Lincoln National Corporation · NYSE:LNC
Lincoln National — Investor Day (November 2008)
68 slides from Lincoln National's investor day presentation, Nov 19, 2008
Slide 1: Evolution of Industry's Business Model: Before Crisis versus After Crisis
Business Model Before Crisis Business Model After Crisis Evolution of Industry’s Business Model “Before Crisis” versus “After Crisis” Market Crisis
Slide 2: Lincoln Financial's Positioning
Expense management Focus on capital preservation Review of variable annuity product pricing and design Monitoring asset quality Lincoln Financial’s Positioning Retirement opportunity remains compelling Multi-channel distribution franchise, driven by value of advice Balanced business model Discipline
Slide 3: Diverse and Balanced Earnings Mix
Retirement Solutions 42% LNUK 3% Spreads 40% Mortality & Morbidity 30% Asset Base 30% Investment Mgmt. 3% Earnings* Margins** * Based on LFG after-tax 3Q 2008 income from operations including notable items as defined in the earnings press release, excluding Other Operations ** Based on 3Q 2008 pre-t
Slide 4: Centralized, Advice-Driven Distribution
W/R BANK MGA TPA IP INSURANCE SOLUTIONS Group Protection INSURANCE SOLUTIONS Life Insurance RETIREMENT SOLUTIONS Individual Annuities RETIREMENT SOLUTIONS Defined Contribution Note: Wholesaler and planner counts as of September 30, 2008. LFD Wholesaler count includes 85 DC wholesalers INVESTMENT MAN
Slide 5: Capital: Strong Position and Actionable Levers
* Based on estimated excess capital position at September 30, 2008, of approximately $500 million “The Topic” - Capital Strong capital position entering 2008 and 4Q Excess capital* + Actionable capital levers = ~$1.5 Billion Dividend reduction Cost control Reinsurance strategies Corporate assets Tak
Slide 6: Cornerstones of Our Success
Product Innovation and Responsiveness Insurance Solutions Retirement Solutions Operational Effectiveness Comprehensive Risk Management Distribution Depth and Breadth Cornerstones of Our Success Underlying Principles Remain the Same
Slide 7: Insurance Solutions: Life Insurance and Group Protection
Total Life Sales UL Sales LTD Contracts # 3 # 1 # 3 Life Insurance Deep distribution relationships: Top 3 manufacturer in majority of strategic partners* Industry leading underwriting “Back to Basics” Term, UL and MoneyGuard Group Protection Strong position in <500 lives New distribution model payin
Slide 8: Retirement Solutions: Annuities and Defined Contribution Market Leader
Individual VA Sales Individual Fixed Annuities 403b Plan Assets # 5 # 10 # 6 Defined Contribution Strong new business pipeline; gaining market share 403(b)e Sure and Director Regulatory catalysts Annuities Market share gain in ’08 Increased VA shelf space: #1 VA provider in 6 of 10 top partners* Env
Slide 9: Variable Annuity Environment: Living in the Tail
* As of October 31, 2008 ** Data reflects S&P implied volatility for 5-year at-the-money options. Increase represents the October 2008 average versus the 3-year average from 09/30/05-09/30/08 The “Tail” S&P 500 down 34% YTD* Implied volatility in October up 50% from averages** Stochastic Scenarios E
Slide 10: Third Quarter Earnings Drivers
$352mm $337mm Life Insurance Group Protection Annuities Defined Contrib. Investment Mgmt. UK Other Operations Avg. diluted shares 272.5 257.6 Earnings Drivers * See appendix at the end of this presentation for a reconciliation of income from operations to net income and a schedule of notable items *
Slide 11: October Equity Markets
S&P 500 Dow Jones S&P Financials Equity Market Returns December 31, 2007 - October 31, 2008 Equity Market Quarterly DAC Corridor September 2004 - September 2008 S&P 500 down 17% in October: Retirement Solutions account values down ~$11 billion Estimated DAC unlocking of $200-$300 million, after-tax
Slide 12: Liquidity Position
CP: $300m issued under $1b program $1 billion of unused and multi-year bank line capacity Joined Federal Treasury CP Funding Program Next maturity of $500m due April 2009 $3 billion of liquidity No meaningful change in product lapse rates FHLB: $250m of borrowings under $1b program Sec Lending: $500
