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We are currently in our “quiet period” regarding second quarter results, which means that we are currently
analyzing our results for the second quarter 2008. Therefore, we will not be discussing our second
quarter results, which we will release on July 29, 2008. You should not rely on the information in this
presentation as being indicative of actual second quarter results, and we do not hereby undertake any
obligation to provide such information during this presentation or to update such information except
through our public earnings release.
analyzing our results for the second quarter 2008. Therefore, we will not be discussing our second
quarter results, which we will release on July 29, 2008. You should not rely on the information in this
presentation as being indicative of actual second quarter results, and we do not hereby undertake any
obligation to provide such information during this presentation or to update such information except
through our public earnings release.
Important Note
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This presentation and certain oral statements made on LNC’s behalf may contain information that
includes or is a “forward-looking statement” within the meaning of the Private Securities Litigation Reform
Act of 1995 (“PSLRA”). A forward-looking statement is a statement that does not strictly relate to a
historical fact. A forward look statement 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.
includes or is a “forward-looking statement” within the meaning of the Private Securities Litigation Reform
Act of 1995 (“PSLRA”). A forward-looking statement is a statement that does not strictly relate to a
historical fact. A forward look statement 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.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ
materially from the results contained in the forward-looking statements, and include but are not limited to,
legislative and regulatory changes and proceedings, changes in interest rates, sudden or prolonged
declines in the equity markets, deviation in actual experience regarding future persistency, mortality,
morbidity, interest rates or equity market returns from Lincoln’s assumptions used in pricing its products,
in establishing related insurance reserves, and in the amortization of intangibles that may result in an
increase in reserves and a decrease in net income; and changes in general economic or business
conditions. These risks and uncertainties, as well others, are described in LNC’s recent Forms 10-K, 10-
Q, 8-K, and other documents filed with the Securities and Exchange Commission. 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.
materially from the results contained in the forward-looking statements, and include but are not limited to,
legislative and regulatory changes and proceedings, changes in interest rates, sudden or prolonged
declines in the equity markets, deviation in actual experience regarding future persistency, mortality,
morbidity, interest rates or equity market returns from Lincoln’s assumptions used in pricing its products,
in establishing related insurance reserves, and in the amortization of intangibles that may result in an
increase in reserves and a decrease in net income; and changes in general economic or business
conditions. These risks and uncertainties, as well others, are described in LNC’s recent Forms 10-K, 10-
Q, 8-K, and other documents filed with the Securities and Exchange Commission. 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 presentation.
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 presentation.
Safe Harbor
* Represents account values of riders on individual annuities as of March 31, 2008
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Rider | Positioning | Rider Fee | Restrictions | Account Value* |
Guaranteed Withdrawal Benefits | ||||
SmartSecurity 5 year SmartSecurity 1 year (Lifetime feature) | Protection feature with upside opportunity from market performance. Protection feature with upside opportunity from market performance. | 45 bps (max 95 bps, change possible on reset after year 5) 65 bps (max 150 bps, change possible on reset after year 10) | Withdrawal rate limited to 7%. Withdrawal rate limited to 5%. | $18.1 billion |
Lifetime Income Advantage Plus option | Protection feature with upside from market performance and a guaranteed enhancement (5%) when withdrawals are delayed. 7-year money back option with Plus. | 75 bps (max 150 bps, change possible on reset) 90 bps for Plus option (max 150bp, possible on reset) | Withdrawal rate limited to 5%; “nursing home” provision can double withdrawal. Has investment restrictions. Enhancement encourages delay in withdrawals. | $155 million |
Guaranteed Income Benefits | ||||
i4LIFE Advantage with Guaranteed Income Benefit | Immediate income solution with downside protection. | 40 bps (for i4LIFE) 50 bps (max 150 bps for Guaranteed Income Benefit) | Less behavior risk versus a withdrawal benefit - know when and how much income will come out. | $5.6 billion |
4Later | Protection feature with upside from market performance and a guaranteed enhancement (every 3 years, 15%) when income is delayed. | 50 bps (max 150 bps, change possible on reset after year 3) | i4LIFE is the income solution. Qualifying for the roll-up feature requires policyholder to delay income. | $3.0 billion |
Current VA Living Benefit Rider Designs
55%
14%
31%
VA Account Value
VA Deposits
$2.5
$2.7
24%
43%
33%
31%
44%
25%
Account Value = $58 billion*
($ billions)
* As of March 31, 2008
No Living Benefit
Guaranteed Withdrawal Benefits
Guaranteed Income Benefits
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Individual Variable Annuity
Living Benefits Profile
Living Benefits Profile
Years
5
VA Living Benefit Pricing
Variables driving potential living benefit claims:
Product features - benefits, restrictions, etc.
