Market Crisis
Business
Model
Before Crisis
Business
Model
After Crisis
Evolution of Industry’s Business Model
“Before Crisis” versus “After Crisis”
“Before Crisis” versus “After Crisis”
Long-Term Value Drivers
Short-Term Action Plan
Expense
management
management
Focus on capital
preservation
preservation
Review of variable
annuity product
pricing and design
annuity product
pricing and design
Monitoring asset
quality
quality
Lincoln Financial’s Positioning
Retirement opportunity
remains compelling
remains compelling
Multi-channel
distribution franchise,
driven by value of
advice
distribution franchise,
driven by value of
advice
Balanced business
model
model
Disciplined approach
to product design,
pricing, and risk
transfer
to product design,
pricing, and risk
transfer
Retirement
Solutions
42%
Insurance
Solutions
52%
LNUK 3%
Spreads
40%
Mortality &
Morbidity
Morbidity
30%
Asset Base
30%
Investment
Mgmt. 3%
Mgmt. 3%
Earnings*
Margins**
* Based on LFG after-tax 3Q 2008 income from operations including notable items as defined in the earnings press release, excluding Other Operations
** Based on 3Q 2008 pre-tax contribution margins including notable items as defined in the earnings press release, excluding Other Operations
See appendix at the end of this presentation for a reconciliation of income from operations to net income and a schedule of notable items
Diverse and Balanced Earnings Mix
W/R
BANK
MGA
TPA
IP
LINCOLN FINANCIAL
NETWORK
NETWORK
7,300+ Retail Advisors
GROUP PROTECTION
DISTRIBUTION
DISTRIBUTION
140+ GP Wholesalers
LINCOLN
FINANCIAL
DISTRIBUTORS
FINANCIAL
DISTRIBUTORS
800+ Wholesalers
INSURANCE
SOLUTIONS
Group Protection
SOLUTIONS
Group Protection
INSURANCE
SOLUTIONS
Life Insurance
SOLUTIONS
Life Insurance
RETIREMENT
SOLUTIONS
Individual Annuities
SOLUTIONS
Individual Annuities
RETIREMENT
SOLUTIONS
Defined Contribution
SOLUTIONS
Defined Contribution
Note: Wholesaler and planner counts as of September 30, 2008. LFD Wholesaler count includes 85 DC wholesalers
INVESTMENT
MANAGEMENT
Retail Investments
MANAGEMENT
Retail Investments
Centralized, Advice-Driven Distribution
* Based on estimated excess capital position at September 30, 2008, of approximately $500 million
“The Topic” - Capital
Strong capital position entering 2008 and 4Q
Excess capital* + Actionable capital levers =
~$1.5 Billion
~$1.5 Billion
Dividend reduction
Cost control
Reinsurance strategies
Corporate assets
Taken necessary steps to qualify for TARP
No current plans to raise common equity
Product Innovation and
Responsiveness
Responsiveness
Insurance Solutions
Retirement Solutions
Retirement Solutions
Operational Effectiveness
Comprehensive
Risk Management
Risk Management
Distribution Depth
and Breadth
and Breadth
Cornerstones of Our Success
Underlying Principles Remain the Same
Underlying Principles Remain the Same
Total Life Sales | UL Sales | LTD Contracts |
# 3 | # 1 | # 3 |
Life Insurance
Deep distribution relationships: Top 3 manufacturer in
majority of strategic partners*
majority of strategic partners*
Industry leading underwriting
“Back to Basics” Term, UL and MoneyGuard
Group Protection
Strong position in <500 lives
New distribution model paying off
Focus on growing voluntary market
Rankings Source: LIMRA, US sales; LTD (long-term disability) based on number of contracts sold year-to-date as of June 30, 2008. Total Life and UL
(universal life) ranking based on year-to-date sales data as of September 30, 2008
(universal life) ranking based on year-to-date sales data as of September 30, 2008
* Based on year-to-date sales as of September 30, 2008
Insurance Solutions
Life Insurance and Group Protection
Life Insurance and Group Protection
Individual VA Sales | Individual Fixed Annuities | 403b Plan Assets |
