Sunday, 19 May 2019
BREAKING NEWS

Lincoln Financial Group Reports Third Quarter 2018 Results and Announces Increase to Dividend

RADNOR, Pa.–(BUSINESS WIRE)–Lincoln Financial Group (NYSE: LNC) today reported net income for the third quarter of 2018 of $490 million, or $2.24 per diluted share available to common stockholders, compared to net income in the third quarter of 2017 of $418 million, or $1.87 per diluted share available to common stockholders. Third quarter adjusted income from operations was $510 million, or $2.34 per diluted share available to common stockholders, compared to $454 million, or $2.03 per diluted share available to common stockholders, in the third quarter of 2017.

The board of directors of Lincoln National Corporation approved raising the quarterly dividend on its common shares to $0.37 per share. The dividend represents a 12% increase over the prior-year level. The increased dividend on the common stock will be payable on February 1, 2019 to shareholders of record at the close of business on January 10, 2019.

“We delivered record adjusted operating EPS and a 14.5% ROE in the third quarter driven by double-digit earnings growth in nearly every business,” said Dennis R. Glass, president and CEO of Lincoln Financial Group. “Targeted management actions are further enhancing our results with annuity net flows close to turning positive, group results benefitting from our Liberty acquisition, strategic investments improving expense efficiencies and future growth opportunities, and capital management remaining ever important.”

         
  As of or For the   As of or For the

Quarter Ended
September 30

Nine Months Ended
September 30

(in millions, except per share data)   2018   2017   2018   2017
Net Income (Loss) $ 490   $ 418 $ 1,242   $ 1,264
Net Income (Loss) Available to Common Stockholders 490 418 1,236 1,269
Net Income (Loss) per Diluted Share Available to Common Stockholders 2.24 1.87 5.59 5.58
Revenues 4,264 3,511 11,893 10,588
Adjusted Income (Loss) from Operations 510 454 1,405 1,314
Adjusted Income (Loss) from Operations per Diluted Share Available to Common

Stockholders

2.34 2.03 6.33 5.80
Average Diluted Shares 218.5 223.9 221.1 227.4
ROE, Including AOCI (Net Income) 13.0% 10.3% 10.5% 10.9%
Adjusted Operating ROE, Excluding AOCI (Income from Operations) 14.5% 13.6% 13.5% 13.3%
Book Value per Share, Including AOCI $ 70.17 $ 74.31 $ 70.17 $ 74.31
Book Value per Share, Excluding AOCI     66.27     61.29     66.27     61.29

Operating Highlights – Third Quarter 2018 versus Third Quarter 2017

  • Adjusted operating EPS up 15%, or 21% excluding notable items
  • Pre-tax adjusted income from operations, up 6%
  • Annuity sales of $3.1 billion, up 61%
  • Retirement Plan Services net flows of $1.4 billion, up 219%
  • Life Insurance operating revenues of $1.8 billion, up 9%
  • Group Protection after-tax margin of 6.2%

Notable items in the current quarter included net unfavorable items of approximately $0.01 per share primarily related to the company’s annual review of DAC and reserve assumptions. The prior-year quarter included net favorable items of approximately $0.09 per share primarily related to tax adjustments.

Third Quarter 2018 – Segment Results

Annuities

The Annuities segment reported income from operations of $302 million, up 9% compared to the prior-year period driven by higher fee income from account value growth and a lower reported tax rate as a result of tax reform.

Total annuity deposits of $3.1 billion were up 61% from the prior-year quarter as both variable and fixed annuities benefitted from product and distribution expansion. Variable annuity sales were up 43% versus the prior-year quarter, and fixed annuity sales increased 132% over the same period.

Net outflows improved to $81 million compared to outflows of $841 million in the prior-year period driven by growth in deposits. When combined with favorable equity market performance, average account values of $139 billion increased 5% from the prior-year quarter.

The current quarter included net favorable items of $13 million related to the company’s annual review of DAC and reserve assumptions. The prior-year results included net favorable items of $15 million related to the company’s annual review of DAC and reserve assumptions.

Retirement Plan Services

Retirement Plan Services reported income from operations of $40 million, up 14% compared to the prior-year quarter. This increase is attributable to a lower reported tax rate as a result of tax reform, higher fee income and lower expenses.

Total deposits for the quarter of $3.3 billion were up 74% versus the prior-year period. First-year sales were up 194% versus the prior-year quarter, driven by growth in target markets combined with one large case, and recurring deposits increased 9% over the same period.

