Lincoln Financial Group (NYSE:LNC) today reported net income for the first quarter of 2012 of $245 million, or $0.83 per diluted share, compared to net income in the first quarter of 2011 of $314 million, or $0.97 per diluted share.
First quarter income from operations was $296 million, or $1.00 per diluted share, compared to $322 million, or $1.00 per diluted share, in the first quarter of 2011.
|For the Quarter Ended|
|($ in millions except per share data)||2012||2011|
|Net Income (Loss)||$||245||$||314|
|Net Income (Loss) Per Diluted Share||0.83||0.97|
|Income (Loss) from Operations||296||322|
|Income (Loss) from Operations Per Diluted Share||1.00||1.00|
|Average Diluted Shares||295.9||322.9|
|ROE (Income from Operations)||11.2||%||11.6||%|
|ROE (Net Income)||9.3||%||11.3||%|
|Book value per share, including AOCI||$||46.43||$||38.45|
|Book value per share, excluding AOCI||$||37.25||$||35.67|
“Our strong first quarter operating results continue to reflect the actions we have taken to grow our top line and protect margins across our businesses,” said Dennis R. Glass, president and CEO of Lincoln Financial Group. “Sales increases in Retirement Plan Services and Group Protection are the direct result of strategic investments we have made in these areas, while strong capital generation drove higher share repurchases.”
First Quarter 2012 Highlights:
- Total account balances increased 5% and reached a record $170 billion.
- Positive net flows helped drive record annuity account balances of $92 billion.
- Retirement Plan Services deposits of $1.5 billion, up 13%, helped drive a 58% increase in net flows to $212 million.
- Sales of MoneyGuard® increased 19% to $41 million.
- Group Protection sales increased 47% to $67 million in response to investments in distribution and product expansion.
The current quarter included no items of note while the prior year quarter included $34 million (as adjusted for ASU 2010-26) of net positive notable items.
First Quarter 2012 – Segment Results
The Annuities segment reported income from operations of $137 million in the first quarter of 2012 compared to $144 million in the year-ago period which included $18 million of net positive notable items.
Variable annuity deposits of $2.2 billion were flat with the prior year quarter and up 8% from the fourth quarter driven by strong equity market performance and consistent with industry growth. Variable annuity net flows of $0.5 billion were in line with the prior year quarter.
Fixed annuity deposits of $295 million were down 35% from the first quarter of last year as low interest rates continued to dampen demand. Fixed annuity net outflows were $170 million compared to net inflows of $31 million in the prior year quarter.
Account values ended the quarter at a record $92 billion, up 4% from the prior year quarter and up 7% from the fourth quarter.
Retirement Plan Services
Retirement Plan Services reported income from operations of $35 million compared to $48 million in the year-ago period, which included $9 million of net positive notable items.
Our investments in technology and distribution continue to advance business results. Gross deposits of $1.5 billion were up 13% versus the prior-year quarter and benefitted from a 74% increase in small case sales. These strong deposits, along with improved retention and market growth, drove quarter end account balances to a record high $42 billion. Total net flows in the current quarter were $212 million, up 58% as compared to the 2011 quarter.
Life Insurance income from operations was $142 million compared to $142 million in the first quarter of 2011 which included $2 million of net positive notable items.
Life insurance sales of $122 million decreased 24% over the prior-year quarter reflecting a decline in secondary guarantee universal life sales in response to pricing actions. The company’s strategy to direct sales to higher return products, including indexed universal life, variable universal life and term insurance, was successful as the aggregate sales of these products increased 11% over the prior year quarter.
Life insurance in force of $580 billion grew 2% and account values of $36 billion increased 5% over the prior-year quarter.
For the first quarter, Group Protection income from operations was $16 million, compared to $24 million in the prior-year period, which included $5 million of notable items. The non-medical loss ratio of 75% in the current quarter increased from 74% in the first quarter of 2011 due to a fluctuation in mortality, which led to higher than expected claims.
Group Protection sales of $67 million for the quarter increased 47% from lower than expected sales in the prior year quarter. Non-medical net earned premiums were $431 million in the first quarter, up 7% over the year-ago period on strong sales.
The operating loss in Other Operations was $34 million in the quarter versus a loss of $37 million in the prior-year quarter.
Realized Gains and Losses
Realized gains/losses (after-tax) in the quarter included:
- A net gain from general account investments of $6 million, as compared to a $3 million net loss in the prior-year quarter
- Strong performance by the variable annuity hedge program of $19 million was offset by a non-economic adjustment of $84 million related to the non-performance risk reserve component, which is unhedged.
Unrealized Gains and Losses
The company reported a net unrealized gain of $6.4 billion, pre-tax, on its available-for-sale securities as of March 31, 2012, compared to a net unrealized gain of $2.8 billion as of March 31, 2011, and $6.5 billion as of December 31, 2011.
