Lincoln National (LNC) Q4 2003 earnings summary

Executive summary

• 2003 results rebounded as stronger equity and credit markets lifted fee income, reduced guaranteed-benefit reserves and lowered credit losses; positive net flows strengthened growth prospects.

• Reported net income was $511.9M versus $48.8M in 2002; 2003 included a $255.2M after-tax cumulative accounting charge and gains from securities reclassification.

Financial highlights

• Revenue rose 14% to $5,283.9M from $4,635.5M; the 2003 total included a $371.5M gain from transferring securities to trading classification.

• Income before cumulative accounting changes was $767.1M versus $48.8M; diluted EPS was $2.85 versus $0.26, while reported net income included the $255.2M cumulative charge.

• Net investment income was nearly flat at $2,638.5M versus $2,631.9M; realized investment and derivative losses narrowed to $19.2M from $271.5M.

• Operating activities generated $1.0B cash in 2003 versus $0.3B in 2002; total assets reached $106.7B and shareholders’ equity $5.8B at year-end.

Outlook and guidance

• 2004 priorities: grow deposits and retain assets, broaden distribution, sustain product innovation, manage expenses and maintain pricing discipline amid competitive and regulatory uncertainty.

• Retirement expected Principal Security sales momentum to continue; sustained low rates could compress spreads, while a rapid rate rise could increase disintermediation risk.

• Life Insurance expected a challenging 2004: new money rates were ~150 bps below portfolio yields, limiting spread management as ~25% of interest-sensitive account values were at minimum crediting rates.

• Investment Management planned to sustain investment performance and positive flows; regulatory scrutiny of market timing, late trading, access payments and soft-dollar arrangements remained a concern.

• Share repurchases were expected to resume in 2004, contingent on capital ratios, ratings expectations, free cash flow and alternative capital uses.