Lincoln Financial Group Reports First Quarter 2011 Results

PHILADELPHIA, April 27, 2011 /PRNewswire/ -- Lincoln Financial Group (NYSE: LNC) today reported net income for the first quarter of 2011 of $339 million, or $1.05 per diluted share, compared to net income in the first quarter of 2010 of $283 million, or $0.85 per diluted share available to common stockholders.  

First quarter income from operations was $349 million, or $1.08 per diluted share, compared to $276 million, or $0.83 per diluted share available to common stockholders, in the first quarter of 2010.  

"First quarter operating results continued our quarterly trend of strong sales and margins, and growing account balances stemming from positive net flows and rising equity markets," said President and CEO Dennis R. Glass. "The increased base of ongoing operating income was added to by extra investment earnings and positive mortality fluctuations, resulting in a very good earnings start for the year."

First Quarter 2011 Operating Highlights:

• Consolidated deposits of $5.3 billion up 13%
• Consolidated net flows of $1.4 billion up 12%
• Total account balances of $162 billion up 11%
• Annuity deposits of $2.6 billion up 16%
• Life insurance sales of $159 million up 12%
• Group Protection non-medical loss ratio improves to 74%

The quarter included better than expected investment income of $26 million from alternative investments and prepayment premiums, $13 million of favorable mortality fluctuations and $7 million of other items.  

First Quarter 2011 – Segment Results

Retirement Solutions

Individual Annuities

The Individual Annuities segment reported income from operations of $147 million in the first quarter of 2011 versus income from operations of $119 million in the year-ago period, reflecting a 14% increase in annuity account values.  

Total annuity deposits of $2.6 billion were up 16% over the prior-year quarter reflecting strong double digit sales increases in both variable and fixed indexed annuities. Total net flows in the current quarter were $483 million as compared to $575 million in the 2010 quarter.

The quarter included better than expected investment income of $6 million from alternative investments and prepayment premiums, $7 million of favorable mortality and $5 million of other items.  

Defined Contribution

Defined Contribution reported income from operations of $49 million, versus income from operations of $36 million for the same period a year ago, reflecting a 10% increase in account values.

Gross deposits of $1.3 billion were up 3% versus the prior-year quarter.  Total net flows in the current quarter were $134 million as compared to $109 million in the 2010 quarter.

The quarter included better than expected investment income of $7 million from alternative investments and prepayment premiums and $2 million of other items.  

Insurance Solutions

Life Insurance

Life Insurance income from operations was $166 million, compared to $137 million in the first quarter of 2010.  

Life insurance sales of $159 million increased 12% over the prior-year quarter.  Life insurance in force of $567 billion grew 4% and account values of $34 billion increased 7% over the prior year quarter.  

The quarter included better than expected investment income of $8 million primarily from alternative investments and a $6 million favorable mortality fluctuation.

Group Protection

For the first quarter, Group Protection's income from operations was $24 million, compared to $21 million in the prior-year period.  

The non-medical loss ratio of 74% in the current quarter declined from 75% in the first quarter of 2010 and 76% in the fourth quarter 2010.

Non-medical net earned premiums were $403 million in the first quarter, up 7 % over the year-ago period. Annualized sales of $45 million decreased 28 % year-over-year due to challenging market conditions.

The current quarter benefited from $5 million of several favorable items relative to expectations.

Other Operations

The operating loss in Other Operations of $37 million in the quarter was flat compared to the prior-year quarter.

Realized Gains and Losses

In the quarter, net realized losses and impairments totaled $6 million, pre-DAC and pre-tax, compared to a loss of $59 million in prior-year quarter.

Unrealized Gains and Losses

The company reported a net unrealized gain of approximately $2.8 billion, pre-tax, on its available-for-sale securities at March 31, 2011.  This compares to a net unrealized gain of $1.2 billion at March 31, 2010.  

Stock Repurchase

During the quarter the company repurchased 2.4 million shares of stock at a cost of $75 million.

Book Value

As of March 31, 2011, the book value per share of common stock, including accumulated other comprehensive income ("AOCI"), was $41.74 up 9% from $38.19 a year ago. Book value per share, excluding AOCI, was $39.24 up 6% from $37.19 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 tables attached to this release define and reconcile income from operations, return on equity ("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.

Lincoln Financial Group will discuss the company's first quarter results with investors in a conference call beginning at 11:00 a.m. (ET) on Thursday, April 28, 2011. 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:

The company will also post its first quarter 2011 statistical supplement and a general account supplement on its Web site, www.LincolnFinancial.com/earnings.

