Lincoln National (LNC) Q4 2002 earnings summary

Executive summary

• 2002 net income was $91.6 million, down 84% YoY, as equity-market declines, investment losses and $199.1 million of after-tax reinsurance reserve charges weighed on results.

• Lower revenue also reflected the absence of most former reinsurance operations following the 2001 Swiss Re transaction; ongoing deferred-gain amortization partly offset the decline.

Financial highlights

• Revenue was $4.635 billion, down 27% YoY; income before accounting changes was $91.6 million versus $605.8 million, and diluted EPS was $0.49 versus $3.13.

• Net realized investment and derivative losses were $271.5 million; after-tax realized losses were $176.4 million, versus $73.6 million in 2001.

• Operating cash flow was $489.6 million, down from $1.263 billion in 2001; total assets were $93.1 billion versus $98.0 billion at year-end 2001.

• Adjusted for the non-amortization of goodwill under FAS 142, 2002 net income increased by $41.7 million, or $0.22 per diluted share.

Outlook and guidance

• Positive annuity net flows in 2003 may be difficult amid uncertain tax, economic and market conditions; priorities include broader distribution and expense management.

• A hypothetical 2.5% Q1 2003 equity-market decline was estimated to reduce quarterly earnings by $17.7 million; actual effects could differ with markets, business mix and policyholder behavior.

• Planned 2003 restructuring: Life Insurance expected after-tax costs of $15–$17 million, with $15–$20 million of annualized pre-tax savings expected in 2004; Retirement expected after-tax costs of $3–$5 million and annual pre-tax savings of $4–$6 million from Q3 2003.

• Life Insurance outlook emphasized affluent-market demand and product breadth, while earnings could remain sensitive to mortality and morbidity; Lincoln UK focused on retention, administration and expense control.