6/30/2011 | | | | | | | | | | | | | ii |
NOTES | | | | | | | | | | | |
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Definitions and Presentation | | | | | | | | |
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"Income (loss) from operations," "operating revenues" and "return on capital" are non-GAAP financial measures and do not replace GAAP |
revenues, net income (loss) and return on stockholders' equity. Detailed reconciliations of these non-GAAP financial measures to the most directly |
comparable GAAP financial measure are included in this statistical supplement. | | | | |
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• | 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. | | | | | | |
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Income (loss) from operations available to common stockholders is net income (loss) available to common stockholders (used in the calculation of |
earnings (loss) per share) in accordance with GAAP, excluding the after-tax effects of the items above and the acceleration of our Series B preferred |
stock discount as a result of redemption prior to five years from the date of issuance. | | | | |
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| • | 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. | | | | |
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| • | 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. | | |
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| • | Return on capital measures the effectiveness of our use of total capital, which includes equity (excluding accumulated other |
| | comprehensive income), debt, capital securities and junior subordinated debentures issued to affiliated trusts. Return on capital is |
| | calculated by dividing annualized income (loss) from operations (after adding back interest expense) by average capital. The difference |
| | between return on capital and return on stockholders' equity represents the effect of leveraging on our consolidated results. |
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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. Our management |
and Board of Directors believe that these performance measures explain the results of our ongoing businesses in a manner that allows for a better |
understanding of the underlying trends in our 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. In addition, we believe that our definitions of operating revenues and income (loss) from operations |
will provide investors with a more valuable measure of our performance because it better reveals trends in our business. |
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| • | Certain operating and statistical measures are included in this report to provide supplemental data regarding the performance of our |
| | current business. These measures include deposits, sales, net flows, first-year premiums, in force and spreads. | |
| • | Sales as reported consist of the following: | | | | | | |
| | • | Universal life ("UL") (excluding linked-benefit products) and variable universal life ("VUL"), including corporate-owned life |
| | | insurance ("COLI") and bank-owned life insurance ("BOLI") - first year commissionable premiums plus 5% of excess premiums |
| | | received, including an adjustment for internal replacements at approximately 50% of target; | | |
| | • | Whole life and term - 100% of first year paid premiums; | | | | | |
| | • | Linked-benefit - 15% of premium deposits; | | | | | | |
| | • | Annuities - deposits from new and existing customers; | | | | | |
| | • | Group Protection - annualized first year premiums from new policies; and | | | | |
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Our roll forwards of deferred acquisition costs ("DAC") and value of business acquired ("VOBA"), deferred sales inducements ("DSI") and DFEL |
disclose the net impact of prospective and retrospective unlocking on amortization for these items. This information helps explain a |
source of volatility in amortization. | | | | | | | | |
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| • | Prospective unlocking - In the third quarter of each year, we review and update our assumptions used in projecting our future estimated |
| | gross profits ("EGPs") used to amortize DAC, VOBA, DFEL, DSI and the calculations of embedded derivatives and reserves for |
| | annuity and life insurance products with certain guarantees. We may also have prospective unlocking if we experience long-term |
| | or significant deviations from expected equity market returns requiring a change to best estimate projections of EGPs and reversion |
| | to the mean ("RTM") prospective unlocking of DAC, VOBA, DFEL, DSI and other contract holder funds. We may also have prospective |
| | unlocking in other quarters as we become aware of information that warrants updating prospective assumptions outside of our annual |
| | comprehensive review. These updates to assumptions result in unlocking that represent an increase or decrease to our carrying value of DAC, |
| | VOBA, DFEL and DSI based upon our updated view of future EGPs. The various assumptions that are reviewed include investment margins, |
| | mortality, retention and rider utilization. In addition, in the third quarter of each year during our annual prospective unlocking review, we may |
| | identify and implement actuarial modeling refinements which can result in prospective and retrospective unlocking impacts that impact DAC, |
| | VOBA, DSI, DFEL and embedded derivatives and reserves for annuity and life products with living and death benefit guarantee reserves. |
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| • | Retrospective unlocking - On a quarterly basis, we “true-up” our models for actual gross profits and in-force experience for the period. |
| | To the extent that actual experience differs from previously expected, a positive or negative retrospective adjustment to the |
| | amortization of DAC, VOBA, DSI and DFEL is recorded. This update to the models may generate a change in the amortization rate |
| | which results in a catch-up to the cumulative amortization, by recalculating the DAC, VOBA, DSI and DFEL balances assuming that |
| | the revised amortization rate had been used since issue. | | | | | | |
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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 attributable primarily to our business operations. We believe 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. | | |
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Pre-tax operating margin is calculated as income (loss) from operations before federal income taxes divided by operating revenues. After-tax operating |
margin is calculated as income (loss) from operations divided by operating revenues. | | | | |
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We use our prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently |
in our financial statements and federal income tax returns when reconciling our non-GAAP measures to the most comparable GAAP measure. |
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Effective April 30, 2010, we amended our non-director deferred compensation plans to allow participants the option to diversify from LNC stock to |
other investment alternatives and to be settled in shares or cash at the participant’s discretion. As a result of the amendment, we reclassified the cost |
basis of deferred units of LNC stock from common stock to other liabilities on our Consolidated Balance Sheet. Consequently changes in the value of |
our stock are recorded in underwriting, acquisition, insurance and other expenses on our Consolidated Statement of Income (Loss). When calculating |
our weighted-average dilutive shares, we presume the investment option will be settled in cash and exclude the shares from our calculation, unless the |
effect of assuming it will be settled in shares ("equity classification") would be more dilutive to our diluted EPS. The numerator used in the calculation |
of our diluted EPS is adjusted to remove the mark-to-market adjustment for deferred units of LNC stock in our non-director deferred compensation |
plans if the effect of equity classification would be more dilutive to our diluted EPS. | | | | |
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Throughout the document, "after-DAC" refers to the associated amortization expense of DAC, VOBA, DSI and DFEL and changes in other contract |
holder funds and funds withheld reinsurance liabilities. | | | | | | |
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Reclassifications | | | | | | | | | |
In addition to the items discussed above, certain amounts reported in prior periods have been reclassed to the presentation adopted in the current period. |
These reclassifications had no effect on net income, income from operations or stockholders' equity in the prior period. |