Net flows totaled $1.4 billion in the quarter compared to $442 million in the prior-year quarter. When combined with favorable equity market performance, average account values for the quarter increased 12% to $71 billion.

The current quarter included net unfavorable items of $2 million related to the company’s annual review of DAC and reserve assumptions. The prior-year results included net unfavorable items of $1 million related to the company’s annual review of DAC and reserve assumptions.

Life Insurance

Life Insurance reported income from operations of $176 million, up 45% versus the prior-year quarter. This increase is attributable to favorable mortality coupled with revenue growth and a lower reported tax rate as a result of tax reform.

Total Life Insurance sales were $167 million in the quarter, down 6% versus the prior-year period, but up 3% sequentially driven by growth in VUL sales.

Average Life Insurance in-force of $733 billion increased 4% over the prior-year quarter, and average account values of $50 billion were up 6% over the same period.

The current quarter included net unfavorable items of $20 million related to the company’s annual review of DAC and reserve assumptions. The prior-year results included net unfavorable items of $16 million related to the company’s annual review of DAC and reserve assumptions.

Group Protection

Group Protection income from operations was $63 million in the quarter versus $41 million in the prior-year period. This increase in earnings was primarily attributable to the acquisition of the Liberty Mutual group benefits business.

Underlying claim results remain favorable, which produced a total non-medical loss ratio of 74%. The loss ratio increased versus the prior-year quarter due to combining two blocks of business with different loss characteristics.

Group Protection sales were $158 million in the quarter, up 68%, primarily driven by the acquisition. Employee-paid sales represented 40% of total sales.

Non-medical earned premiums were $1.0 billion, up 102% from the prior-year quarter driven by both the acquisition and continued growth.

This quarter included net favorable items of $7 million related to the company’s annual review of reserve assumptions. The prior-year results included net favorable items of $3 million related to the recapture of previously reinsured business.

Other Operations

Other Operations reported a loss from operations of $71 million versus a loss of $20 million in the prior-year quarter. The decrease is attributable to tax items, funding the recent acquisition, and a planned increase in strategic digitization expenses.

There were no notable items in the current quarter. The prior-year results included net favorable items of $20 million related to tax adjustments.

Realized Gains and Losses / Impacts to Net Income

Realized gains/losses and impacts to net income (after-tax) in the quarter were predominantly driven by:

  • A $32 million gain from tax reform.
  • A $24 million variable annuity net derivative loss.
  • A $15 million loss from general account investments.
  • An $8 million acquisition and integration expense.

Unrealized Gains and Losses

The company reported a net unrealized gain of $2.4 billion, pre-tax, on its available-for-sale securities at September 30, 2018. This compares to a net unrealized gain of $7.2 billion at September 30, 2017, with the year-over-year decline primarily driven by an increase in interest rates.

Capital

The quarter’s average diluted share count of 218.5 million was down 2% from the third quarter of 2017, the result of repurchasing 5.9 million shares of stock at a cost of $400 million since September 30, 2017.

Book Value

As of September 30, 2018, book value per share, including accumulated other comprehensive income (“AOCI”), of $70.17 decreased 6% from a year ago. Book value per share, excluding AOCI, of $66.27 increased 8% from the prior-year period.

The tables attached to this release define and reconcile the non-GAAP measures adjusted income from operations, adjusted operating return on equity (“ROE”) and book value per share, excluding AOCI to net income, ROE and book value per share, including AOCI calculated in accordance with GAAP.

This press release may contain statements that are forward-looking, and actual results may differ materially, especially given the current economic and capital market 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.

For other financial information, please refer to the company’s third quarter 2018 statistical supplement available on its website, www.lfg.com/earnings.

Earnings Conference Call Information

Lincoln Financial Group will discuss the company’s third quarter results with investors in a conference call beginning at 10:00 a.m. Eastern Time on Friday, November 2, 2018. The conference call will be broadcast live through the company website at www.lfg.com/webcast. Please log on at least fifteen minutes prior to the call to register and download any necessary streaming media software. To participate via phone: (866) 394-4575 (U.S./Canada) or (678) 509-7536 (International). Ask for the Lincoln National Conference Call.

A replay of the call will be available by 1:00 p.m. Eastern Time on November 2, 2018 at www.lfg.com/webcast. Audio replay will be available from 1:00 p.m. Eastern Time on November 2, 2018 through 12:00 p.m. Eastern Time on November 9, 2018. To access the re-broadcast, dial: (855) 859-2056 (Domestic) or (404) 537-3406 (International). Enter conference code: 3590255.