Slide 13: Asset Quality and Unrealized Losses
General account placed in a defensive position Spreads continue to widen in October OTTI and “intent to hold” dictates impairment RMBS/CMBS reasonably well positioned Financial concentration helped by global capital infusion Mortgage metrics are solid heading into slowdown Gross Unrealized Losses $4
Slide 14: VA Capital and Reserving
AG 34 and 39 VACARVM in 2009 C3 Phase 2 LNC Lincoln Life Captive Re Premium Reserve Credit Captive Reduces Statutory Volatility Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 * Expected Run Rate = ongoing cost of the hedge program representing option premium amortization and implied borrowing costs on hedg
Slide 15: Statutory Capital Conditions
Built-up strong capital position heading into 2008 October markets (CARVM) reduced RBC by 20-25 points Potential negatives - investment losses and annual cash flow testing Potential positives - securitization, cost saves, reduced new business strain * Represents statutory results of Lincoln National
Slide 16: Rating Agencies
Lincoln’s Position: Communicate proactively and transparently Target AA category Relative ratings critical to competitive positioning Agency Financial Strength Holding Company Liquidity Standard & Poor’s AA “Stable” A+ “Negative” A-1 Moody’s Aa3 “Stable” A3 “Stable” P-2 Fitch AA “Stable” A “Stable”
Slide 17: Capital Strategy
Lincoln’s Position: Strong RBC and >$500m of excess capital at 9-30-08 Suspended share repurchases, cut dividend, controlling costs $1 billion in levers available, filed TARP application Monitoring conditions and communicating with agencies Reduced Dividend Cost control & scaling back investment Res
Slide 18: Net Income to Operating Earnings Reconciliation
Less: Excluded realized gain (loss) Income (loss) from reserve changes (net of related amortization) on business sold through reinsurance Income (loss) from discontinued operations Income from Operations Net Income Income from Operations (Excluding accumulated other comprehensive income) Net Income
Slide 19: Schedule of Notable Items 3Q 2008
Reported DAC & Model Adjustments Tax-related Items Seed Capital Expenses Other 42 137 -25 3 -2 -6 27 5 -3 -3 12 -2 4 -38 131 -12 21 4 3Q 2008 Income From Operations Schedule of Notable Items Retirement Solutions Annuities Insurance Solutions Defined Contrib. Life Insurance Group Protection Invest. M
Slide 20: Schedule of Notable Items 3Q 2007
Reported DAC Unlocking & Model Adj. Tax-related Items Expenses Loss Ratio vs. Expected Other 126 7 -1 -3 41 -4 2 -1 183 14 5 -4 33 8 10 2 -5 -50 -5 -3 22 1 3Q 2007 Income From Operations Schedule of Notable Items Retirement Solutions Annuities Insurance Solutions Defined Contrib. Life Insurance Grou
Slide 21: Market Perspective
Index Spreads ABX CMBX Market Perspective
Slide 22: Portfolio Allocation
All data presented as of September 30, 2008, at amortized cost; Other includes equity securities, policy loans, derivative instruments, and other investments; CMBS includes Commercial Real Estate CDO; RMBS includes CMOs, Mortgage Pass Throughs, Home Equity ABS Ratings are based on Bonds (Corporates,
Slide 23: Moved into a Defensive Position
* AFS securities only; High yield defined as BB and below ** Excludes Lincoln UK; AFS securities only; Book value; Ratings represent the middle rating of the three rating agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q High Yiel
Slide 24: Residential MBS and Mortgage-Related ABS
Prime/Agency 65% Alt-A 13% Subprime 7% Residential MBS and Mortgage-Related ABS Prime/Non- Agency 15%
Slide 25: Commercial Mortgage-Backed Securities
2004 & Prior 66% 2005 17% 2007 6% AAA 66% AA 16% A 11% CMBS = $2.6 billion* BB and below 1% Commercial Mortgage-Backed Securities 2006 11% BBB 6%
Slide 26: Corporate Bonds
All data presented as of September 30, 2008, at amortized cost; AFS securities only; Ratings represent the middle rating of the three rating agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q A 40% BB and below 7% Corporate Bonds $
