Lincoln National Corporation · NYSE:LNC
Lincoln National — Investor Day (November 2014)
76 slides from Lincoln National's investor day presentation, Nov 20, 2014
Slide 1: Lincoln Financial Group Distribution
©2014 Lincoln National Corporation November 20, 2014 Will Fuller President Lincoln Financial Group Distribution Lincoln Financial Group Distribution 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 2: Powerful and diverse distribution reach
Powerful and diverse distribution reach CONSISTENT RESULTS WITH UPSIDE POTENTIAL Lincoln’s results are driven by our consistent market presence and distribution scale that delivers a broad product portfolio to producers and consumers Targeting segments where we win, on our terms Tapping distribution
Slide 3: Targeting segments where we win, on our terms
TARGETING SEGMENTS WHERE WE WIN, ON OUR TERMS 1 Source: U.S. Census Bureau 2 McKinsey Retirement Growth Model; Survey of Consumer Finance; Federal Reserve Flow of Funds: Includes qualified retirement plan assets (DC and IRA but EXCLUDES DB) as well as assets held in individual annuities outside of q
Slide 4: Accessing diverse producers through our channelized model
Product Rank Share MoneyGuard1 #1 64% RPS Healthcare2 #3 10% Annuity3 #3 7% Life Insurance4 #3 6% Group Disability5 #5 8% Group Life5 #7 6% Small Market RPS6 #8 3% Market Leader On Our Terms Insurance Brokerage Consultants/TPA’S Benefit Brokers Financial Institutions Independent Advisors Life, Annui
Slide 5: Proven discipline to expand base and productivity
Number of Producers Improving Productivity With Room To Grow CROSS-SELL PRODUCERS REPEAT PRODUCERS representing 70% of Total Sales1 Grew 18% from 2011 14,000 producers 2 Small Market RPS and MoneyGuard sales 68,000+ 5% CAGR Grew 29% from 2011 and PROVEN DISCIPLINE TO EXPAND BASE AND PRODUCTIVITY 52,
Slide 6: A go to market system that delivers our strategy
Shift of GUL producer to Pivot products New to Lincoln through Pivot Already selling Pivot products Success Driven by 15,900 Producers2 Success Driven by 9,000 Producers2 Shift of VA producer to non- living benefit New to Lincoln through non-living benefit Already selling non-living benefit Pre Post
Slide 7: Drivers of upside – now and in the future
46% 28% 35% 49% Small Market – Wirehouse Government VA w/out Living Benefits Middle Market Annuity Employee paid Increased pricing Younger age MoneyGuard Registered Life Producers (VUL) Term for Mass Affluent /DIY Consumer $210M $487M Upside in Core Markets Upside in “Focus” Opportunit
Slide 8: Consistent results with upside potential
CONSISTENT RESULTS WITH UPSIDE POTENTIAL Powerful and diverse distribution reach Targeting segments where we win, on our terms Tapping distribution strength for expansion
Slide 9: Life Insurance
©2014 Lincoln National Corporation November 20, 2014 Mark Konen President Insurance and Retirement Solutions Life Insurance 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 10: Superior product diversification and scale
Superior product diversification and scale POSITIONED TO WIN FOR THE LONG TERM Lincoln’s Individual Life Insurance business: consistent market leadership through innovation and disciplined risk management Strong new business returns with upside potential and reduced downside Growth through product b
Slide 11: Decisive actions to adapt to evolving environment
New business priced to achieve 12-15% returns Reduced dependence of new business returns on interest rates Rising interest rates remain a positive to total Life portfolio DECISIVE ACTIONS TO ADAPT TO EVOLVING ENVIRONMENT 10 Yr. Treasury Rate New Business Returns 2013 2014 2012 New Business Returns 1