# 5 | # 10 | # 6 |
Defined Contribution
Strong new business pipeline; gaining market share
403(b)e Sure and Director
Regulatory catalysts
Annuities
Market share gain in ’08
Increased VA shelf space: #1 VA provider in
6 of 10 top partners*
6 of 10 top partners*
Environment shaping changes
Annuity Rankings Source: VARDS and LIMRA, US sales; based on year-to-date sales as of June 30, 2008
DC Ranking Source: LIMRA, based on assets at December 31, 2007
* Based on year-to-date sales as of August 31, 2008
Retirement Solutions
Annuities and Defined Contribution
Annuities and Defined Contribution
Market Leader
* As of October 31, 2008
** Data reflects S&P implied volatility for 5-year at-the-money options. Increase represents the October 2008 average versus the 3-year average from
09/30/05-09/30/08
09/30/05-09/30/08
The “Tail” |
S&P 500 down 34% YTD* Implied volatility in October up 50% from averages** |
Stochastic Scenarios
Expected Return
Variable Annuity Environment
Living in the “Tail”
Living in the “Tail”
Solution still compelling:
“Security” and predictable
lifetime income
lifetime income
Rebalance value
proposition to shareholder,
distributor, policyholder
needs
proposition to shareholder,
distributor, policyholder
needs
Monitoring competition
In force levers
DAC & model refinements
Market Impact**:
Variable Annuities: -$7.1b
Defined Contribution: -$2.7b
Delaware: - -$6.5b
Positive insurance flows
Stable spreads & mortality
margins
margins
Strong group loss ratios
$352mm
$337mm
Life Insurance
Group Protection
Annuities
Defined Contrib.
Investment Mgmt.
UK
Other Operations
Avg. diluted shares
272.5 257.6
Earnings Drivers
* See appendix at the end of this presentation for a reconciliation of income from operations to net income and a schedule of notable items
** Represents equity market impact on variable account values in the third quarter of 2008
3Q Income From Continuing Operations
Adjusted for Notable Items*
Adjusted for Notable Items*
Third Quarter
S&P 500
Dow Jones
S&P Financials
Equity Market Returns
December 31, 2007 - October 31, 2008
Equity Market Quarterly DAC Corridor
September 2004 - September 2008
S&P 500 down 17% in October:
Retirement Solutions account values down ~$11 billion
Estimated DAC unlocking of $200-$300 million, after-tax
+ Outer
+ Inner
Base
- Outer
- Inner
pvEGPs
10%
-60%
-20%
-40%
October Equity Markets
Holding Company
Insurance Company
CP: $300m issued under
$1b program
$1b program
$1 billion of unused and
multi-year bank line
capacity
multi-year bank line
capacity
Joined Federal Treasury
CP Funding Program
CP Funding Program
Next maturity of $500m
due April 2009
due April 2009
$3 billion of liquidity
No meaningful change
in product lapse rates
in product lapse rates
FHLB: $250m of
borrowings under $1b
program
borrowings under $1b
program
Sec Lending: $500m
lent, collateral invested
in s-term liquid assets
lent, collateral invested
in s-term liquid assets
Solid liquidity with diverse contingencies
As of November 14, 2008
Liquidity Position
General account placed in
a defensive position
a defensive position
Spreads continue to
widen in October
widen in October
OTTI and “intent to hold”
dictates impairment
dictates impairment
RMBS/CMBS reasonably
well positioned
well positioned
Financial concentration
helped by global capital
infusion
helped by global capital
infusion
Mortgage metrics are
solid heading into
slowdown
solid heading into
slowdown
Gross Unrealized Losses
$4.96 Billion
Financial Sector
$1.35 billion
$1.35 billion
Corporate General
$1.62 billion
$1.62 billion
ABS/CDO
$502 million
$502 million
RMBS $968
million
million
CMBS $292 million
Muni/Gov $82m / Other $144m
As of September 30, 2008
* AFS securities only; RMBS includes CMOs, Mortgage Pass Throughs, Home