Slide 27: Corporate Bonds Exposure to Financials
Data as of September 30, 2008 at amortized cost; AFS securities only Top 20 Financials $mm % of Inv. Assets General Electric 236 0.3% Regions Financial Corp 213 0.3% JPMorgan Chase 203 0.3% Goldman Sachs Group Inc 198 0.3% Wachovia Corp 196 0.3% Bank Of America Corporation 190 0.3% HSBC Holdings 171
Slide 28: Credit Linked Notes
Attachment / Detachment Points Est # of Defaults with No Loss to Tranche Est # of Defaults with 100% Loss Actual # Defaults to Date CDS Recovery Tranche Rating Rating Agency Original # of Issuers Average Quality of Underlying Issues Maturity 4.77%-5.78% 10 14 1 Floating A+ S&P 125 A- 12/20/16 1.48%-
Slide 29: Gross Unrealized Losses
* Represents only those securities in an unrealized loss position **Represents only those securities with a market value less than 70% of book value for greater than 12 months ***Corporates include Emerging Markets Debt and Municipals; CMBS includes Commercial Real Estate CDOs CLN Other ABS/CDO 2005
Slide 30: Mortgage Loan Portfolio
Excludes residential loans (7 loans totaling $198,080) * Net of GAAP premium/discount, default charges & service fees All data as of September 30, 2008, excludes Lincoln UK Mortgage Loan Portfolio 1,368 Loans Principal Balance of $7.6 Billion Wtd. Avg. Gross Coupon of 6.47% Wtd. Avg. Net Coupon of 6
Slide 31: Mortgage Loan Portfolio
* Weighted Averages All data as of September 30, 2008, excludes Lincoln UK Originations 2006 2007 YTD 9/30/08 Loans Closed 113 143 96 Total Amount ($ million) 752 1,123 703 Debt Service Coverage* 1.39x 1.39x 1.41x Loan-to-Value* 64% 63% 59% Portfolio Principal Balance by LTV Mortgage Loan Portfolio
Slide 32: Mortgage Loan Portfolio
All data as of September 30, 2008, excludes Lincoln UK Mortgage Loan Portfolio # of Loans
Slide 33: Summary
Summary Challenging market conditions Shift towards higher quality and away from riskier credits Well-diversified portfolio Long-term focus and strong credit skills allow us to take advantage of short-term opportunities
Slide 34: Mortgage Loan Portfolio by Region
ACLI data as of June 30, 2008 Life Companies with Portfolios over $5B Based on Principal Balance Excludes Residential All data is as of September 30, 2008 (unless noted otherwise); excludes Lincoln UK ACLI Lincoln Mortgage Loan Portfolio by Region
Slide 35: Mortgage Loan Portfolio by Type
ACLI data as of June 30, 2008 Life Companies with Portfolios over $5B Based on Principal Balance Excludes Residential All data is as of September 30, 2008 (unless noted otherwise); excludes Lincoln UK ACLI Lincoln Mortgage Loan Portfolio by Type
Slide 36: We Believe in the Retirement Income Opportunity
We Believe… In the Retirement Income Opportunity Responsibility and risk transferred to individuals In the long term growth opportunity of equities We understand the risk Mortality/Longevity Policyholder Behavior Other claims drivers The industry value proposition will evolve
Slide 37: Living Benefit Suite & Positioning
Lincoln SmartSecurity SM Advantage i4LIFE ® Advantage with GIB Age 35 45 55 65 75 85 95 Protection feature with upside opportunity from market performance. Immediate income solution with downside protection. Protection feature with upside from market performance and a guaranteed enhancement (5%) whe
Slide 38: Competitive Positioning
Roll-up: Increases the Guaranteed Amount (starts at the initial deposit) Double: Increases Guaranteed Amount, generally at age 70 or after 10 years, doubles initial deposit Reset: When Account Value exceeds roll-up value, establishes new Guaranteed Amount Fee Roll-up & Method Double Reset Lincoln 75
Slide 39: Living Benefit Risk Control Features
Investment Restrictions Frequency of Step-Up Incentives to Delay Income Living Benefit Risk Control Features Charge Basis Ability to Increase Charge
Slide 40: Individual Variable Annuity Living Benefits Profile