Slide 12: New business priced to pass the test of time
NEW BUSINESS PRICED TO PASS THE TEST OF TIME 37% 12-15% 11% Target New Business Return Scenario New Business Return 12-15% 16% Interest Rate Scenario New money pricing approach ensures inforce profitability not eroded by new sales Interest rate assumption only; actual results of other assumptions ma
Slide 13: Growing mortality earnings
Driving uncorrelated profitability growth Improved risk and earnings profile 22 of last 23 quarters within 95% confidence interval GROWING MORTALITY EARNINGS Retaining More Business Focusing on Mortality Driven Products Current Inforce New Business
Slide 14: Consistently outgrowing the industry
Outpacing the Industry CONSISTENTLY OUTGROWING THE INDUSTRY ’11-’12 ’12-’13 3-Year CAGR Revenue1 4% 4% 5% Profit Drivers (Face Amount, Reserves) 5% 5% 6% ` Lincoln Industry 20132 Face Amount Inforce +4% +1% 20133 Sales +18% -1% 1 Operating revenues excluding DFEL unlocking and variable net investmen
Slide 15: Actions achieve improved product balance
Shift in mix result of pivot strategy Distribution breadth key enabler Reduced exposure to long-dated guarantees Diverse and growing portfolio ACTIONS ACHIEVE IMPROVED PRODUCT BALANCE
Slide 16: Superior product diversification & scale
SUPERIOR PRODUCT DIVERSIFICATION & SCALE 1H14 Sales Product 1H14 Rank VUL 1 Other UL 3 Term 9 GUL 4 IUL 11 All Products 3 Sales figures based on LIMRA 2Q14
Slide 17: Positioned to capture growth opportunities
POSITIONED TO CAPTURE GROWTH OPPORTUNITIES PROTECTION RETIREMENT ACCUMULATION TAX PLANNING MoneyGuard GUL VUL IUL Term IUL VUL GUL VUL IUL WHAT LINCOLN PROVIDES Minimizing the amount I pay in taxes Putting money away for retirement Protecting my wealth or assets 1 2013 MOOD of America Survey, fielde
Slide 18: The power of Lincoln's life insurance franchise
Superior product diversification and scale THE POWER OF LINCOLN’S LIFE INSURANCE FRANCHISE LEADING THE MARKET ON OUR TERMS Strong new business returns with upside potential and reduced downside Growth through product breadth, innovation and market expansion
Slide 19: Group Protection
©2014 Lincoln National Corporation November 20, 2014 Mark Konen President Insurance and Retirement Solutions Group Protection 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 20: Restoring profitability while investing for growth
Targeting attractive and growing markets RESTORING PROFITABILITY WHILE INVESTING FOR GROWTH Lincoln is taking decisive pricing actions on sales and renewals to improve returns while making investments to support growth in targeted markets. Intensely focused on price increases to drive profit improve
Slide 21: Using pricing actions to improve profitability
USING PRICING ACTIONS TO IMPROVE PROFITABILITY Employer-Paid Life/Disability Renewal Schedule (millions) Employer-Paid Life/Disability Renewal Schedule (millions) Premium 2014 500 2015 500 2016 100 Employer-Paid Life and Disability Price Increases Employer-Paid Life and Disability Price Increases Em
Slide 22: Targeting the fastest growing market segments
Market leader in key product segments 1 Life: #7 and 6% Disability: #5 and 8% Total Group TARGETING THE FASTEST GROWING MARKET SEGMENTS Industry Growth Expectations2 4% 1 Source is LIMRA (as of 4Q13) and is premium based 2 Source is McKinsey and Company research and LIMRA Disability and Life Sales a
Slide 23: Distribution investment enables growth
DISTRIBUTION INVESTMENT ENABLES GROWTH Distribution channel continues to be resilient Supporting increased prices on new business and renewals Maintaining industry leading productivity Continuing to grow employee-paid sales as a percentage of the total Growing Headcount Productivity Expansion in Tar
