Lincoln Financial Group Reports Second Quarter 2009 Results
Net Flows Double Year-over-Year
Second Quarter Actions Strengthen Capital Position and Financial Flexibility
Capital and Liquidity
| Realized and Unrealized Gains and Losses on Investments
| Consolidated Retail Retirement and Insurance Deposits and Flows
| Second Quarter 2009 Segment Results
| Retirement Solutions
| Insurance Solutions
| Investment Management
| Other Operations
| Book Value
| Reconciliation Table
| Digest of Earnings
| General Account Supplement
PHILADELPHIA, July 29, 2009 Lincoln Financial Group (NYSE:LNC) today reported a net loss of $161 million, or $0.62 per share, for the second quarter of 2009, versus net income of $125 million, or $0.48 per diluted share in the prior-year quarter. The 2009 quarter included a loss of $170 million, after tax, or $0.65 per share, related to the sale of Lincoln National (UK) plc, realized investment losses of $109 million, after tax, or $0.42 per share, and positive variable annuity hedge program results which were more than offset by the FAS 157 non-performance risk factor resulting in a net loss of approximately $110 million, after tax, or $0.42 per share.
Income from operations for the second quarter of 2009 was $212 million, or $0.81 per diluted share, compared to $323 million, or $1.24 per diluted share, in the second quarter of 2008. The current quarter reflects the year-over-year decline in the equity markets and included a loss on alternative investments of $29 million, after tax, versus alternative investment income in the year-ago quarter of $5 million, after tax. The 2009 quarter also included a restructuring charge related to expense-save initiatives of approximately $19 million, after tax, or $0.07 per diluted share. As a result of the pending sale agreement for the Lincoln UK subsidiary, income from operations in the second quarter of 2009 excludes approximately $10 million of income from this segment, which is now included in discontinued operations.
Dennis R. Glass, president and CEO, said, "We have responded to the external challenges by taking aggressive steps including a diverse set of capital actions, expense-save initiatives, and product and distribution enhancements to accommodate changing client preferences and the economic realities. These actions have improved our capital position, better protect the company against further capital market fluctuations and support the continued growth of our businesses as we move forward."
Second Quarter 2009 Highlights:
Consolidated net flows of $2.1 billion doubled versus the 2008 period and increased 8% sequentially, with stable retail deposits and improved lapse rates across all segments.
Issued $690 million of common equity and $500 million of senior debt and ended the quarter with holding company cash and cash equivalents of approximately $800 million.
Unrealized losses at the end of the quarter improved more than 40% sequentially, contributing to an overall increase of $1.8 billion in stockholders' equity.
Completed expense reductions expected to yield run-rate savings $250 million, pre DAC and tax, by year-end 2009.
Glass added, "For the second consecutive quarter, we reported positive net flows and profits in each of our business segments. In addition to our core strengths, strong sales in our indexed annuities, term insurance and MoneyGuard® linked-benefit product highlighted our ability to adapt to market demands. These solid fundamentals underscored the resilience of Lincoln's business model, our diverse product portfolio, and the quality of our distribution platforms."
Capital and Liquidity
In the second quarter of 2009, Lincoln issued $690 million of common stock, or 46 million shares, and $500 million of senior notes in the public markets. On July 10, 2009, the company issued $950 million in Series B preferred shares, or 950,000 shares, pursuant to the U.S. Treasury's Capital Purchase Program (CPP) and warrants to purchase approximately 13 million shares of LNC common stock. The CPP financing represents approximately 6% of the company's total capitalization. The company retained approximately $1.1 billion of the proceeds at the holding company and contributed $1 billion to the insurance subsidiaries.
As of June 30, 2009, commercial paper outstanding was approximately $200 million, which the company expects to maintain in the near-term. The holding company reduced its borrowings under the inter-company cash management program to zero and held cash and cash equivalents of approximately $800 million at the end of the second quarter.
Lincoln Financial estimates a risk based capital (RBC) ratio at June 30, 2009, of approximately 350% for The Lincoln National Life Insurance Company and its affiliates. This estimate does not reflect the $1 billion contribution made to the insurance subsidiaries in the month of July, which would add approximately 70 percentage points to RBC.
Realized and Unrealized Gains and Losses on Investments
Total gross realized losses on general account investments were $236 million, pre DAC and tax, down modestly from the sequential quarter. At the end of the second quarter, the company reported a net unrealized loss position for available-for-sale securities, including unrealized gains, of $1.6 billion, after tax, an improvement of more than 40% from March 31, 2009.