Equity ABS; CMBS includes Commercial Real Estate CDO; Other includes
preferred stock and equity securities;
Equity ABS; CMBS includes Commercial Real Estate CDO; Other includes
preferred stock and equity securities;
Asset Quality and Unrealized Losses
GAAP Earnings
Statutory Capital
AG 34 and 39
VACARVM in 2009
C3 Phase 2
LNC
Lincoln
Life
Life
Captive
Re
Re
Premium
Reserve
Credit
Credit
Captive Reduces Statutory Volatility
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
* Expected Run Rate = ongoing cost of the hedge program representing option premium amortization and implied borrowing costs on hedge instruments
Focused On Economics
VA Capital and Reserving
Built-up strong capital position heading into 2008
October markets (CARVM) reduced RBC by 20-25 points
Potential negatives - investment losses and annual cash flow testing
Potential positives - securitization, cost saves, reduced new business strain
* Represents statutory results of Lincoln National Life Insurance Company and Lincoln Life & Annuity of New York; Excludes First-Penn Pacific Life
Insurance Company; 2006 represents pro forma data to include Jefferson-Pilot legal entities
Insurance Company; 2006 represents pro forma data to include Jefferson-Pilot legal entities
Estimate
Statutory Capital Conditions
Lincoln’s Position:
Communicate proactively and transparently
Target AA category
Relative ratings critical to competitive positioning
Agency | Financial Strength | Holding Company | Liquidity |
Standard & Poor’s | AA “Stable” | A+ “Negative” | A-1 |
Moody’s | Aa3 “Stable” | A3 “Stable” | P-2 |
Fitch | AA “Stable” | A “Stable” | F-1 |
A.M. Best | A+ “Stable” | a “Stable” | AMB-1 |
Rating Agencies
S&P affirmed all ratings
Moody’s, Fitch, and AM Best pending
Lincoln’s Position:
Strong RBC and >$500m of excess capital at 9-30-08
Suspended share repurchases, cut dividend, controlling costs
$1 billion in levers available, filed TARP application
Monitoring conditions and communicating with agencies
Actions
Capital Raise
Reduced Dividend
Cost control & scaling
back investment
back investment
Reserve Securitization
Potential Sale of
Corporate Assets
Corporate Assets
Reinsurance transactions
$200m annually
$100- $150m annually
$300 - - $400m
$200 - - $300m
$300 - - $400m
Capital Strategy
Net Income
Less:
Excluded realized gain (loss)
Income (loss) from reserve changes (net of related
amortization) on business sold through reinsurance
amortization) on business sold through reinsurance
Income (loss) from discontinued operations
Income from Operations
Earnings per share (diluted)
Net Income
Income from Operations
Average Equity
(Excluding accumulated other comprehensive income)
Return on Equity
Net Income
Income from Operations
($ in millions, except per share
data)
data)
For the Quarter Ended
September 30,
September 30,
$148.4
-166.8
0.4
-1.0
$315.8
$0.58
$1.23
$11,308
5.2%
11.2%
$329.6
-42.7
0.4
6.6
$365.3
$1.21
$1.34
$11,726
11.2%
12.5%
2008
2007
Net Income to Operating Earnings
Reconciliation
Reconciliation
Reported
DAC & Model
Adjustments
Adjustments
Tax-related
Items
Items
Seed Capital
Expenses
Other
Retirement Solutions
Annuities
Insurance Solutions
Defined
Contrib.
Contrib.
Life
Insurance
Insurance
Group
Protection
Protection
Invest.
Mgmt.
Mgmt.
Lincoln
UK
UK
Other
Operations
Operations
42
137
-25
3
-2
-6
27
5
-3
-3
12
-2
4
-38
Total
118
42
167
27
11
10
-38
131
-12
21
4
3Q 2008 Income From Operations
Schedule of Notable Items
Schedule of Notable Items
Reported
DAC Unlocking
& Model Adj.
& Model Adj.
Tax-related
Items
Items
Expenses
Loss Ratio vs.
Expected
Expected
Other
Retirement Solutions
126
7
-1
-3
123
Annuities
Insurance Solutions
Defined
Contrib.
Contrib.
Life
Insurance
Insurance
Group
Protection
Protection
Invest.
Mgmt.
Mgmt.
