Lincoln Financial Group Reports Second Quarter 2005 Earnings
Retail and Institutional Net Flows Support Solid Second Quarter Results
PHILADELPHIA, August 1, 2005 - Lincoln National Corporation (NYSE:LNC) today reported net income of $197.9 million, or $1.13 per diluted share for its second quarter of 2005. By comparison, net income for the second quarter of 2004 was $187 million, or $1.04 per diluted share.
Income from operations for the second quarter of 2005 was $218.6 million, or $1.25 per diluted share, compared with $181.4 million, or $1.00 per diluted share, in the second quarter of 2004. Return on equity (ROE), based on income from operations, for the quarter was 16.2%. The attached table defines and reconciles income from operations and ROE, non-GAAP measures, to net income and ROE calculated in accordance with GAAP.
While benefiting from continued growth in deposits across the enterprise, the second quarter was impacted by better than expected performance in Lincoln’s alternative investments, specifically partnership income and fees earned from its standby real estate equity commitment program. In addition, the quarter’s results included a favorable tax adjustment. “Although these income items vary in magnitude quarter to quarter, they provide economic value that can be invested into the business or returned to shareholders,” said Jon A. Boscia, chairman and chief executive officer of Lincoln Financial Group.
Consolidated domestic retail deposits, which include annuities, mutual funds, life insurance and other personal wealth accumulation products, reached $6.9 billion, up 48% over the second quarter of 2004. Lincoln reported consolidated retail net flows for the quarter of $3.5 billion, up 110% from the prior year quarter. Institutional net flows were a record $4.1 billion in the quarter, up 100% over the prior year quarter and up 238% over first quarter, 2005.
“Both the retail and institutional businesses delivered robust results in the second quarter, as Lincoln continued to shape its business around clients’ retirement and income objectives,” said Boscia.
Lincoln Retirement
Second quarter income from operations for the retirement segment was $119.4 million versus $101.8 million for the same period a year ago. Income from operations in 2005 and 2004 benefited from approximately $20 million and $14 million respectively, after-tax, of better than expected investment income.
Gross deposits were $2.5 billion for the quarter, while net flows reached a record $857 million. The second quarter was fueled by strong performance in the following retirement income products and features:
| § | The Lincoln SmartSecuritySM Advantage, a step-up withdrawal rider on individual variable annuity products, was elected on 54% of second quarter deposits on those products where the rider is available, consistent with the prior quarter. |
| § | Lincoln’s i4LIFE® Advantage, a patented individual variable annuity rider that provides investors with a retirement income management tool, recorded year-to-date elections of $408 million, nearly achieving the full-year 2004 level of $410 million. Total assets under management have now crested at $1 billion. |
| § | The Lincoln Alliance® Program, an employer-sponsored retirement plan solution, reached $336 million in deposits in the second quarter, 2005. |
“The strong deposits and net flows across multiple retirement planning solutions demonstrate Lincoln’s ability to respond to prevailing and emerging market needs while adhering to our prescribed risk tolerance levels.” said Boscia.
Life Insurance
Life insurance income from operations was $75.8 million, compared to $76.2 million in the second quarter of 2004. Income from operations in 2005 and 2004 included approximately $5 million and $4 million respectively, after-tax, of better than expected investment income. The benefit in the second quarter 2005 was partially offset by unfavorable mortality expenses of approximately $2 million.
First year premiums from retail life insurance were consistent with the prior year quarter. Included in the first year retail premiums was a 34% increase in variable universal life over second quarter 2004. “Once again, the strength and diversity in the life product portfolio coupled with our strategic partnerships provided balance to Lincoln’s results,” said Boscia. “We are excited to see the innovative Lincoln VULONE product, a hybrid variable universal life policy with upside potential and downside protection, gaining traction in the marketplace,” added Boscia.
Investment Management
The investment management segment reported income from operations of $3.9 million for the quarter, compared with income from operations of $13.4 million for the same period a year ago. The year ago quarter included $4 million of income from operations from Delaware International Advisors Ltd. (DIAL), which was sold in September, 2004. In the second quarter of 2005, income from operations benefited from strong flows and investment performance, offset by net costs associated with recent investment talent acquisitions of approximately $4 million, consistent with management’s first quarter guidance.
Total net flows were a record $6.4 billion, with deposits reaching a record $4.0 billion in the retail division and a record $5.9 billion in the institutional division.
“With the addition of an international value equity team in June, combined with three prior talent acquisitions in key investment styles, Delaware is well positioned with strong performance in all major asset classes,” said Boscia.
Lincoln UK
For the second quarter, the Lincoln UK segment continued to produce positive results, as it reported income from operations of $10.3 million, which compares with $10.7 million in the second quarter of 2004.
