Lincoln National Corporation · NYSE:LNC
Lincoln National — Investor Day (November 2011)
66 slides from Lincoln National's investor day presentation, Nov 15, 2011
Slide 1: 2011 Conference for Analysts, Investors and Bankers
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Bob Dineen President and CEO Lincoln Financial Network LFD and LFN Successfully Affecting Outcomes Will Fuller President and CEO Lincoln Financial Distributors
Slide 2: Lincoln's Distribution Franchise
Lincoln’s Distribution Franchise 568 Wholesalers LFN 8,045 Advisors 311 Worksite Consultants Group Protection 148 Wholesalers Disciplined Powerful • Dedicated to consumer driven products • Focused on growing market segments where advice and planning are highly valued
Slide 3: Consumer Trends
Consumer Trends • Focus on safety (guarantees) • Tempered expectations on returns • Concern regarding taxes • Need for advice 1 Source: US Census Bureau Projections 2 Source: Federal Reserve Flow of Funds Report April 2010, 10-year Treasury Note maturity 2/15/2021, interest rate 3.625%. Company esti
Slide 4: Industry Trends and Advisor Flows
Daily Registered 14,769 RIA Only 18,582 Regional B/Ds 35,994 Industry Trends and Advisor Flows • Environmental conditions accelerating migration from wirehouse and regionals to independent Sources: Securities Industry Association, Investment News, Financial Planning, Bank Insurance Market Research G
Slide 5: LFN: Delivering Shareholder Value to Lincoln
Insurance BD LFA/Sagemark Independent LFN: Delivering Shareholder Value to Lincoln Wirehouse Regionals ABGA GA LFN: Keys to Sustained Growth • Independence – Open architecture and affiliation choice • National Recruiting Platform – Growing number of productive, process driven advisors • Retention of
Slide 6: LFD: A History of Consistent Achievement
LFD: A History of Consistent Achievement 49,743 Producers 55,029 Producers 57,264 Producers 58,000 Producers Across different business cycles, consistent new business levels and growing producer levels S&P 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q08 3Q08 $5 $2 $1 $4 $3 Consolidated D
Slide 7: Doing Business on Our Terms
2008 2009 • De-risking and re-pricing of VA portfolio Variable Annuities 2010 2Q 2011 • Risk mitigation built into products and further re-pricing 2008 2009 • Increased Term focus • Continued expansion of MoneyGuard franchise Life 2010 2Q 2011 • Re-pricing of SG UL and MoneyGuard products • Increase
Slide 8: Growth On: LFD Creating Value for Lincoln
Growth On: LFD Creating Value for Lincoln 1 Excludes 2011 Defined Contribution expansion Growing Active Producers +17% Growing Wholesaler Productivity +27% • Increasing producers across products – 8,000+ new producers – 10,000+ producers selling multiple Lincoln products • Winning the war for talent
Slide 9: Life Insurance: Protecting Margins / Leveraging Franchise
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Life Insurance Protecting Margins / Leveraging Franchise Mark Konen President, Insurance and Retirement Solutions
Slide 10: The Life Insurance Industry Today
Tailwinds Headwinds Life insurance remains an important solution • Renewed consumer interest in protection; favorable demographics • Innovation to meet changing needs • Risk management track record • Advice-driven model The Life Insurance Industry Today • Macro economic environment • Resetting expec
Slide 11: Comprehensive portfolio: relevant and adaptable to market conditions
Comprehensive portfolio: relevant and adaptable to market conditions Diverse Product Portfolio • Secondary Guarantee Universal Life (SG UL) now less than 50% of sales • Sales of products other than SG UL up 19% year-over-year Sales 1 by Product 1 Sales as defined on page ii of our quarterly statisti
Slide 12: Multi-Channel Distribution Strategy
Multi-channel distribution drives ability to “pivot” across products Retail Banks/ Wires 2Q11 Market Share % 5.5% 34% Rank 8 2 Multi-Channel Distribution Strategy • Significant scale in each channel • Lincoln ranks #1 in Top 10 accounts 2 Sales by Channel 1 Source: LIMRA; core life sales (excluding
Slide 13: Responding to Market Conditions