Lincoln
UK
UK
Other
Operations
Operations
41
-4
2
-1
44
183
14
5
-4
168
33
8
25
10
2
-5
13
-50
-5
-3
-42
Total
22
1
21
3Q 2007 Income From Operations
Schedule of Notable Items
Schedule of Notable Items
Index Spreads
ABX
CMBX
Market Perspective
All data presented as of September 30, 2008, at amortized cost; Other includes equity securities, policy loans, derivative instruments, and other
investments; CMBS includes Commercial Real Estate CDO; RMBS includes CMOs, Mortgage Pass Throughs, Home Equity ABS
investments; CMBS includes Commercial Real Estate CDO; RMBS includes CMOs, Mortgage Pass Throughs, Home Equity ABS
Ratings are based on Bonds (Corporates, UST/Agency/Muni) and Structured Products (ABS/CDO, CMBS, RMBS); AFS securities only; Ratings
represent the middle rating of the three rating agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter
2008 Form 10-Q
represent the middle rating of the three rating agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter
2008 Form 10-Q
Total Invested Assets
$72 billion
Average Rating: “A”
$56 billion
Real Estate
<1%
<1%
Corporate
Bonds
Bonds
54%
RMBS
14%
Comm.
Mortgages
11%
Mortgages
11%
UST/Agency/Muni 4%
CMBS 4%
Alternative
Inv 1%
Inv 1%
ABS/CDO 2%
Trading Sec 3%
Other
7%
7%
Portfolio Allocation
* AFS securities only; High yield defined as BB and below
** Excludes Lincoln UK; AFS securities only; Book value; Ratings represent the middle rating of the three rating agencies (S&P, Moody’s and Fitch) and vary
slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q
slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q
Pre-Merger
High Yield Trend*
YTD Purchases/Sales
through Sept. 30, 2008**
through Sept. 30, 2008**
Portfolio Allocation Trend
Moved into a Defensive Position
Moved into a Defensive Position
Prime/Agency
65%
Prime/Non-
Agency
Agency
15%
Alt-A
13%
Subprime 7%
Residential MBS and
Mortgage-Related ABS
Mortgage-Related ABS
2004 & Prior
66%
2005
17%
2006
11%
2007
6%
AAA
66%
AA
16%
A
11%
BBB 6%
CMBS = $2.6 billion*
BB and below
1%
Commercial Mortgage-Backed Securities
All data presented as of September 30, 2008, at amortized cost; AFS securities only; Ratings represent the middle rating of the three rating
agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q
agencies (S&P, Moody’s and Fitch) and vary slightly from the NAIC ratings disclosed in the third quarter 2008 Form 10-Q
Ratings
BBB
45%
A
40%
AA
7%
7%
BB and
below
below
7%
Corporate Bonds | $ in millions |
Financial Services | 10,363 |
Basic Industry | 2,339 |
Capital Goods | 2,675 |
Communications | 2,637 |
Consumer Cyclical | 2,954 |
Consumer Non-Cyclical | 4,269 |
Energy | 2,937 |
Technology | 737 |
Transportation | 1,271 |
Industrial Other | 680 |
Utilities | 8,374 |
Total | $39,236 |
AAA 1%
Corporate Bonds
Data as of September 30, 2008 at amortized cost; AFS securities only
Top 20 Financials | ||
$mm | % of Inv. Assets | |
General Electric | 236 | 0.3% |
Regions Financial Corp | 213 | 0.3% |
JPMorgan Chase | 203 | 0.3% |
Goldman Sachs Group Inc | 198 | 0.3% |
Wachovia Corp | 196 | 0.3% |
Bank Of America Corporation | 190 | 0.3% |
HSBC Holdings | 171 | 0.2% |
Royal Bank of Scotland | 170 | 0.2% |
BB&T Corporation | 168 | 0.2% |
Citigroup Inc | 145 | 0.2% |
Morgan Stanley | 145 | 0.2% |
United Healthcare Group | 140 | 0.2% |
Bank Of New York Inc | 136 | 0.2% |
ING Groep NV | 119 | 0.2% |
Rabobank Nederland N.V. | 116 | 0.2% |
Suntrust Banks Inc | 116 | 0.2% |
Metlife Inc | 107 | 0.1% |
Westpac Banking Corp | 105 | 0.1% |
Wellpoint Health Networks | 103 | 0.1% |
PNC Financial Services | 99 | 0.1% |
Health
Insurers
Insurers
4%
Banking
47%
Brokerage
6%
Life
Insurers
Insurers
8%
P&C
Insurers
Insurers
11%
REITs
9%
Non-Captive
Diversified
6%
Non-Captive
Consumer
4%
Consumer
4%
Other 5%
Corporate Bonds
Exposure to Financials
Exposure to Financials
Attachment / Detachment Points
Est # of Defaults with No Loss to Tranche
Est # of Defaults with 100% Loss
Actual # Defaults to Date
CDS Recovery
Tranche Rating
Rating Agency
Original # of Issuers
Average Quality of Underlying Issues
Maturity
$400mm
December 2006
$200mm
April 2007
4.77%-5.78%
10
14
1
Floating
A+
S&P
125
A-
12/20/16
1.48%-2.50%
6
11
2
70% Fixed
Baa2
Moody's
100
A
3/20/17
Deal Statistics
Credit Linked Notes (CLNs)
As of October 31, 2008
As of October 31, 2008
* Represents only those securities in an unrealized loss position
**Represents only those securities with a market value less than 70% of book value for greater than 12 months
***Corporates include Emerging Markets Debt and Municipals; CMBS includes Commercial Real Estate CDOs
Corporates***
ABS/CDO
CMBS***
RMBS and
Related ABS
Related ABS
Government/Government Agencies
Equities
Total AFS Securities
$ millions
AFS - - Securities
CLN
Other ABS/CDO
Other ABS/CDO
2005 and Earlier
2006 and Later
2006 and Later
Prime/Agency
Alt-A
Subprime
Alt-A
Subprime
Amortized
Cost**
Cost**
Unrealized
(Losses)
(Losses)
Unreal.
