Lincoln Financial Group Reports Third Quarter 2019 Results and Announces Increase to Dividend

Net loss EPS of $(0.83) and adjusted operating EPS of $(0.25)

Excluding notable items and alternative investment income, adjusted operating EPS of $2.22

BVPS, including AOCI, of $100.84, up 44%; BVPS, excluding AOCI, of $69.33, up 5%

Increased common stock dividend to $0.40, up 8%

RADNOR, Pa.–(BUSINESS WIRE)–Lincoln Financial Group (NYSE: LNC) today reported a net loss for the third quarter of 2019 of $161 million, or $(0.83) per diluted share available to common stockholders, compared to net income in the third quarter of 2018 of $490 million, or $2.24 per diluted share available to common stockholders. Third quarter adjusted loss from operations was $46 million, or $(0.25) per diluted share available to common stockholders, compared to adjusted income from operations of $510 million, or $2.34 per diluted share available to common stockholders, in the third quarter of 2018.¹

The current quarter’s adjusted operating results included net unfavorable notable items of approximately $403 million, or $2.00 per share, related to the company’s annual review of DAC and reserve assumptions, and approximately $94 million, or $0.47 per share, from underperformance in the alternative investment portfolio, largely driven by a write-down of a large private equity investment. The prior-year quarter included net unfavorable items of approximately $2 million, or $0.01 per share, primarily related to the company’s annual review of DAC and reserve assumptions.

“Appropriate adjustments to our assumptions, including interest rates, as part of our annual review, and fluctuations in key earnings drivers resulted in a significant impact on third quarter results,” said Dennis R. Glass, president and CEO of Lincoln Financial Group. “Importantly, we continue to see momentum in key strategic initiatives, including strong sales growth and further expense improvements.”

The board of directors of Lincoln National Corporation approved raising the quarterly dividend on its common shares to $0.40 per share. The dividend represents an 8% increase over the prior-year level. The increased dividend on common stock will be payable on February 1, 2020 to shareholders of record at the close of business on January 10, 2020.

Operating Highlights – Third Quarter 2019

• General and administrative expenses, net of amounts capitalized, decreased 3%
• Total Annuity sales of $3.5 billion, up 12%, with positive net flows of $253 million
• Retirement Plan Services net flows of $272 million
• Individual life insurance sales of $206 million, up 26%
• Group Protection sales of $242 million, up 53%

Third Quarter 2019 – Segment Results

Annuities

Annuities reported income from operations of $169 million compared to $302 million in the prior-year quarter. This decrease was primarily driven by impacts from the company’s annual review of DAC and reserve assumptions, which were unfavorable in the current quarter and favorable in the prior-year quarter. Not including the impact from the review, the decline in income from operations was driven by a decrease in account values from the Athene reinsurance transaction completed in the fourth quarter of 2018 and impacts from underperformance in the alternative investment portfolio.

Total annuity deposits of $3.5 billion were up 12% from the prior-year quarter. Variable annuity sales were up 11% versus the prior-year quarter and fixed annuity sales were up 15% over the same period.

Net flows were $253 million in the quarter compared to net outflows of $81 million in the prior-year period. Average account values of $134 billion decreased 3% over the prior-year quarter. Not including the Athene reinsurance transaction completed in the fourth quarter of 2018, average account values would have increased 2% over the prior-year quarter.

The current quarter included net unfavorable items of $93 million related to the company’s annual review of DAC and reserve assumptions. The prior-year results included net favorable items of $13 million related to the company’s annual review of DAC and reserve assumptions.

Retirement Plan Services

Retirement Plan Services reported income from operations of $44 million compared to $40 million in the prior-year quarter with the increase driven by expense management.

Total deposits for the quarter were $2.2 billion compared to $3.3 billion in the prior-year quarter with the decline being driven by one large case in the prior year. Recurring deposits increased 12% over the same period.

Net flows of $272 million combined with equity market growth resulted in average account values of $74 billion, up 4%.

There were no notable items in the current quarter. The prior-year results included net unfavorable items of $2 million related to the company’s annual review of DAC and reserve assumptions.

Life Insurance

Life Insurance reported a $245 million loss from operations compared to income from operations of $176 million in the prior-year quarter. This decrease was primarily driven by impacts from the company’s annual review of DAC and reserve assumptions. Not including the impact of the review, the decline in income from operations was driven by underperformance in the alternative investment portfolio and unfavorable mortality relative to the prior-year quarter.

Total Life Insurance sales were $234 million versus $167 million in the prior-year quarter. This increase was driven by 26% growth in individual life products coupled with strong executive benefits sales.

Total Life Insurance in-force of $800 billion grew 9% over the prior-year quarter, and average account values of $52 billion increased 4% over the prior-year quarter.

The current quarter included net unfavorable items of $320 million related to the company’s annual review of DAC and reserve assumptions. The prior-year results included net unfavorable items of $20 million related to the company’s annual review of DAC and reserve assumptions.