Slide 24: Additional investments to support strategy
Enabling target market strategy Absence management Product enhancements Growing employee-paid business Service and retail capabilities “Plug and play” into benefit platforms/private exchanges Improving customer experience by leveraging technology Customer-centric service strategy New admin system “b
Slide 25: Restoring profitability while investing for growth
RESTORING PROFITABILITY WHILE INVESTING FOR GROWTH Targeting attractive and growing markets Intensely focused on price increases to drive profit improvement Investing in business infrastructure to support strategy
Slide 26: Retirement Plan Services
©2014 Lincoln National Corporation November 20, 2014 Chuck Cornelio President Retirement Plan Services Retirement Plan Services 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 27: Executing growth strategy
New market expansion efforts gaining momentum EXECUTING GROWTH STRATEGY Lincoln engages customers in meaningful ways and delivers solutions that help people get to and through retirement Positioned for growth as core markets poised to grow faster than industry Differentiated model increases plan spo
Slide 28: Targeting growing market segments
TARGETING GROWING MARKET SEGMENTS Market Positioning and Strategies Market Growth Expectations (2012 – 2018 CAGR) 4.6%3 6.0%4 8.0%4 8.1%4 1 Plan Sponsor Survey 2014 2 LIMRA not-for-profit survey as of Jun 30, 2014 3 Investments Company Institute, Cerulli, McKinsey Retirement Practice 4 McKinsey & Co
Slide 29: Winning new business as we expand into new markets
17% CAGR In Sales WINNING NEW BUSINESS AS WE EXPAND INTO NEW MARKETS $841M 89% $962M 64% $99M 11% Other Not-For-Profit Corporate + Healthcare $59M 4% 9M 20141 Sales = $1.5B New business success factors Expanding sales force focused in the Small corporate market Expanding relationships with key distr
Slide 30: Investing in our participant experience
INVESTING IN OUR PARTICIPANT EXPERIENCE… 9M Recurring Deposits 6% CAGR Higher Contribution Rates 43% More Confident 3X Increases from our existing block Participants who meet 1-on-1 our Retirement Consultants1 1 Internal Research
Slide 31: Investing in our plan sponsor experience
Avg. Length (yrs) of Client Relationship Keeping Clients Longer …AND INVESTING IN OUR PLAN SPONSOR EXPERIENCE Improving Client Satisfaction Mid-Large Market Small Market Small + Mid-Large Client Satisfaction1 1 % of clients responding Very satisfied or Somewhat satisfied to “Overall Satisfaction wit
Slide 32: Succeeding with plan sponsors & participants
SUCCEEDING WITH PLAN SPONSORS & PARTICIPANTS Plan Sponsor Activity Participant Activity $ Millions 4% Growth 10% Growth
Slide 33: Executing growth strategy
EXECUTING GROWTH STRATEGY New market expansion efforts gaining momentum Positioned for growth as core markets poised to grow faster than industry Differentiated model increases plan sponsor and participant activity
Slide 34: Annuities
©2014 Lincoln National Corporation November 20, 2014 Mark Konen President Insurance and Retirement Solutions Annuities 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 35: Consistent results with upside potential
Outstanding Financial Performance CONSISTENT RESULTS WITH UPSIDE POTENTIAL Lincoln is a consistent and long-term leader in delivering profitable annuity products that help consumers manage retirement risks and maximize income. Quality Block of Business Positioned for Growth
Slide 36: Steady growth. Strong returns. Consistent business.