2006 - 2007 • Merger with Jefferson-Pilot • Integration of product portfolio, underwriting standards, and distribution platform by year- end 2007 • MoneyGuard franchise repositioned in the marketplace 2008 - 2009 • The Great Recession – Capital markets frozen – Consumer and marketplace turmoil • Inc
Slide 14: Product Actions to Improve Margins
Potential sales decline until: • Competition adjusts • Consumers reset expectations Offset is potential for capital redeployment Product Actions to Improve Margins Life Product Portfolio (Combined Pricing IRR) Long-term Target Return Projected Range Improve IRR • Increased SG UL prices by 5-15% • Mo
Slide 15: Effectively Managing Spread Compression
Effectively Managing Spread Compression Yield and Spread History 1 8 bps spread to guarantee Yield = 5.97% 5.96% 5.90% 1 Yields and spreads exclude alternative investments and are gross of default charges 2 As of September 30, 2011 Investment Strategies • Long duration investment portfolio - average
Slide 16: Asset Liability Management
Asset Liability Management Provides Interest Rate Risk Protection Individual Life: Present Value Cash Flows* on 10-year Treasury Scenarios 60,000 2 40,000 s € * 20,000 $ 9/30/2011 : 10-year Treasury = 1.92% 0 1% 2% 3% 4% 5% 6% 7% 8% Target 10-year Rate —PVAsset Inflow ==PV Liability Outflow ¢ Low ra
Slide 17: Effectively Managing Mortality Risk and Lapses
Actual to expected mortality ratios 2010 YTD 1 2011 Business written 1999 forward (expected = pricing) 90% 94% Lapses (% Based on Face Amounts) 2010 YTD 1 2011 SG UL 4.3% 3.8% Non-SG UL 5.4% 4.7% Total UL 4.8% 4.2% These key product risks are realizing better than planned results Effectively Managin
Slide 18: Leading the market on our terms
Leading the market on our terms Strong Franchise Enables Responsible Product Actions While Maintaining Long-Term Growth • Protecting Margins – Repricing secondary guarantee products – MoneyGuard benefit reduction and other changes – Credited rate reductions – ALM and other risk management expertise
Slide 19: Group Protection: Investing for Growth
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Group Protection Investing for Growth Mark Konen President, Insurance and Retirement Solutions
Slide 20: Investing for Growth through Distribution and Service
More Brokers - More Solutions • Increased group representatives and territory management • Broadened suite of solutions • Comprehensive enrollment support Investing for Growth through Distribution and Service Seamless Employer/ Employee Experience
Slide 21: Strong Sales Growth with a Consistent Market Focus
Sales Ranking 1 2008 2009 2010 LTD 4 2 3 STD 3 3 4 Life /ADD 6 5 5 Dental 14 12 12 Total 6 8 6 • Focused investments in distribution fueled sales growth • 2010 ranked 8th in new premium for core lines • Maintain focus on the small case market – Top 5 or better in primary lines; 6th overall – Opportu
Slide 22: Effective Profitability Management
Premium Impacts by Source 3Q 2008 3Q 2009 3Q 2010 3Q 2011 New Sales 18.5% 16.5% 18.5% 15.5% Lapses -14.5% -14.0% -13.0% -13.5% In-force Change 6.5% 0.5% 3.5% 5.0% TOTAL 10.5% 3.0% 9.0% 7.0% Effective Profitability Management • Successful actions bring loss ratios back in line: – Achieved good renewa
Slide 23: Accelerating Sales Growth through Distribution
Accelerating Sales Growth through Distribution Sales Force Expansion 160 = 141 _ 127 rT) 117 100 2009 2010 2011 MReps Small Case & Rookies High Productivity* 3.5 30 3.0 2.9 2.9 525 = 2.0 O15 1.0 2009 2010 2011 = 2010 industry median $1.7 million * Invest to reach more brokers with broader solutions
Slide 24: Strategic Investments
Strategic Spend 2011 2012 2013 Sales Growth Retention Cost Effectiveness Profitability Management Technology & Service P P P P Distribution P P Employee Education & Advice P P Employer Solutions P P P Strategic Investments Positioning Group Protection for Growth $20M $40M $60M
Slide 25: Accelerate Growth and Enhance Service
Results • Top 5 in Voluntary sales Accelerate Growth and Enhance Service Investments • Distribution to accelerate growth – 2012 sales growth outpacing the industry – $500 million + of new sales by 2014 • Service to enhance ease of doing business and improve efficiency – Employee focused services and