During the quarter, the company completed the following capital-related transactions:
- Repurchased 6 million shares of stock at a cost of $150 million
- Issued $300 million of 4.20% Senior Notes due 2022 with proceeds to be used to refinance $300 million of 5.65% senior debt maturing in August.
ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
The financial results reported for the quarter reflect the retrospective adoption of ASU 2010-26, effective January 1, 2012. In accordance with ASU 2010-26, which modifies the accounting guidance for deferred acquisition costs ("DAC"), the company has adjusted its financial results for the periods prior to the first quarter of 2012.
As of March 31, 2012, book value per share of common stock, including accumulated other comprehensive income (“AOCI”), increased 21% to $46.43 from a year ago. Book value per share, excluding AOCI, was $37.25 up 4.5% from $35.67 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 capital markets 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 10:00 a.m. (ET) on Thursday, May 3, 2012. 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) 776-4049 (Domestic)|
|(914) 495-8602 (International)|
|- Ask for the Lincoln National Conference Call.|
The company will also post its first quarter 2012 statistical supplement on its website, 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 $170 billion as of March 31, 2012. 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, Operating Revenues and Return on Equity
Income (loss) from operations, operating revenues and return on equity (“ROE), as used in the earnings release, are non-GAAP financial measures and do not replace GAAP revenues, net income (loss) and ROE. 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 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 (“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.
Operating revenues represent GAAP revenues excluding the pre-tax effects of the following items, as applicable: excluded realized gain (loss); amortization of deferred front-end loads (“DFEL”) arising from changes in GDB and GLB benefit ratio unlocking; amortization of deferred gains arising from the reserve changes on business sold through reinsurance; and revenue adjustments from the initial adoption of new accounting standards.
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.
Income (loss) from operations, operating revenues, return on equity (including and excluding average goodwill within average equity), excluding AOCI, using annualized income (loss) from operations and return on capital are financial measures we use to evaluate and assess our results. Management believes that these performance measures explain 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.
|Lincoln National Corporation|
|Reconciliation of Net Incomes to Income from Operations|
|($ in millions, except per share data)|
|For the Three Months Ended|
|Excluded realized gain (loss), pre-tax||(113.0||)||(20.8||)|
Amortization of DFEL associated with benefit ratio unlocking, pre-tax
Amortization of deferred gains arising from reserve changes on business sold through reinsurance, pre-tax
|Total Operating Revenues||$||2,825.5||$||2,737.9|
|Net Income (Loss)||$||245.3||$||313.5|
|Excluded realized gain (loss), after-tax||(73.4||)||(13.5||)|
|Benefit ratio unlocking, after-tax||23.4||4.9|
Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance, after-tax
|Income (loss) from discontinued operations, after-tax||(0.8||)||-|
|Income (Loss) from Operations||$||295.7||$||321.7|
|Earnings (Loss) Per Share (Diluted)|
|Income (loss) from operations||$||1.00||$||1.00|
|Net income (loss)||0.83||0.97|
|Average Stockholders’ Equity|
|Average equity, including average AOCI||$||13,249.5||$||11,936.5|
|Average equity, excluding AOCI||10,599.1||11,074.6|
|Average equity, excluding AOCI and goodwill||$||8,326.3||$||8,055.2|
|Return on Equity, Excluding AOCI|
|Net income (loss) with average equity including goodwill||9.3||%||11.3||%|
|Income (loss) from operations with average equity including goodwill||11.2||%||11.6||%|
|Income (loss) from operations with average equity excluding goodwill||14.2||%||16.0||%|
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 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, 2012 and 2011 is set forth below.
|As of March 31,|
|Book value per share, including AOCI||$||46.43||$||38.45|
|Per share impact of AOCI||9.18||2.78|
|Book value per share, excluding AOCI||37.25||35.67|
|Lincoln National Corporation|
|Digest of Earnings|
|($ in millions, except per share data)|
|For the Three Months Ended|
|Net Income (Loss)||$||245.3||$||313.5|
|Earnings (Loss) Per Common Share - Basic||$||0.85||$||1.00|
|Earnings (Loss) Per Common Share - Diluted||0.83||0.97|
|Average Shares - Basic||289,055,925||315,014,084|
|Average Shares - Diluted||
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 global capital and credit market conditions could affect our ability to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the 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 reserve requirements related to secondary guarantees under universal life such as a change to reserve calculations under Actuarial Guideline 38, or “AG38” (also known as The Application of the Valuation of Life Insurance Policies Model Regulation) 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 class action cases; new decisions that result in changes in law; and unexpected trial court rulings;
- Declines in or sustained low interest rates causing a reduction in investment income, the interest margins of our businesses, estimated gross profits and demand for our 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 risk management policies and procedures, including 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 DAC, VOBA, DSI and DFEL, which may reduce future earnings;
- Changes in accounting principles generally accepted in the United States, or "GAAP," including the potential incorporation of International Financial Reporting Standards into the U.S. Financial Reporting System 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 press release.