STEADY GROWTH. STRONG RETURNS. CONSISTENT BUSINESS. 2009 2010 2011 2012 2013 2014 Consistent earnings growth with limited volatility Selling through cycles, with steady net flows totaling $19B 2 Excellent returns, including hedge program performance 1 9M represents first 9 months of the year 2 Inclu
Slide 37: Consistent approach to the business
CONSISTENT APPROACH TO THE BUSINESS Product Experience and assumption monitoring Strategic partners Distribution Risk Management Sustainable design Consistent presence Diverse channel mix Industry leading hedge program Deep producer base Diverse portfolio Strong Enterprise Risk Management culture Qu
Slide 38: Diverse product portfolio
DIVERSE PRODUCT PORTFOLIO Variable Annuity Deposits 1 1 Guaranteed Living Benefits is abbreviated as GLB 2 Includes reinsured GLB Continued success selling high return VA living benefits Growing VA without living benefits and Fixed Annuities Goal of 30% VA sales without a living benefit by 2016 Annu
Slide 39: Positioned to address growing tax concerns
Growth powered by tax-deferral Motivated by 2013 tax law changes Investments powered by excellence Top fund managers Tax-free exchanges among 125 options Income powered by innovation Proven ability to deliver tax-efficient exit vehicle with i4LIFE® Achieve annuitization tax benefits and maintain acc
Slide 40: Consistent presence in the marketplace
CONSISTENT PRESENCE IN THE MARKETPLACE Single Life, Issue Age 55, Income 60 Single Life, Issue Age 60, Income 65 Single Life, Issue Age 60, Income 70 4% 4% 5% 5% 6% 6% 7% 7% 8% 8% 9% 9% 10% 10% 11% 11% Historic income range1 Current income 4% 4% 5% 5% 6% 6% 7% 7% 8% 8% 9% 9% 10% 10% 11% 11% 4% 4% 5%
Slide 41: Sustainable product design
SUSTAINABLE PRODUCT DESIGN GMDB NAR as a % of AV GLB NAR as a % of AV Source: 10K and other financial statements published by each company; All values on this slide are as of 12/31/2013 See appendix for information about Net Amount of Risk sources and calculations History of selling through market c
Slide 42: Increasing demand for our solutions
INCREASING DEMAND FOR OUR SOLUTIONS Age 65+ Source: 2013 OASDI Trustees Report (left graph), US Census Bureau (middle graph), Tax Foundation (right graph) Life expectancy at age 65 Retirement Security Tax Concerns 1950 1970 1990 2010 Top federal income tax rates Population (thousands) Investable ass
Slide 43: Positioned to capitalize on growing consumer base
Top 10 VA Companies Guaranteed Living Benefit Investment Only VA Tax-efficient Exit Strategy1 RIA Solution Structured Solution Fixed Indexed Annuity Deferred Income Annuity Single Premium Immediate Annuity Lincoln A B C D E F G H I POSITIONED TO CAPITALIZE ON GROWING CONSUMER BASE Solution offered 1
Slide 44: Consistent results with upside potential
CONSISTENT RESULTS WITH UPSIDE POTENTIAL Outstanding Financial Performance Quality Block of Business Positioned for Growth
Slide 45: General Account Investments
©2014 Lincoln National Corporation November 20, 2014 Ellen Cooper Executive Vice President Chief Investment Officer General Account Investments 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 46: Consistent performance in a low rate environment
CONSISTENT PERFORMANCE IN A LOW RATE ENVIRONMENT Lincoln’s investment strategy is driven by disciplined ALM and maintains flexibility to add incremental risk Spread compression is abating Well diversified and high quality portfolio Proactive investment strategies
Slide 47: Well diversified and high quality portfolio
4.2% 0.8% 0.4% 0.0% $92B total investment portfolio1 Average quality rating is A- 2 Average duration is 7.43 Net unrealized gain of $6.9B3 WELL DIVERSIFIED AND HIGH QUALITY PORTFOLIO 1 As of 3Q14 2 Total fixed maturity rated securities 3 AFS only, does not include CMLs
Slide 48: Impact of higher yielding asset runoff is declining
5.2% 2013 IMPACT OF HIGHER YIELDING ASSET RUNOFF IS DECLINING Portfolio Expected Runoff
Slide 49: Spread compression continues to abate