About Lincoln Financial Group

Lincoln Financial Group provides advice and solutions that help empower people to take charge of their financial lives with confidence and optimism. Today, more than 17 million customers trust our retirement, insurance and wealth protection expertise to help address their lifestyle, savings and income goals, as well as to guard against long-term care expenses. Headquartered in Radnor, Pennsylvania, Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE:LNC) and its affiliates. The company had $262 billion in assets under management as of September 30, 2018. Lincoln Financial Group is a committed corporate citizen included on major sustainability indices including the Dow Jones Sustainability Index North America and FTSE4Good. Additionally, Lincoln is dedicated to upholding a diverse and inclusive organization and was recognized by Forbes as one of the Best Large Employers, Best Employers for Diversity, and Best Employers for Women in 2018 and received a perfect score of 100 percent in 2018 on both the Corporate Equality Index and Disability Equality Index. Learn more at: www.LincolnFinancial.com. Follow us on Facebook, Twitter, LinkedIn, and Instagram. Sign up for email alerts at http://newsroom.lfg.com.

Explanatory Notes on Use of Non-GAAP Measures

Management believes that adjusted income from operations, adjusted operating return on equity and adjusted operating revenues better 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. Management also believes that using book value excluding accumulated other comprehensive income (AOCI) enables investors to analyze the amount of our net worth that is primarily attributable to our business operations. 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.

For the historical periods, reconciliations of non-GAAP measures used in this press release to the most directly comparable GAAP measure may be included in this Appendix to the press release and/or are included in the Statistical Reports for the corresponding periods contained in the Earnings section of the Investor Relations page on our website: www.lfg.com/investor.

Definitions of Non-GAAP Measures Used in this Press Release

Adjusted income (loss) from operations, adjusted operating revenues and adjusted operating return on equity (including and excluding average goodwill within average equity), excluding AOCI, using annualized adjusted income (loss) from operations are financial measures we use to evaluate and assess our results. Adjusted income (loss) from operations, adjusted operating revenues and adjusted operating return on equity (“ROE”), as used in the earnings release, are non-GAAP financial measures and do not replace GAAP net income (loss), revenues and ROE, the most directly comparable GAAP measures.

Adjusted Income (Loss) from Operations

We exclude the after-tax effects of the following items from GAAP net income (loss) to arrive at adjusted 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”;
    • 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”);
    • Changes in the fair value of equities securities;
  • 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 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;
  • Income (loss) from discontinued operations;
  • Acquisition and integration costs related to mergers and acquisitions; and
  • Income (loss) from the initial adoption of new accounting standards, regulations and policy changes including the net impact from the Tax Cuts and Jobs Act.

Adjusted Operating Revenues

Adjusted 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 charges on business sold through reinsurance;
  • Revenue adjustments from the initial adoption of new accounting standards.

Adjusted Operating Return on Equity

Adjusted return on equity measures how efficiently we generate profits from the resources provided by our net assets.

  • It is calculated by dividing annualized adjusted income (loss) from operations 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.

Definition of Notable Items

Adjusted income (loss) from operations, excluding notable items is a non-GAAP measure that excludes items which, in management’s view, do not reflect the company’s normal, ongoing operations.

  • We believe highlighting notable items included in adjusted income (loss) from operations enables investors to better understand the fundamental trends in its results of operations and financial condition.

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.
  • 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.

Special Note

Sales

Sales as reported consist of the following:

  • MoneyGuard® – 15% of total expected premium deposits;
  • Universal life (UL), indexed universal life (IUL), variable universal life (VUL) – first-year commissionable premiums plus 5% of excess premiums received;
  • Executive Benefits – single premium bank-owned UL and VUL, 15% of single premium deposits, and corporate-owned UL and VUL, first-year commissionable premiums plus 5% of excess premium received;
  • Term – 100% of annualized first-year premiums;
  • Annuities – deposits from new and existing customers; and
  • Group Protection – annualized first-year premiums from new policies.
   

Lincoln National Corporation

Reconciliation of Net Income to Adjusted Income from Operations

 
(in millions, except per share data) For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2018   2017 2018   2017
 
Total Revenues $ 4,264 $ 3,511 $ 11,893 $ 10,588
 
Less:
Excluded realized gain (loss) (98) (97) (188) (229)
Am