Slide 26: Lincoln Retirement Plan Services: Executing for Growth
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Lincoln Retirement Plan Services Executing for Growth Chuck Cornelio President, Lincoln Retirement Plan Services
Slide 27: Retirement Plan Services: Consistent Strategy
Market AUM Takeover Asset Growth Small Market ($0 - $10M) $520B $40B 7.5% Mid-Large Market ($10M - $500M) $725B $53B 7.5% Healthcare $130B $14B 6.0% Retirement Plan Services Consistent Strategy - Focused on Execution Focus: Target markets with the fastest asset growth characteristics 1 LIMRA not-for
Slide 28: Actions to Capture Market Share
Recordkeeping & Web Participant & Plan Sponsor Experience Distribution Expansion Product Expansion Marketing and Communications Retirement Plan Services Actions to Capture Market Share • New Platform LIVE with New Business • Wholesaler Expansion completed • Leveraging strong worksite presence to imp
Slide 29: Strategic Investments
Sales Growth Asset Retention Expense Efficiencies Recordkeeping Platform & Web P P P Distribution P P Product P P Participant & Plan Sponsor Experience P P P Strategic Spend 2011 2012 2013 Strategic Investments Positioning Retirement Plan Services for Growth $30M $35M $15M
Slide 30: Investments in Our Business Paying Dividends
Investments in Our Business Paying Dividends Net Flows Trending Positive Net Flows in Current Target Markets 1,000 900 * Net flows projected to be $1.4B in target markets é _ * AUM in target markets T 17% to = 700 record high of $22B over the e600 past 2 Years a ¢ Average case size in target markets
Slide 31: Focused Execution Translating to Growth
Growth through new sales AND improved retention on existing block Improving Sales Focused Execution Translating to Growth Total Deposits GOAL: Reach $9B in Sales by 2014 $6B $7B • 50% of wholesalers hired within last 15 months; not yet at target productivity • Upgraded technology solution has gone l
Slide 32: Bifocal Vision
Bifocal Vision Short-term Results AND Long-term Market Success • Implementing strategy focused on targeted growth markets • Executing on strategic investments to increase competitiveness and deliver cost efficiencies • Capitalizing on competitive advantages to continue to win new business • Adding d
Slide 33: Individual Annuities: Growth on Our Terms
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Individual Annuities Growth on Our Terms Mark Konen President, Insurance and Retirement Solutions
Slide 34: Growing the Business while Protecting Margins
Growing the Business while Protecting Margins Growth Diverse solutions Multi-channel distribution Disciplined approach Balanced, proactive and consistent Managing risk Proven track record
Slide 35: Diverse Products and Multi-Channel Distribution Strategy
Diverse Products and Multi-Channel Distribution Strategy • Consistent product offerings • Multi-channel distribution strategy • Continued expansion – Primerica – Fee-based advisors – Partner-specific solutions Annuity Sales by Channel 1 As of September 30, 2011 YTD 2011 1 - $8.3 Billion ($6.7B VA, $
Slide 36: Responding to Market Conditions
2006 - 2Q 2008 Calm and Growing Market Growing S&P Index Low Volatility Escalating Roll-ups: 5% to 7-10% Step-up Frequency: Annual to Daily Our First GLWB 5% Roll-up Investment Requirements 3Q 2008 - 2009 Subprime Crisis - Capital Markets Frozen Significant S&P Drop High Volatility Firms Exit VA Mar
Slide 37: Product Design on Our Own Terms
Product Design on Our Own Terms Lincoln’s Approach Actions Speak Louder... Income protection solutions: downside protection with upside potential ¢ Variable, fixed indexed, inflation Account value matters * Investment flexibility to focus on upside * Innovative asset allocation * Protected funds — m
Slide 38: Better product design and positioning leads to better risk management
Better product design and positioning leads to better risk management Product Design Mitigates Policyholder Behavior Risk i4LIFE is a Compelling Solution for Clients • Guaranteed income with strong upside potential • Tax advantaged income for non-qualified • Flexibility, control, and death benefit R