* As of September 30, 2008; Includes fixed portion of variable annuities 50% 16% $3.0 $2.6 31% 27% 20% 22% Account Value = $54 billion* ($ billions) No Living Benefit Other Guaranteed Withdrawal Benefits Guaranteed Income Benefits 5% Lifetime Income Advantage 43% Individual Variable Annuity Living B
Slide 41: Individual Variable Annuity Guaranteed Death Benefits Profile
1% 33% 13% Account Value = $54 billion* * As of September 30, 2008; Includes fixed portion of variable annuities 9% 1% 39% <60% 60-80% 80-100% 100-130% >130% Individual Variable Annuity Guaranteed Death Benefits Profile GMDB by Type 46% 7% Distribution by AV / DB 51%
Slide 42: Product Profitability: Current Market Conditions
NVP vs Fees for a sample product Conditions are changing rapidly - leading to swings in profitability for new issues Sales Weighted (2007-08) 6/30/08 9/24/08 10/17/08 LSSA IRR 24-25% 18-19% 13-14% 4-5% Charge = 65 NVP 51 70 81 98 LLINC IRR 11-12% 16-17% 12-13% -(2-3)% Charge = 75 NVP 90 81 92 115 Pr
Slide 43: In the Moneyness for GMWB
As of 9/30/08, most of our GMWB business was “in the money”, defined as: AV / Guar Amt <100% No account value growth 100% immediate benefit utilization No lapse or mortality “In the Moneyness” for GMWB Stressed Illustration of Claim Patterns
Slide 44: Liabilities and Hedge Assets
GAAP * Represents 09/30/2005 - 09/30/2008 4Q07 3Q07 1Q08 2Q08 3Q08 SAP Target DB Reserves Hedge 9/30/08 Oct Avg. 3yr Avg.* 10 yr Implied Vol 30.1 33.0 24.8 30 yr Swap Spread 39.3 14.4 53.6 Liabilities and Hedge Assets Target is based on current market assumptions GAAP reserve is Target minus Non- Pe
Slide 45: Risk Transfer Spectrum
Risk Transfer Spectrum Risk Transfer A long term view Not a “callable” liability Accumulate assets to fund future claims Product features drive risk transfer needs Under current design, extreme volatility may lead to breakage Strong governance No hedge 3-Greek Reinsurance Structured Hedges Delta Onl
Slide 46: Hedging the Economics: Assets and Liabilities
Not shown on chart DC $.001 billion $1.0 Billion $0.93 Billion $0.14 Billion Living Benefits Death Benefits Put Options Variance Swaps Interest Rate Swaps Assets and Liabilities As of September 30, 2008 Hedging the economics LB: SFAS 133 DB: SOP 03-1 Significant difference between hedge target and S
Slide 47: Living Benefit Hedge Performance
Living Benefit Hedge Performance 3Q08 breakage of $330 million $150 million loss from funds basis risk (4.5% under index) $125 million of breakage on 4 days**: Hedge target increased $1 billion vs $680 million for entire quarter Vega shortfall at end of 3Q; not moving to cover October breakage more
Slide 48: Counterparties
As of September 30, 2008 Counterparties 13 Counterparties Maximum gross exposure of $216 million Maximum net exposure of $40 million All rated A+ and above $1.1 billion of gross exposure; $0.3 billion of exposure net of collateral Thresholds for posting collateral are negotiated and depend on size a
Slide 49: Captive Reinsurance
Captive Re LNL LNC Captive Reinsurance Allows for clearer view to risk economics Provides capital stability VACARVM requires review of structure Regularly monitor captive capital and economics Premiums/Risk Reserve Credit
Slide 50: Delaware Investments: Our Focus Areas
6. Increase segment operating margins 4. Drive organic growth 5. Continually improve efficiency 3. Deliver superior investment results Delaware Investments Our Focus Areas 2. Implement effective and consistent investment processes
Slide 51: Financial Update: Year-to-Date September 30, 2008
Financial Update Year-to-Date September 30, 2008 Operating Income of $32.4 million compared to September 2007 of $49.3 million YTD revenue $97m below YTD 07 primarily driven by market declines and sale of institutional fixed income business in October 2007 YTD earnings include a loss on seed capital
Slide 52: Financial Update: Historical Financials
Total Revenue ($m) Total Expenses ($m) Financial Update Historical Financials
Slide 53: Financial Update: Assets Under Management