1 Excludes Alternative investments 2 Year-to-date new money average Trend of Fixed Income Portfolio Yield and New Money Yield1 SPREAD COMPRESSION CONTINUES TO ABATE 2 Assumes flat new money yields
Slide 50: Strong new money yields in a low rate environment
Trend of New Money Yield1 Incremental Contribution to New Money Yield STRONG NEW MONEY YIELDS IN A LOW RATE ENVIRONMENT New money yields consistently achieving a spread of 1.8-2.0% over the average 10 Yr. US Treasury Attaining incremental contribution across diversified sources Benefitting from expa
Slide 51: Benefitting from our yield enhancing debt strategies
BIG Privates Investment Grade Direct Privates Non-Agency RMBS BIG Publics Approximately 10-20% of new money purchases is adding 15-25 bps to new money yields Balanced across IG (40%) and BIG (60%) strategies Better covenants and higher recoveries Direct origination provides diversification beyond br
Slide 52: Strong performance from growing and diversifying our alternatives portfolio
STRONG PERFORMANCE FROM GROWING AND DIVERSIFYING OUR ALTERNATIVES PORTFOLIO Historical Carrying Value1 Portfolio Composition1 2011 FY 2012 FY 2013 FY 3Q14 YTD Income $90mm $125mm $86mm $119mm Annualized Income Yield 11% 15% 9% 15% Contribution to NII Yield 11 bps 15 bps 10 bps 17 bps 1 As of 3Q14 Wi
Slide 53: Continuing to maintain flexibility and capacity for risk
BIG as % of Assets1 Risk Assets % of Surplus2 3Q14 Lincoln 1 Total fixed maturity AFS and Trading securities , adjusted for CLN 2 JP Morgan, Risk assets include high yield bonds, unaffiliated equity, real estate, mortgages overdue 90 days, mortgages in foreclosure and schedule BA assets (includes Al
Slide 54: Consistent performance in a low rate environment
CONSISTENT PERFORMANCE IN A LOW RATE ENVIRONMENT Spread compression is abating Well diversified and high quality portfolio Proactive investment strategies
Slide 55: Financial Overview
©2014 Lincoln National Corporation November 20, 2014 Randy Freitag Executive Vice President Chief Financial Officer Financial Overview 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 56: Consistent results, steady improvement
Positioned for future growth CONSISTENT RESULTS, STEADY IMPROVEMENT Lincoln continues to demonstrate consistent financial results and is well-positioned to create future upside potential. Diversified businesses create consistent results Capital generation and deployment have further momentum
Slide 57: Consistent and strong operating performance
Income from Operations 1 CONSISTENT AND STRONG OPERATING PERFORMANCE Income Statement1 Highlights – 9M 2014 vs. 9M 20132 Balance Sheet Consistent growth in book value and ROE Statutory capital and RBC are strong Minimal impact from DAC reviews $350mn Separate Account Corridor Cushion Operating reven
Slide 58: Diversified sources of earnings; expect tilt towards mortality and morbidity
Expected annual compression 5 – 10bps in Life; 10 – 15bps in RPS 1% increase in S&P 500 is ≈$8mn of annual earnings Internal plan assumes 6% market appreciation 1% move in loss ratio is $13-15mn of annual earnings Target Group Protection margin of 5-7%; Assuming a 6% margin, mortality/morbidity repr
Slide 59: Earnings mix supports targeted EPS growth
EARNINGS MIX SUPPORTS TARGETED EPS GROWTH Organic Earnings Capital Management Capital Markets Assumptions Equity markets 6-8% growth Interest rates Remain at current levels Group Protection 1 point of annual margin improvement
Slide 60: Interest rates remain just an earnings headwind
INTEREST RATES REMAIN JUST AN EARNINGS HEADWIND… … AND SPREAD COMPRESSION IS ABATING Reserve Adequacy Testing Results1 (Billions) Reserve Adequacy Testing Results1 (Billions) Reserve Adequacy Testing Results1 (Billions) Base Case 2.0% Scenario2 2010 $8 $6 2012 $8 $6 2013 $9 $7 Income Statement Sprea
Slide 61: Variable annuity risk management: minimal financial impact, manageable sensitivities