Slide 39: Oliver Wyman Industry Study Agrees
Oliver Wyman Industry Study Agrees • Manage behavior risk through prudent product design • Lincoln’s GLWB economics are less sensitive than most peers to changes in policyholder behavior • Lower sensitivity supports more predictable financial results Source: Oliver Wyman analysis of 19 GLWB and GMIB
Slide 40: Effective Equity Risk Management
Effective Equity Risk Management Strong Linkage Between Pricing and Hedging • All living and death benefit riders hedged • Hedging strategy established and validated prior to all living benefit launches • Strategy is regularly monitored and changed with updates in actuarial assumptions and capital m
Slide 41: Effective Interest Rate Risk Management
• New business rate setting based on new money rates not portfolio rates • Earnings impact from prolonged low interest rates mitigated by – Proactive renewal rate actions – In-force crediting rate cushion to guarantee ~ 105bps – Effective asset liability matching – Pricing based on new money rate wi
Slide 42: Quality Business with Quality Earnings
2007 2008 2009 2010 2011 YTD 1 20% 8% 15% 19% 23% Average = 17% 1Q 2011 2Q 2011 3Q 2011 21% 20% 14% YTD = 18% Quality Business with Quality Earnings In-force ROE VA New Business ROE • Consistently strong ROE on in-force business • Healthy VA new business ROE throughout 2011 – Writing business on our
Slide 43: Growth on Our Terms
Income protection solutions that resonate with consumers Multi-channel distribution Effective protection of margins Growth on Our Terms • Variable Annuity i4LIFE • Fixed Index Annuity GLWB (LINC Edge) • Funds with volatility management and capital protection • LTC combination products • Breadth and
Slide 44: @| Lincoln
@| Lincoln nancial Group Hello future:
Slide 45: Disclosures/Endnotes
Disclosures/Endnotes Source: Internal Competitive Intelligence, Morningstar Ratings, Comparisons done against competitors most popular living benefit riders, Compared against top 10 companies based on YTD 2011 sales excluding captive agency sales 1 Fee reflects cost for single life version of living
Slide 46: Financial Overview
2011 Conference for Analysts, Investors and Bankers November 15, 2011 l New York, NY Financial Overview Randy Freitag Executive Vice President and Chief Financial Officer
Slide 47: Confidence in the Future
Confidence in the Future • Strong business fundamentals driving top and bottom line growth • Capital well protected in low rate environment • Defensively positioned around key risks • Solid balance sheet well positioned for stressed environments
Slide 48: Strong Momentum Across Businesses
Life Annuities GP DC YTD 2011 ROE 1 10% 20% Strong Momentum Across Businesses 1 Adjusted for notable items. See appendix at the end of this presentation for a definition and reconciliation of operating revenues to revenues, income from operations to net income, a reconciliation of return on average
Slide 49: Manageable Impact to GAAP Results from Low Rates
Earnings Impact 2012 $50M 2013 $100M 2014 $150M Earnings growth rate reduced by 3-4% Earnings growth continues despite low rate environment Manageable Impact to GAAP Results from Low Rates • Minimal reserve impact absent changes to long-term earned rate assumption (reflected in earnings impact) • 10
Slide 50: Strong Statutory Reserve Adequacy
Cash Flow Testing Reserve Adequacy ($ billions) Base Case Low Rate Scenario Life 1 $4 $3 Annuity $4 $3 Total 1 $8 $6 Significant statutory reserve adequacy in low rate environment Strong Statutory Reserve Adequacy Impact of 10-year Treasury at 2.0% for 10 years on Statutory Reserve Adequacy Statutor
Slide 51: VA Hedge Program Protects Capital
Hedge assets in excess of statutory requirements at all points VA Hedge Program Protects Capital • Hedge assets have exceeded economic and statutory reserves at all points • Hedge program focused on economics • All guaranteed living and death benefits covered by hedge program • No additional capital
Slide 52: Strong Statutory Capital and Holding Company Liquidity Positions
