter of 2006, and net flows were $133 million. Record deposits of $861 million into the Lincoln Alliance® Program, a medium to large case employer-sponsored retirement plan solution, represented the third consecutive quarter of year-over-year increases exceeding 50%.
"We expect our ongoing investments in distribution, technology and product development to fuel production and long-term earnings growth while putting pressure on near-term earnings," said Glass.
In the quarter, income from operations for Executive Benefits was $11.0 million, compared to $12.8 million in the third quarter of 2006. The current quarter included approximately $2 million, after tax, of net negative items primarily related to DAC unlocking.
For the third quarter, Group Protection's income from operations was $33.2 million, versus $28.8 million in the prior-year period. Favorable non-medical loss ratios of 68.6% contributed approximately $8 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 $60.8 million, up 21% versus the 2006 quarter.
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The Investment Management segment reported record income from operations of $21.8 million in the third quarter of 2007, which compares to $13.4 million in the prior-year period. The 2007 quarter included approximately $1 million, after tax, of favorable expense items. The growth in income was primarily attributable to an 11% increase in investment advisory fees, which drove the pre-tax operating margin to 22.7%.
Total deposits for the quarter were $5.7 billion, driven by $1.5 billion of retail mutual fund sales, a 34% increase versus the year-ago period.
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Other Segments' Results
For the third quarter, the UK segment's income from operations was $10.3 million, versus $8.3 million in the same year-ago period. The current quarter included approximately $2 million, after tax, of net negative items primarily related to reserve adjustments. The third quarter of 2006 included a net negative impact of approximately $3 million, after tax, primarily related to an unfavorable prospective DAC unlocking adjustment.
Lincoln Financial Media income from operations was $13.6 million in the third quarter of 2007, compared to $14.6 million in the prior-year period.
The operating loss in Other Operations was $58.9 million in the quarter versus a loss of $11.5 million in the third quarter of 2006. The third quarter of 2007 included approximately $8 million, after tax, of unfavorable expense items, including executive retirement benefits. Merger-related expenses in the current quarter were $29.3 million, pre tax. The year-ago quarter included net positive items of approximately $13 million, after tax, primarily related to an insurance recovery related to past mis-selling claims in the UK operation.
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Capital and Share Repurchase
As of September 30, 2007, the book value per share of Lincoln National Corporation common stock, including AOCI, was $44.41, compared with $43.39 a year ago. Book value per share, excluding AOCI, was $43.68, compared with $41.20 a year ago. Lincoln repurchased 3.1 million shares in the third quarter at a total cost of $174.6 million.
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Realized Gains and Losses
The company reported net realized losses of $23.7 million in the quarter, including gross realized losses and write downs of approximately $11 million, pre DAC and pre tax, on securities backed by subprime-related loans.
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Lincoln Financial does not expect material changes to its previous guidance except for those items noted below.
Merger-related expenses are expected to be in the $30 million range, pre tax, in the fourth quarter of 2007.
The company currently expects to repurchase approximately $200 million of stock during the fourth 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 approximately $2 billion of security buyback authorization remaining.
This outlook contains estimates that are forward-looking, and actual results may differ materially. Lincoln Financial'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. 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 third quarter results and outlook for 2007 with investors in a conference call beginning at 11:00 a.m. (ET) on Wednesday, October 31, 2007. Interested persons may also listen to the call by dialing the following numbers and asking for the Lincoln National conference call:
||888 263-2906 (Domestic)
||913 312-0685 (International)
The company will post its third quarter 2007 statistical 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 $251 billion as of September 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, including a copy of our most recent SEC reports containing our balance sheets, please visit www.LincolnFinancial.com.
Financial data will be posted at www.LincolnFinancial.com/investor