Lincoln National (LNC) Q4 2005 earnings summary

Executive summary

• Record gross deposits of $40.0B, up 31% YoY, and net flows of $20.2B, up 39%; net income reached $831.1M and operating ROE was 15.4%.

• The Jefferson-Pilot merger closed Apr. 3, 2006, adding complementary products and distribution and opening opportunities across retirement, life and investment management.

Financial highlights

• FY05 revenue was $5,487.9M, up 2%; net income was $831.1M versus $707.0M, and diluted EPS was $4.72 versus $3.95.

• Insurance fees rose 11% and investment advisory fees rose 10%; net investment income was nearly flat at $2,702.3M as lower portfolio yields and premiums offset asset growth.

• Net realized investment losses narrowed to $17.5M from $58.2M; 2005 included a $14.2M pretax Capita settlement gain and a $46.8M tax benefit from releasing a deferred tax valuation allowance.

• Consolidated expenses included $29.5M pretax restructuring charges and a $41.6M pretax net expense reduction from favorable unlocking of assumptions.

Outlook and guidance

• 2006 priorities included completing merger integration, expanding distribution, strengthening employer-sponsored retirement and retaining focus on product quality and expense management.

• Lincoln Retirement expected interest margins to decline 2–3 bps per quarter in 2006; Life Insurance expected declines of 1–2 bps per quarter, assuming 50 bps annual improvement in new-money rates.

• Investment Management expected solid performance and positive net flows in 2006, while capacity limits in some asset classes could constrain growth versus 2005.

• Low interest rates, increased regulatory scrutiny and tax reform were identified as key challenges for 2006.