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 $162 billion as of March 31, 2011. Through its affiliated companies, Lincoln Financial Group offers: annuities; life, group life, disability and dental insurance; 401(k) and 403(b) plans; savings plans; and comprehensive financial planning and advisory services. 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 Return on Equity

Income (loss) from operations and return on equity, 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.  We exclude the after-tax effects of the following items from GAAP net income (loss) to arrive at income (loss) from operations: realized gains and losses associated with the following ("excluded realized gain (loss)"): sale or disposal of securities; impairments of securities; change in the fair value of derivative investments; embedded derivatives within certain reinsurance arrangements and the change in the fair value of our trading securities; change in the fair value of the derivatives we own to hedge our guaranteed death benefit ("GDB") riders within our variable annuities, which is referred to as "GDB derivatives results"; change in the fair value of the embedded derivatives of our guaranteed living benefit ("GLB") riders within our variable annuities accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification^TM ("ASC") ("embedded derivative reserves"), net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves, the net of which is referred to as "GLB net derivative results"; and changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC ("indexed annuity forward-starting option"); change in reserves accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC resulting from benefit ratio unlocking on our GDB and GLB riders ("benefit ratio unlocking"); income (loss) from the initial adoption of new accounting standards; income (loss) from reserve changes (net of related amortization) on business sold through reinsurance; gain (loss) on early extinguishment of debt; losses from the impairment of intangible assets; and income (loss) from discontinued operations.

Return on equity measures how efficiently we generate profits from the resources provided by our net assets.  Return on equity is calculated by dividing annualized net income (loss) by average equity, excluding accumulated other comprehensive income (loss) ("AOCI").  Management evaluates return on equity by both including and excluding average goodwill within average equity.  

The earnings used to calculate ROE, as used in the earnings release, are net income (loss) and 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 businesses in a manner that allows for a better understanding of the underlying trends in the company's current business because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in most instances, decisions regarding these items do not necessarily relate to the operations of the individual segments.

The company uses its prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in its financial statements and federal income tax returns when reconciling non-GAAP measures to the most comparable GAAP measure.

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 and Series B preferred stock balances as it is non-convertible (issued and sold to the U.S. Treasury in connection with the Troubled Asset Relief Program Capital Purchase Program as part of the Emergency Economic Stabilization Act of 2008), by (b) common shares outstanding, assuming conversion of Series A preferred shares. We provide book value per share excluding AOCI to enable investors to analyze the amount of our net worth that is primarily attributable to our 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, 2011 and 2010 is set forth below.

Forward Looking Statements — Cautionary Language

Certain statements made in this press 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 Lincoln's 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:

• Deterioration in general economic and business conditions that may affect account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results;
• Adverse capital and credit market conditions could cause us to realize impairments on investments and certain intangible assets, including goodwill and a valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures;
• Because of our holding company structure, the inability of our subsidiaries to pay dividends to the holding company in sufficient amounts could harm the holding Company's ability to meet its obligations;
• Legislative, regulatory or tax changes, both domestic and foreign, that affect the cost of, or demand for, our subsidiaries' 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, or "RBC," requirements related to secondary guarantees under universal life and variable annuity products such as Actuarial Guideline 43, or "AG43" (also known as Commissioners Annuity Reserve Valuation Method for Variable Annuities or "VACARVM"); restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. Federal tax reform;
• Uncertainty about the effect of rules and regulations to be promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the economy and financial services sector in particular;
• The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and extra-contractual and class action cases; new decisions that result in changes in law; and unexpected trial court rulings;
• Changes in or sustained low interest rates causing reductions in investment income, estimated gross profits to our variable annuity and universal life products, the margins of our subsidiaries' fixed annuity and life insurance businesses and demand for their products;
• A decline in the equity markets causing a reduction in the sales of our subsidiaries' products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of amortization of deferred acquisition costs, or "DAC," value of business acquired, or "VOBA," deferred sales inducements, or "DSI," and deferred front end sales loads, or "DFEL," and an increase in liabilities related to guaranteed benefit features of our subsidiaries' variable annuity products;
• Ineffectiveness of our various hedging strategies used to offset the effect 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 the assumptions used in pricing our subsidiaries' products, in establishing related insurance reserves and in the amortization of intangible assets such as deferred acquisition costs;
• Changes in accounting principles generally accepted in the United States, or "GAAP," including moving to International Financial Reporting Standards, as well as the methodologies, estimations and assumptions thereunder, that may result in unanticipated changes to our net income;
• Lowering of one or more of our debt ratings issued by nationally recognized statistical rating organizations and the adverse effect such action may have on our ability to raise capital and on our liquidity and financial condition;
• Lowering of one or more of the insurer financial strength ratings of our insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity;
• Significant credit, accounting, fraud, corporate governance or other issues that may adversely affect the value of certain investments in our portfolios as well as counterparties to which we are exposed to credit risk requiring that we realize losses on investments;
• The effect of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions;
• The adequacy and collectibility of reinsurance that we have purchased;
• Acts of terrorism, a pandemic, war or other man-made and natural catastrophes that may adversely affect our 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 our subsidiaries can charge for their products;
• The unknown effect on our subsidiaries' businesses resulting from changes in the demographics of their client base, as aging baby-boomers move from the asset-accumulation stage to the asset-distribution stage of life; and
• Loss of key management, financial planners or wholesalers.

The risks included here are not exhaustive. Our 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 our business and financial performance. Moreover, we operate 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 our businesses 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 this release.

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SOURCE Lincoln Financial Group

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