Loss
% of Cost
Loss
% of Cost
Market/Book <70%
and Age >12 Months
and Age >12 Months
Amortized
Cost*
Cost*
Unrealized
(Losses)
(Losses)
Unreal.
Loss
% of Cost
Loss
% of Cost
Total
30,128
600
639
639
1,807
408
408
3,743
1,300
754
1,300
754
373
618
40,370
-3,041
-421
-81
-81
-215
-77
-77
-401
-370
-197
-370
-197
-16
-144
-4,963
-10.1%
-70.2%
-12.7%
-12.7%
-11.9%
-19.0%
-19.0%
-10.7%
-28.4%
-26.2%
-28.4%
-26.2%
-4.4%
-23.2%
-12.3%
888
600
34
34
181
60
60
251
305
189
305
189
0
0
2,508
-374
-421
-20
-20
-97
-25
-25
-123
-175
-93
-175
-93
0
0
-1,328
-42.1%
-70.2%
-57.4%
-57.4%
-53.9%
-41.4%
-41.4%
-48.9%
-57.6%
-49.0%
-57.6%
-49.0%
n/a
n/a
-52.9%
Gross Unrealized Losses
As of September 30, 2008
As of September 30, 2008
Excludes residential loans (7 loans totaling $198,080)
* Net of GAAP premium/discount, default charges & service fees
All data as of September 30, 2008, excludes Lincoln UK
Mortgage Loan Portfolio
1,368 Loans
Principal Balance of $7.6 Billion
Wtd. Avg. Gross Coupon of 6.47%
Wtd. Avg. Net Coupon of 6.40%
Wtd. Avg. Net Book Yield of 6.31%*
Wtd. Avg. Maturity of 8.7 years
Avg. Loan Size of $5.6 Million
Wtd. Avg. Loan-to-Value of 59%
Wtd. Avg. Debt Service Coverage of 1.53x
Amortizing Loans - 98% (Based on # of Loans)
* Weighted Averages
All data as of September 30, 2008, excludes Lincoln UK
Originations | 2006 | 2007 | YTD 9/30/08 |
Loans Closed | 113 | 143 | 96 |
Total Amount ($ million) | 752 | 1,123 | 703 |
Debt Service Coverage* | 1.39x | 1.39x | 1.41x |
Loan-to-Value* | 64% | 63% | 59% |
Portfolio Principal Balance by LTV
Mortgage Loan Portfolio
All data as of September 30, 2008, excludes Lincoln UK
# of Loans
Mortgage Loan Portfolio
Summary
Challenging market conditions
Shift towards higher quality and away
from riskier credits
from riskier credits
Well-diversified portfolio
Long-term focus and strong credit skills
allow us to take advantage of short-term
opportunities
allow us to take advantage of short-term
opportunities
ACLI data as of June 30, 2008
Life Companies with Portfolios over $5B
Based on Principal Balance
Excludes Residential
All data is as of September 30, 2008 (unless noted otherwise); excludes Lincoln UK
ACLI
Lincoln
Mortgage Loan Portfolio by Region
ACLI data as of June 30, 2008
Life Companies with Portfolios over $5B
Based on Principal Balance
Excludes Residential
All data is as of September 30, 2008 (unless noted otherwise); excludes Lincoln UK
ACLI
Lincoln
Mortgage Loan Portfolio by Type
We Believe…
In the Retirement Income Opportunity
Responsibility and risk transferred to individuals
In the long term growth opportunity of equities
We understand the risk
Mortality/Longevity
Policyholder Behavior
Other claims drivers
The industry value proposition will evolve
Protect Assets Today and Tomorrow
Lincoln SmartSecuritySM Advantage
Guarantee Income Today
i4LIFE® Advantage with GIB
Age
35
45
55
65
75
85
95
Protection feature with upside
opportunity from market performance.