VARIABLE ANNUITY RISK MANAGEMENT: MINIMAL FINANCIAL IMPACT, MANAGEABLE SENSITIVITIES 1 Estimated after-DAC, after-tax impact. Based upon 9/30/2014 sensitivity modeling. 2 Estimated after-DAC, after-tax impact. Based upon year end 2013 sensitivity modeling. Breakage is estimated over one year. 3 Oper
Slide 62: Capital generation continues to gain momentum
Capital generation represents 83% of Income from Operations since 2011 Consistent Free Cash Flow (FCF) conversion1 49% in 2014 vs. 46% from 2011-2013 RBC ratio remains strong at 507% as of 9/30/2014 More diversified mix of life sales has reduced dependence on reserve financing transactions $100mn le
Slide 63: Consistent capital allocation to shareholders
$2 billion of buybacks since year-end 2010 21% of year-end 2010 share count Completed at $29.82/share, 47% below current share price1 $576 million in cash returned to shareholders year-to-date2 Buybacks to exceed original plan of $500 million to $550 million Target $150 million to $200 million in 4Q
Slide 64: Capital allocated to shareholders has outpaced peers
CAPITAL ALLOCATED TO SHAREHOLDERS HAS OUTPACED PEERS Free cash flow conversion of 47% is above the peer average of 44% Share repurchases 83% of capital returned vs. peer average of 40% Returning capital to shareholders remains a priority Buybacks to remain primary use of capital Strong free cash flo
Slide 65: Consistent results, steady improvement
CONSISTENT RESULTS, STEADY IMPROVEMENT Positioned for future growth Diversified businesses create consistent results Capital generation and deployment have further momentum
Slide 66: Appendix
©2014 Lincoln National Corporation November 20, 2014 Appendix 2014 CONFERENCE FOR ANALYSTS, INVESTORS AND BANKERS
Slide 67: Forward-looking statements
Certain statements made in this presentation and in other written or oral statements made by Lincoln or on Lincoln’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
Slide 68: Risk factors
The initiation of legal or regulatory proceedings against us, and the outcome of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited t
Slide 69: Risk factors (continued)
Competitive conditions, including pricing pressures, new product offerings and the emergence of new competitors, that may affect the level of premiums and fees that our subsidiaries can charge for their products; The unknown effect on our subsidiaries’ businesses resulting from changes in the demogr
Slide 70: Non-GAAP financial measures
Management believes that income from operations, return on equity and 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 unpredi
Slide 71: Income from operations definitions
Income (loss) from operations, operating revenues and return on equity (“ROE”), as used in the earnings release, are non-GAAP financial measures and do not replace GAAP revenues, net income (loss) and ROE. We exclude the after-tax effects of the following items from GAAP net income (loss) to arrive
Slide 72: Tax rate and book value per share definitions
The company uses its prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in its financial statements and federal income tax returns when reconciling non-GAAP measures to the most comparable GAAP measure. Book value
Slide 73: Reconciliation of net income to income from operations
RECONCILIATION OF NET INCOME TO INCOME FROM OPERATIONS
Slide 74: Reconciliation of book value per share and return on equity
RECONCILIATION OF BOOK VALUE PER SHARE AND RETURN ON EQUITY
Slide 75: Reconciliation of annuities return on equity to pro-forma return on equity
RECONCILIATION OF ANNUITIES RETURN ON EQUITY TO ANNUITIES PRO-FORMA RETURN ON EQUITY
Slide 76: Oliver Wyman Disclosures: Qualifications, assumptions & limiting conditions
Oliver Wyman Disclosures: QUALIFICATIONS, ASSUMPTIONS & LIMITING CONDITIONS All opinions, advice and materials provided by Oliver Wyman that are included, reflected or summarized herein (the “Oliver Wyman Content”) are for the exclusive use of Oliver Wyman’s client, Lincoln Financial Group, and its