Consolidated Retail Retirement and Insurance Deposits and Flows
Consolidated retail deposits into retirement and insurance products of $4.9 billion in the second quarter compared to $5.9 billion a year ago and were up modestly from the first quarter. Consolidated retail retirement and insurance product net flows of $1.9 billion compared to $2.5 billion in the 2008 quarter and were up 16% sequentially. Retirement and insurance account balances were $125.0 billion at June 30, 2009, down 11% year-over-year and up 9% sequentially.
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Second Quarter 2009 Segment Results
The Individual Annuities segment reported income from operations of $65 million in the second quarter of 2009 versus $116 million in the year-ago period, reflecting a $13.9 billion decline in average variable account balances compared to the prior year. The 2009 quarter included a loss on alternative investments of $5 million, after tax.
Gross annuity deposits were $2.6 billion, down 23% from the prior year but up 20% from the first quarter. Net flows were $1.0 billion versus $1.6 billion in the 2008 quarter, but more than doubled sequentially. Variable annuity product deposits of $1.7 billion and net flows of $651 million were down 41% and 59% year-over-year, respectively, reflecting depressed economic and market conditions. Variable annuity product deposits and net flows increased 9% and 49%, respectively, from the first quarter. Fixed and indexed annuity product deposits of $900 million were up 83% year-over-year and 49% sequentially, driving an improvement in net flows for both periods.
Defined Contribution reported income from operations of $28 million, versus $41 million for the same period a year ago, reflecting a $6.1 billion decline in average variable account balances compared to prior year. The 2009 quarter included a loss on alternative investments of $3 million, after tax.
Gross deposits of $1.2 billion were down 13% versus prior year. Total net flows increased 39% to $329 million compared to the year-ago quarter, reflecting continued strong persistency. Deposits and net flows were down sequentially, a result of normal seasonality in the first quarter.
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Life Insurance income from operations was $133 million compared to $164 million in the second quarter of 2008. The 2009 quarter included a loss on alternative investments of $20 million, after tax. The current quarter's results also included a net positive impact of approximately $10 million, after tax, primarily attributable to favorable mortality.
Life insurance sales were $124 million in the second quarter compared to $166 million in the 2008 period and $145 million in the first quarter. MoneyGuard®, a linked-benefit universal life insurance policy with a long term care rider, and term life insurance sales improved year-over-year and sequentially once again, as market demand shifted toward lower-cost protection products.
For the second quarter, Group Protection's income from operations was $34 million, compared to $32 million in the prior-year period. The non-medical loss ratio in the current period was 68.2%, driven by favorable experience in group disability.
Net earned premiums were $413 million in the second quarter, up 5% over the year-ago period. Annualized sales of $59 million declined 8% compared to the 2008 quarter due primarily to weak economic conditions, but were up 10% sequentially.
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Investment Management segment income from operations was $5 million in the second quarter of 2009, compared to $15 million in the prior year, reflecting weak equity markets. Assets under management of $126.7 billion as of June 30, 2009, were down $15.0 billion year-over-year, but up $10.0 billion sequentially.
Total deposits for the second quarter were $3.9 billion, up 10% versus the year-ago period, but down 25% versus the first quarter. Positive net flows were $73 million compared to a negative $1.5 billion in the prior-year and a positive $211 million in the sequential quarter. Year-over-year improvements were balanced across the retail and institutional businesses.
The operating loss in Other Operations was $52 million in the quarter, versus $45 million in the prior-year quarter. A charge of approximately $19 million, after tax, related to expense-save initiatives was included in the 2009 quarter's results.
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As of June 30, 2009, the book value per share of common stock, including accumulated other comprehensive income (AOCI), was $30.02 compared to $40.85 a year ago. Book value per share, excluding AOCI, was $35.67, compared to $43.99 a year ago.
This press release may contain statements that are forward-looking, and actual results may differ materially, especially given the current economic and credit conditions. 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. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities.
The tables attached to this release define and reconcile income from operations, ROE, and book value per share excluding AOCI, non-GAAP measures, to net income, ROE, and book value per share including AOCI calculated in accordance with GAAP.
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Lincoln Financial Group will discuss the company's second quarter results with investors in a conference call beginning at 11:00 a.m. (ET) on Thursday, July 30, 2009. 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: 877 852-6543 (Domestic)
719 325-4773 (International)
Ask for the Lincoln National Conference Call.
The company will also post its second quarter 2009 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 the Philadelphia region, the companies of Lincoln Financial Group had assets under management of $181 billion as of June 30, 2009. 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