opportunity from market performance.
Immediate income solution with
downside protection.
downside protection.
Protection feature with upside from market
performance and a guaranteed enhancement (5%)
when withdrawals are delayed.
performance and a guaranteed enhancement (5%)
when withdrawals are delayed.
Protection feature with upside from market
performance and a guaranteed enhancement
(every 3 years, 15%) when income is delayed.
performance and a guaranteed enhancement
(every 3 years, 15%) when income is delayed.
Minimum Income Tomorrow
Lincoln Lifetime IncomeSM Advantage
4LATERSM Advantage
Living Benefit Suite & Positioning
Roll-up: Increases the Guaranteed Amount (starts at the initial deposit)
Double: Increases Guaranteed Amount, generally at age 70 or after 10 years, doubles initial deposit
Reset: When Account Value exceeds roll-up value, establishes new Guaranteed Amount
Fee | Roll-up & Method | Double | Reset | |
Lincoln | 75 bps | 5% Compound | Yes | Annual |
90 bps | i4LIFE® Advantage with GIB | Annual | ||
Market | 60 bps | 5% Compound | Yes | Monthly |
75 bps | 6% Compound | Yes | Annual | |
65-95 bps | 7% Simple/Compound | Yes | Annual to Daily | |
65 bps | 7.25% Compound | Roll-up does this | Annual | |
75 - 85 bps | 10% Simple | Roll-up does this | Annual to Quarterly |
Competitive Positioning
Investment Restrictions
Frequency of Step-Up
Incentives to Delay Income
Living Benefit Risk Control Features
Charge Basis
Ability to Increase
Charge
Charge
* As of September 30, 2008; Includes fixed portion of variable annuities
50%
16%
29%
VA Account Value
VA Deposits
$3.0
$2.6
31%
42%
27%
20%
15%
22%
Account Value = $54 billion*
($ billions)
No Living Benefit
Other Guaranteed Withdrawal Benefits
Guaranteed Income Benefits
5%
Lifetime Income Advantage
43%
Individual Variable Annuity
Living Benefits Profile
Living Benefits Profile
GMDB by Type
1%
33%
46%
13%
7%
Distribution by AV / DB
Account Value = $54 billion*
* As of September 30, 2008; Includes fixed portion of variable annuities
9%
1%
39%
51%
<60%
60-80%
80-100%
100-130%
>130%
Individual Variable Annuity
Guaranteed Death Benefits Profile
Guaranteed Death Benefits Profile
NVP vs Fees for a sample product
Conditions are changing rapidly - leading to
swings in profitability for new issues
swings in profitability for new issues
Fees
NVP
Sales Weighted (2007-08) | 6/30/08 | 9/24/08 | 10/17/08 | ||
LSSA | IRR | 24-25% | 18-19% | 13-14% | 4-5% |
Charge = 65 | NVP | 51 | 70 | 81 | 98 |
LLINC | IRR | 11-12% | 16-17% | 12-13% | -(2-3)% |
Charge = 75 | NVP | 90 | 81 | 92 | 115 |
Product Profitability
Current Market Conditions
Current Market Conditions
As of 9/30/08, most of
our GMWB business
was “in the money”,
defined as:
our GMWB business
was “in the money”,
defined as:
AV / Guar Amt <100%
No account value
growth
growth
100% immediate
benefit utilization
benefit utilization
No lapse or
mortality
mortality
Stressed Illustration of Claim Patterns
“In the Moneyness” for GMWB
GAAP
* Represents 09/30/2005 - 09/30/2008
4Q07
3Q07
1Q08
2Q08
3Q08
SAP
Target
DB Reserves
Hedge
9/30/08 | Oct Avg. | 3yr Avg.* | |
10 yr Implied Vol | 30.1 | 33.0 | 24.8 |
30 yr Swap Spread | 39.3 | 14.4 | 53.6 |
Liabilities and Hedge Assets
Target is based on current
market assumptions
market assumptions
GAAP reserve is
Target minus Non-
Performance Risk
Target minus Non-
Performance Risk
Statutory reserve is not
very market sensitive
very market sensitive
Reported “Breakage”
is versus Target
is versus Target
Hedge is market
value of assets
value of assets
Risk Transfer Spectrum
No hedge