Corporate and Other
Corporate and Other recorded income from operations for the second quarter of $9.2 million, versus an operating loss of $20.7 million in the second quarter of 2004. Distribution losses were $9.8 million in the second quarter of 2005 versus $11.8 million a year ago. The reduction in distribution losses at Lincoln Financial Distributors reflects gains in wholesaler productivity and level fixed expenses, despite a nearly 20% increase in the number of wholesalers during the last year. Progress at Lincoln Financial Advisors reflects the implementation of their Consistency of Excellence model and the associated reduction in operating expenses. The second quarter of 2005 included a $23.5 million, after-tax, reduction in the deferred tax asset valuation allowance previously established in the company's Barbados subsidiary.
2005 Outlook
In the second half of 2005, Lincoln expects to deliver solid deposits and flows in variable annuities, employer-sponsored, and investment management businesses. A diverse product portfolio, investment performance, and strategic distribution relationships should continue to drive results.
For the retirement segment, Lincoln anticipates income from operations, as reported in the second quarter of 2005, to benefit from continued positive variable flows, excluding the period’s better than expected investment income items and adjusted for the equity markets.
Lincoln expects the life segment’s income from operations to build from results reported in the second quarter after factoring in greater than expected investment income items and assuming normalized mortality. Lincoln’s expectation for growth assumes a modest increase in life insurance in-force and is sensitive to the mix of business between permanent and term insurance. Lincoln continues to expect first year premiums for 2005 to equal or modestly outperform 2004 levels. Life sales continue to be pressured by competitive market conditions, while the effect of the revised regulatory reserving requirements on universal life sales is unclear at this time.
For investment management, Lincoln expects income from operations to build from levels experienced throughout 2004 after adjusting for the sale of DIAL and incorporating equity market impacts. As outlined in first quarter guidance, Lincoln anticipates $1 million per quarter, after tax, of additional expenses related to investment talent acquisitions.
Lincoln confirms its previous guidance for a modest improvement in distribution results over 2004 levels, recognizing these results remain sensitive to sales, especially life insurance, which traditionally increase in the later half of the year. The outlook for distribution assumes continued successful implementation of the new affiliation model at Lincoln Financial Advisors as well as continued wholesaler expansion and productivity gains at Lincoln Financial Distributors.
Lincoln confirms previous 2005 guidance for the UK segment income from operations, the reinsurance deferred gain amortization income, and the annual pre-tax interest expense. Lincoln’s equity market guidance and spread compression guidance remain unchanged from the sensitivity detailed in its 2004 10-K.
This outlook contains estimates that are forward-looking, and Lincoln’s actual experience in 2005 will almost certainly differ from many of the assumptions utilized in the outlook. 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.
Capital and Share Repurchase
As of June 30, 2005, the book value per share of Lincoln National Corporation common stock, excluding accumulated other comprehensive income, was $31.56, compared with $28.51 a year ago. Book value per share, including accumulated other comprehensive income, was $36.86, compared with $31.32 a year ago. In the second quarter of 2005, 1.58 million shares were repurchased at a total cost of $69 million.
Lincoln National Corporation will discuss the company’s second quarter results with investors in a conference call beginning at 11:00 a.m. (ET) on Tuesday, August 2, 2005. The company will also post its second quarter 2005 statistical supplement on its Web site, www.lfg.com.
Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. With headquarters in Philadelphia, Lincoln Financial Group has consolidated assets of $119 billion as of June 30, 2005, and had annual consolidated revenues of $5.4 billion in 2004. Through its wealth accumulation, retirement income and wealth protection businesses, the company provides annuities, life insurance, 401(k) and 403(b) plans, savings plans, mutual funds, managed accounts, institutional investment, and comprehensive financial planning and advisory services. For more information, please visit www.lfg.com.
Income (loss) from operations and ROE, 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. Income (loss) from operations represents after-tax results excluding, as applicable, realized gains or losses on investments and derivatives, cumulative effect of accounting changes, restructuring charges, reserve changes on business sold through reinsurance, gain on sale of subsidiaries and book of business and loss on early retirement of debt. The earnings used to calculate ROE, as used in the earnings release, are 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 operations in a manner that allows for a better understanding of the underlying trends in the company’s current business because the excluded items are either unpredictable and/or not related to decisions regarding the underlying businesses.
Certain statements made in this release and in other written or oral statements made by LNC or on LNC’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. LNC claims the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
The risks included here are not exhaustive. LNC’s annual reports on Form 10-K, current reports on Form 8-K and other documents filed with the Securities and Exchange Commission include additional factors which could impact LNC’s business and financial performance. Moreover, LNC operates 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 LNC’s business 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 undo reliance on forward-looking statements as a prediction of actual results. In addition, LNC disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