Policyholder behavior - withdrawal rates, resets, lapses, mortality, etc.
Capital markets - interest rates, equity volatility and correlations
The same considerations used to calculate Net Valuation Premium
* Expected Run Rate = ongoing cost of the hedge program representing option premium amortization and implied borrowing costs on hedge instruments.
Increase in Living Benefit Reserve
Net Income Impact Above/Below Expected Run Rate*
($ millions)
1Q
2005
2005
1Q
2006
2006
1Q
2007
2007
1Q
2008
2008
-$100
$0
$100
$200
$300
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VA Living Benefit Hedging
Historically focused on protecting against GAAP income movements
SFAS 157 created disconnect between GAAP and economics
Greater focus on hedging economics going forward
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VALB Rider Fees
- Net Valuation Premiums
Income from Operations
Revised VA Living Benefit Income from
Operations
Operations
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Financial Statement Line Items | Current Financial Reporting | Revised Financial Reporting | |
Income from Operations | Expense assessments | Rider fees | Rider fees - Attributed fees |
Operating realized gains (losses) | N/A | Attributed fees - NVP | |
Benefits | “Hedge performance” | N/A | |
VALB operating margin | Rider fees +/- “Hedge performance” | Rider fees - NVP | |
Net Income | Realized gains (losses) | N/A | NVP +/- “Hedge performance” |
SFAS 157 Attributed Fee Definition: The Net Valuation Premiums (NVP) plus a
margin for risk/profit, including a non-performance risk factor related to the credit quality
of the “selling” company, that a “willing buyer” would apply to assume the risk for the
current period issues
margin for risk/profit, including a non-performance risk factor related to the credit quality
of the “selling” company, that a “willing buyer” would apply to assume the risk for the
current period issues
VALB Financial Statement Presentation
SFAS 157
SFAS 157
Mechanics - - Current to Revised:
Attributed fee calculated under SFAS 157 and recorded in realized gains (losses)
The difference between NVP and attributed fee pulled back into income from
operations and recorded in “operating realized gains and losses”
operations and recorded in “operating realized gains and losses”
“Hedge performance” moved from income from operations to realized gains (losses)
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($ millions)
1Q07
$ 121
5
0
(1)
4
$ 117
2Q07
$ 130
4
0
3
7
$ 123
3Q07
$ 107
(15)
0
(4)
(19)
$ 126
4Q07
$ 90
(24)
0
(5)
(29)
$ 119
1Q08
$ 129
18
(3)
(3)
12
$ 117
Reported Income from Operations:
Changes in Definition:
VALB
GMDB
Indexed Annuities
Revised Income From Operations:
Individual Annuities Segment Reporting
Change In Income From Operations:
VALB - hedge performance moved to realized gains (losses): Rider fees less
net valuation premium = VALB operating margin.
net valuation premium = VALB operating margin.
Guaranteed Minimum Death Benefits (GMDB) - hedge performance moved
to realized gains/losses: Rider fees less benefits and hedge costs = GMDB
operating margin.
to realized gains/losses: Rider fees less benefits and hedge costs = GMDB
operating margin.
Indexed Annuities (IA) - forward starting option valuation moved to realized
gains/losses: Spreads and net option values = IA operating margin.
gains/losses: Spreads and net option values = IA operating margin.
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Disclosures
Expanded disclosure on realized gains/losses:
VALB and GMDB hedge performance
Indexed Annuity Forward starting option impact.
Expanded disclosure on components of attributed fee
Expanded disclosure on types of guarantees sold and
account value by VALB type.
account value by VALB type.