3-Greek
Reinsurance
Structured Hedges
Delta Only
Risk/Return
Risk/Return
LNC
Risk Transfer
A long term view
Not a “callable” liability
Accumulate assets to fund future claims
Product features drive risk transfer needs
Under current design, extreme volatility may lead
to breakage
to breakage
Strong governance
Not shown on chart DC $.001 billion
$1.0
Billion
Billion
$0.1
Billion
Billion
$0.93
Billion
Billion
$0.14
Billion
Billion
$0.03
Billion
Billion
Living
Benefits
Death
Benefits
Put Options
Variance
Swaps
Interest Rate
Swaps
Assets and Liabilities
As of September 30, 2008
As of September 30, 2008
Hedging the economics
LB: SFAS 133
DB: SOP 03-1
Significant difference
between hedge target
and SAP liability
between hedge target
and SAP liability
LB: $1.0 vs $0.3 billion
DB: $0.1 vs $0.2 billion
Reinsurance credit
supported by captive
assets
supported by captive
assets
Living Benefit Hedge Performance
3Q08 breakage of $330 million
$150 million loss from funds basis risk (4.5% under index)
$125 million of breakage on 4 days**:
Hedge target increased $1 billion vs $680 million for entire quarter
Vega shortfall at end of 3Q; not moving to cover
October breakage more severe; story largely the
same
same
As of September 30, 2008
Counterparties
13 Counterparties
Maximum gross exposure of $216 million
Maximum net exposure of $40 million
All rated A+ and above
$1.1 billion of gross exposure; $0.3 billion of
exposure net of collateral
exposure net of collateral
Thresholds for posting collateral are negotiated
and depend on size and rating
and depend on size and rating
If counterparty rating drops, then threshold is
lowered
lowered
Holding Company guarantee facilitates
relationship with captive
relationship with captive
Captive
Re
LNL
LNC
Premiums/Risk
Reserve Credit
Captive Reinsurance
Allows for clearer view to risk economics
Provides capital stability
VACARVM requires review of structure
Regularly monitor captive capital and economics
6. Increase
segment
operating
margins
segment
operating
margins
2. Implement
effective and
consistent
investment
processes
effective and
consistent
investment
processes
4. Drive organic
growth
growth
5. Continually
improve
efficiency
improve
efficiency
3. Deliver
superior
investment
results
superior
investment
results
Delaware
Investments
Investments
Our Focus Areas
Financial Update
Year-to-Date September 30, 2008
Year-to-Date September 30, 2008
Operating Income of $32.4 million compared to
September 2007 of $49.3 million
September 2007 of $49.3 million
Major items of note when comparing year-to-date results:
YTD revenue $97m below YTD 07 primarily driven by
market declines and sale of institutional fixed income
business in October 2007
market declines and sale of institutional fixed income
business in October 2007
YTD earnings include a loss on seed capital of
$10.6m versus a gain of $5.1m YTD 2007
$10.6m versus a gain of $5.1m YTD 2007
YTD expenses $70m below YTD 07
Lower compensation expenses
Lower variable expenses
Lower Corporate overhead charges
Total Revenue ($m)
Total Expenses ($m)
Financial Update
Historical Financials
Historical Financials
AUM by Investment Type
AUM by Client Type
Equity
Retail
Fixed Income
Institutional
General Account
Financial Update
Assets Under Management
Assets Under Management
9/30/08 AUM: $130.1 billion
Indicates transfer of JP Gen Acc AUM
1 - defined as (net flows / beginning assets excluding General Account)
Financial Update
Organic Growth
Organic Growth
= September 2007 year-to-date amount of $45.0 million
Free Cash Flow to Parent
All data as of 9/30/08