AUM by Investment Type AUM by Client Type Equity Retail Fixed Income Institutional General Account Financial Update Assets Under Management 9/30/08 AUM: $130.1 billion
Slide 54: Financial Update: Organic Growth
Indicates transfer of JP Gen Acc AUM 1 - defined as (net flows / beginning assets excluding General Account) Financial Update Organic Growth
Slide 55: Free Cash Flow to Parent
= September 2007 year-to-date amount of $45.0 million Free Cash Flow to Parent
Slide 56: Lipper Performance: Percent of Fund Assets in Top Half
All data as of 9/30/08 Domestic Equity International / Global Equity Taxable Fixed Income Tax-Free Fixed Income Lipper Performance Percent of Fund Assets by Style in Top Half of Lipper Universes
Slide 57: Lipper Performance: Percent of Funds in Top Half
All data as of 9/30/08 Domestic Equity International / Global Equity Taxable Fixed Income Tax-Free Fixed Income Lipper Performance Percent of Funds by Style in Top Half of Lipper Universes
Slide 58: Centralized, Advice-Driven Distribution
Note: Wholesaler counts as of September 30, 2008; Wholesaler count includes 85 DC wholesalers, excludes 143 Group Protection wholesalers W/R BANK MGA TPA IP RETIREMENT SOLUTIONS INSURANCE SOLUTIONS INVESTMENT MANAGEMENT Centralized, Advice-Driven Distribution LINCOLN FINANCIAL DISTRIBUTORS 800+ Whol
Slide 59: Distribution Depth and Breadth: Sales by Channel
Variable Annuities Individual Life Year-To-Date September 30, 2008 Wire MGA Bank Independent Planner Distribution Depth and Breadth Sales by Channel
Slide 60: Scale of Wholesaling
* Based on total count of 844 as of September 30, 2008 Data includes external wholesalers, internal wholesalers, and sales management Number of Wholesalers Wholesalers by Product* Variable Annuities 47% Investments 9% MoneyGuard 10% Fixed Annuities 3% Defined Contribution 10% Scale of Wholesaling Li
Slide 61: Wholesaler Productivity
DC Wholesaler Tenure As of September 30, 2008 2+ Years 47% <1 Year 34% 2+ Years 31% <1 Year 40% Wholesaler Productivity 1-2 Years 19% 1-2 Years 29% Recruiting Retaining
Slide 62: Strategic Partner Focus: What We Mean to Them
#1 #1 #1 #1 #3 #4 #3 #3 #3 #1 #3 #2 Edward Jones Smith Barney UBS LFN Merrill Lynch Morgan Stanley * Based on year-to-date sales as of August 31, 2008 ** Seven possible product categories 6 6 7 7 7 6 Strategic Partner Focus What We Mean to Them…. Strategic Partner VA Life Sales Rankings* # of Produc
Slide 63: Strategic Partner Focus
* Based on year-to-date September 30, 2008, annualized sales Strategic Partner Focus Our top 6 partner firms each sell over $1 billion of Lincoln product annually* Edward Jones LFN LPL Merrill Lynch Smith Barney UBS
Slide 64: Growth Opportunities
Growth Opportunities Deepen Current Relationships Market share with Existing Platform Introduction of other Lincoln Capabilities New Distributors Edward Jones - ChoicePlus VA WAMU - - Life & MoneyGuard Sun Trust - Annuities Wells Fargo - Annuities Citigroup/Smith Barney - Defined Contribution Merril
Slide 65: Lincoln Financial Network Overview
Independent Full Service Support Lincoln Financial Network Overview 7,300 affiliated producing advisors Flexibility in advisor affiliation ranging from full service support to independent, self-service practice 2 broker-dealers and access to 2 industry-leading clearing firms
Slide 66: LFN's Contribution to Lincoln Financial
* Includes defined contribution ** Includes defined contribution and individual mutual funds LFN’s Contribution to Lincoln Financial Year-to-Date September 30, 2008
Slide 67: Enterprise Sales Results
Enterprise Sales Results Year-to-Date September 30, 2008 Compared to the same period last year Life Insurance -7% Variable Annuity -7% Fixed Annuity +7% Defined Contribution +7% Delaware Mutual Funds -18%
Slide 68: LFN Strategies for Success
LFN Strategies for Success Growing number of productive advisors Nationwide footprint Open architecture & affiliation choice Best-in-class products Deep financial planning expertise National recruiting platform investment The leverage of Lincoln Financial Group