Group Protection

Group Protection income from operations was $61 million in the quarter compared to $63 million in the prior-year period. The decrease in earnings was attributable to underperformance in the alternative investment portfolio, which was partially offset by expense savings from the acquisition.

The total loss ratio was 74% in the current quarter and remained relatively flat year over year as the increase in favorable impacts from the annual review of reserve assumptions were largely offset by higher claims experience.

Group Protection sales were $242 million in the quarter, up 53% versus the prior-year quarter driven by strong growth in both life and disability products. Employee-paid sales were 42% of total sales in the quarter.

Insurance premiums were $1 billion in the quarter, up slightly from the prior-year period driven by continued growth.

The current quarter included net favorable items of $10 million related to the company’s annual review of reserve assumptions. The prior-year results included net favorable items of $7 million related to the company’s annual review of reserve assumptions.

Other Operations

Other Operations reported a loss from operations of $75 million versus a loss of $71 million in the prior-year quarter.

There were no notable items in the current quarter or the prior-year quarter.

Realized Gains and Losses / Impacts to Net Loss

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

• A $33 million loss on early extinguishment of debt.
• A $31 million acquisition and integration expense.
• A $22 million loss from variable annuity net derivative results.
• A $20 million loss from indexed annuity forward-starting options.

Unrealized Gains and Losses

The company reported a net unrealized gain of $11.5 billion, pre-tax, on its available-for-sale securities at September 30, 2019. This compares to a net unrealized gain of $2.4 billion at September 30, 2018, with the year-over-year increase primarily driven by lower treasury rates.

Capital

The quarter’s average diluted share count of 201.6 million was down 8% from the third quarter of 2018, the result of repurchasing 17.8 million shares of stock at a cost of $1.1 billion since September 30, 2018.

Book Value

As of September 30, 2019, book value per share, including AOCI, increased 44% from the prior-year period to $100.84. Book value per share, excluding AOCI, increased 5% from the prior-year period to $69.33.

The tables attached to this release define and reconcile the non-GAAP measures adjusted income from operations, adjusted operating ROE and BVPS, excluding AOCI, to net income, ROE and BVPS, including AOCI, calculated in accordance with GAAP. The tables also include a reconciliation of adjusted operating EPS excluding notable items and alternative investment income to net income EPS.

This press release may contain statements that are forward-looking, and actual results may differ materially. Please see the Forward Looking Statements – Cautionary Language at the end of this release for 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 2019 statistical supplement available on its website, www.lfg.com/earnings.

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 Thursday, October 31, 2019. 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 October 31, 2019 at www.lfg.com/webcast. Audio replay will be available from 1:00 p.m. Eastern Time on October 31, 2019 through 12:00 p.m. Eastern Time on November 7, 2019. To access the re-broadcast, dial: (855) 859-2056 (Domestic) or (404) 537-3406 (International). Enter conference code: 6548798.

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 $261 billion in assets under management as of September 30, 2019. Lincoln Financial Group is a committed corporate citizen included on major sustainability indices including the Dow Jones Sustainability Index North America and FTSE4Good. Dedicated to diversity and inclusion, Lincoln was recognized by Forbes as one of the Best Large Employers, Best Employers for Diversity, and Best Employers for Women. Lincoln also earned perfect 100 percent scores on the Corporate Equality Index and the 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 income), adjusted operating return on equity, adjusted operating revenues, and adjusted operating EPS 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 presentation to the most directly comparable GAAP measure may be included in this Appendix to the presentation 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 presentation, 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

Adjusted income (loss) from operations is GAAP net income (loss) excluding the after-tax effects of the following items, as applicable:

• Realized gains and losses associated with the following (“excluded realized gain (loss)”):
  • Sales or disposals and impairments of securities;
  • Changes in the fair value of derivatives, embedded derivatives within certain reinsurance arrangements and trading securities (“gain (loss) on the mark-to-market on certain instruments”);
  • Changes in the fair value of the derivatives we own to hedge our guaranteed death benefit (“GDB”) riders within our variable annuities;
  • Changes in the fair value of the embedded derivatives of our guaranteed living benefit (“GLB”) riders reflected within variable annuity net derivative results accounted for at fair value;
  • Changes in the fair value of the derivatives we own to hedge our GLB riders reflected within variable annuity 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 at fair value (“indexed annuity forward-starting options”); and
  • Changes in the fair value of equity securities;

• Changes in reserves 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;
• Gains (losses) 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);
• Revenue adjustments from the initial adoption of new accounting standards;
• Amortization of deferred front-end loads (“DFEL”) arising from changes in GDB and GLB benefit ratio unlocking; and
• Amortization of deferred gains arising from reserve changes on business sold through reinsurance.

Adjusted Operating Return on Equity

Adjusted operating 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:

• Annuities and Retirement Plan Services – deposits from new and existing customers;
• 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; and
• Group Protection – annualized first-year premiums from new policies.

Contacts

Chris Giovanni

(484) 583-1793

Investor Relations

[email protected]

Scott Sloat

(484) 583-1625

Media Relations

[email protected]

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