REVISED: Lincoln Financial Group Reports First Quarter 2008 Results
Long-term earnings drivers and capital position remain strong despite volatile markets
Year-over-year net flows up 57% in individual annuities and 27% in defined contribution
| Employer Markets
| Investment Management
| Lincoln UK
| Other Operations
| Capital and Share Repurchase
| Realized Gains and Losses/Impairment Charge
| 2008 Outlook
| Reconciliation Table
| Digest of Earnings
| General Account Supplement
PHILADELPHIA, April 29, 2008 Lincoln Financial Group (NYSE:LNC) today reported net income of $289 million, or $1.10 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.
Income from operations for the first quarter of 2008 was $333 million, or $1.27 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 1012% 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)
|Individual Life Insurance (DAC Unlocking, Mortality)
|Other Operations (Expense Items)
|Investment Management (Seed Capital)
|Defined Contribution (DAC Unlocking)
|Individual Annuities (Hedge Performance, DAC Unlocking, SFAS 157, 133)
Notable Items Referenced in the 1Q 2007 Press Release Affecting Income from Operations*
|($ in millions except per share data)
|Individual Annuities (Hedge Performance)
|| $ 4
|| $ 0.01
|Individual Life (DAC Unlocking, Mortality)
* Excludes the equity market and alternative investment impacts referenced above.
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First Quarter 2008 Segment Results
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®, 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.
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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® Variable Annuity, an older small-to-medium case retirement plan solution.
In the quarter, income from operations for Executive Benefits was $12 million, consistent with results in the first quarter of 2007.
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.
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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.
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For the first quarter, the UK segment's income from operations was $11 million, consistent with results in the first quarter of 2007.
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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.
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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.
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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.
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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.
Sales are expected to increase throughout the year as compared to first quarter results, benefiting from ongoing product enhancements and normal seasonality trends.
Fixed annuity spreads are expected in the 210220 basis point range, reflecting continued pressure on portfolio yields mitigated somewhat by anticipated crediting rate action.
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 1517%, recognizing results are sensitive to equity market movements.
Merger-related expenses are expected to range from $1520 million, pre tax, in the second quarter.
Lincoln Financial intends to repurchase approximately $200300 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.
Financial data will be posted at www.LincolnFinancial.com/investor