Strong Statutory Capital and Holding Company Liquidity Positions • Strong statutory earnings generation • Upstreamed $1.7 billion to HoldCo after funding new business needs • Strong liquidity position at HoldCo – $770 million at 9/30/11 – $1.5 billion increase since 12/31/08 Statutory Capital Stat O
Slide 53: General Account Strategy
Product Sep-08 Sep-09 Sep-10 Sep-11 Life -$2.2 $0.2 $3.4 Annuities -$0.7 $0.2 $1.2 Surplus & Other -$1.4 -$0.3 $1.5 $1.7 Total -$4.3 $0.1 $5.1 $6.3 C1 capital down 20% since 2009 on $6 billion increase in invested assets 30% reduction in risk profile General Account Strategy A “Risk-Off” Position Si
Slide 54: European Exposure Reduced & Well-Positioned
$84 million of direct EU peripheral 1 exposure, mostly non-European subsidiaries of large Spanish Banks European Exposure Reduced & Well-Positioned 1 Defined as sovereign and banking exposure to Portugal, Ireland, Italy, Greece and Spain 2 Debt and preferred stock issued by companies domiciled in EU
Slide 55: Strong Capital Margin Above Rigorous Threshold
Assumptions (2012/2013/2014) Moderate Stress Severe Stress GDP Growth 2% / 2% / 2% -2% / -1% / 0% Unemployment 9% / 9% / 9% 10% / 11% / 10% Housing Price Change -3% / -3% / -3% -5% / -5% / -5% Interest Rates (10-year Treasury) 2.0% / 2.5% / 3.0% 1.5% / 1.75% / 2.0% S&P 500 (YE2011 / 2012 / 2013 / 20
Slide 56: Confidence in the Future
Confidence in the Future • Strong balance sheet and capital generation • Well positioned to withstand low interest rate environment from both Statutory and GAAP perspective • Effective risk management reduces exposure to credit and equity markets risks • Strong capital margin positions Lincoln for e
Slide 57: @| Lincoln
@| Lincoln nancial Group Hello future:
Slide 58: Non-GAAP financial measures definitions
Income (loss) from operations and ROE are non-GAAP financial measures and are not substitutes for net income (loss) and ROE, calculated using GAAP measures. We exclude the after-tax effects of the following items from GAAP net income (loss) to arrive at income (loss) from operations: realized gains
Slide 59: Reconciliation of Net Income to Income from Operations
Reconciliation of Net Income to Income from Operations
Slide 60: Reconciliation of Operating Revenues to Revenues
Reconciliation of Operating Revenues to Revenues
Slide 61: Reconciliation of Return on Average Equity
Reconciliation of Return on Average Equity For the Nine Months Ended September 30, 2011
Slide 62: 3Q 2011 Income From Operations: Schedule of Notable Items
$ millions Retirement Solutions Insurance Solutions Other Operations Annuities Group Protection Reported 162 41 132 28 (45) DAC Unlocking (8) (4) 8 Mortality 10 Traditional Reserves 4 Tax-related items (22) (5) 3 Guaranty Association Assessments 9 Other (net) 1 1 Total 132 38 150 28 (33) 3Q 2011 Inc
Slide 63: 2Q 2011 Income From Operations: Schedule of Notable Items
$ millions Retirement Solutions Insurance Solutions Other Operations Annuities Defined Contributions Group Protection Reported 150 42 152 26 (22) Net Investment Income (4) (4) (5) (1) (1) DAC Unlocking (8) (6) (1) Mortality/Morbidity 6 (2) Expense 2 (1) (9) Tax-related items (2) (2) Other (net) 4 To
Slide 64: 1Q 2011 Income From Operations: Schedule of Notable Items
$ millions Retirement Solutions Insurance Solutions Other Operations Annuities Defined Contributions Group Protection Reported 147 49 166 24 (37) Net Investment Income (6) (7) (8) (2) (4) DAC Unlocking (5) (2) (1) Mortality/Morbidity (7) (6) Expense (2) 4 Tax-related items Other (net) Total 129 40 1
Slide 65: 3Q 2010 Income From Operations: Schedule of Notable Items
$ millions Retirement Solutions Insurance Solutions Other operations Annuities Defined Contributions Group Protection 1 Reported 126 50 60 10 (40) DAC Unlocking (2) 11 (82) Mortality (10) Expense (2) Tax-related items 14 (2) Other (net) (3) Total 114 39 152 13 (36) 1 Group Protection results do not
Slide 66: EITF 09-G: Estimated Impact
Low High Pretax DAC Reduction $1.45b $1.75 % DAC Balance 16% 19% AT Impact to Equity $950m $1.15b Impact on BV/Share ($3.15) ($3.81) EITF 09-G Estimated Impact • Retrospective adoption on 1/1/2012 • Reduces GAAP equity, but no impact on statutory surplus • Pro forma impact on YTD 2011 earnings: 5% t