Domestic Equity
International / Global Equity
Taxable Fixed Income
Tax-Free Fixed Income
Lipper Performance
Percent of Fund Assets by Style in
Top Half of Lipper Universes
Top Half of Lipper Universes
All data as of 9/30/08
Domestic Equity
International / Global Equity
Taxable Fixed Income
Tax-Free Fixed Income
Lipper Performance
Percent of Funds by Style in
Top Half of Lipper Universes
Top Half of Lipper Universes
Note: Wholesaler counts as of September 30, 2008; Wholesaler count includes 85 DC wholesalers, excludes 143 Group Protection wholesalers
W/R
BANK
MGA
TPA
IP
LINCOLN
FINANCIAL
DISTRIBUTORS
FINANCIAL
DISTRIBUTORS
800+ Wholesalers
RETIREMENT
SOLUTIONS
SOLUTIONS
INSURANCE
SOLUTIONS
SOLUTIONS
INVESTMENT
MANAGEMENT
MANAGEMENT
Centralized, Advice-Driven Distribution
Variable Annuities
Individual Life
Year-To-Date
September 30, 2008
September 30, 2008
Wire
MGA
Bank
Independent Planner
Distribution Depth and Breadth
Sales by Channel
Sales by Channel
* Based on total count of 844 as of September 30, 2008
Data includes external wholesalers, internal wholesalers, and sales management
Number of
Wholesalers
Wholesalers
Wholesalers by
Product*
Product*
Variable
Annuities
Annuities
47%
Life 21%
Investments
9%
9%
MoneyGuard
10%
Fixed Annuities
3%
3%
Defined
Contribution
Contribution
10%
Scale of Wholesaling
DC Wholesaler Tenure
As of September 30, 2008
2+ Years
47%
47%
<1 Year
34%
34%
1-2 Years
19%
19%
2+ Years
31%
31%
<1 Year
40%
40%
1-2 Years
29%
29%
Recruiting
Retaining
Wholesaler Productivity
#1
#1
#1
#1
#3
#4
#3
#3
#3
#1
#3
#2
Strategic Partner
VA
Life
Edward Jones
Smith Barney
UBS
LFN
Merrill Lynch
Morgan Stanley
Sales Rankings*
* Based on year-to-date sales as of August 31, 2008
** Seven possible product categories
# of Product
Categories
Offered**
Categories
Offered**
6
6
7
7
7
6
Strategic Partner Focus
What We Mean to Them….
Edward Jones
LFN
LPL
Merrill Lynch
Merrill Lynch
Smith Barney
UBS
* Based on year-to-date September 30, 2008, annualized sales
Strategic Partner Focus
Our top 6 partner firms each sell over
$1 billion of Lincoln product annually*
$1 billion of Lincoln product annually*
Growth Opportunities
Deepen Current Relationships
Market share with Existing Platform
Introduction of other Lincoln Capabilities
New Distributors
Edward Jones - ChoicePlus VA
WAMU - - Life & MoneyGuard
Sun Trust - Annuities
Wells Fargo - Annuities
Citigroup/Smith Barney - Defined Contribution
Merrill Lynch - Defined Contribution
Lincoln Financial Retail
Cross-Selling
Institutional Life Sales
Independent
Full Service
Support
Support
Lincoln Financial Network Overview
7,300 affiliated producing advisors
Flexibility in advisor affiliation ranging from full
service support to independent, self-service
practice
service support to independent, self-service
practice
2 broker-dealers and access to 2 industry-leading
clearing firms
clearing firms
* Includes defined contribution
** Includes defined contribution and individual mutual funds
LFN’s Contribution to Lincoln Financial
Year-to-Date September 30, 2008
Year-to-Date September 30, 2008
Enterprise Sales Results
Year-to-Date September 30, 2008
Year-to-Date September 30, 2008
Compared to the same period last year
Life Insurance -7%
Variable Annuity -7%
Fixed Annuity +7%
Defined Contribution +7%
Delaware Mutual Funds -18%
LFN Strategies for Success
Growing number of productive advisors
Nationwide footprint
Open architecture & affiliation choice
Best-in-class products
Deep financial planning expertise
National recruiting platform investment
The leverage of Lincoln Financial Group