Lincoln National Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars. The company operates retirement and insurance businesses across annuities, defined contribution, life insurance, and group protection.
Financial highlights
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue | $8.499 billion | $9.224 billion |
| Income (loss) from continuing operations | $(415) million | $(10) million |
| Net income (loss) | $(485) million; $(1.85) per diluted share | $57 million; $0.22 per diluted share |
| Operating cash flow | $937 million | $1.259 billion |
| Total assets at year-end | $177.433 billion | $163.136 billion |
| Stockholders’ equity at year-end | $11.700 billion | $7.977 billion |
| Short-term and long-term debt at year-end | $5.400 billion | $5.546 billion |
| Cash and invested cash at year-end | $4.025 billion | $5.588 billion |
Fourth-quarter 2009 revenue was $2.403 billion, continuing-operations income was $98 million, and net income was $102 million. These quarterly figures are unaudited.
Segment income from operations, a company-defined non-GAAP measure, totaled $942 million in 2009, compared with $778 million in 2008: Annuities $353 million; Defined Contribution $133 million; Life Insurance $569 million; Group Protection $124 million; and Other Operations loss of $237 million. The measure excludes items including realized investment results, intangible impairments, discontinued operations, and certain reserve and benefit-ratio changes.
Business trends and comparison with 2008
- Revenue declined 8% and net income moved from profit to loss. Continuing-operations loss widened to $415 million from $10 million.
- Retirement Solutions operating revenue fell 4% to $3.227 billion; Insurance Solutions revenue rose 2% to $6.006 billion. Annuity deposits decreased 12%, defined-contribution deposits decreased 11%, and total deposits decreased 9% to $19.765 billion.
- Total net flows were $7.309 billion, down 5%. Reported account values rose 20% to $141.327 billion, primarily reflecting market recovery and flows.
- Operating income improved in Annuities and Defined Contribution versus 2008, but remained below 2007 levels. Life Insurance and Group Protection operating income also improved year over year.
- Net investment income increased 1% to $4.178 billion. The reported annuity spread declined 20 basis points to 1.76%; the life-insurance interest-sensitive spread declined 11 basis points to 1.49%.
Capital, liquidity, and unusual items
- Operating activities generated $937 million of cash; investing activities used $7.852 billion and financing activities provided $5.173 billion. The holding company reported $990 million of cash and cash equivalents at year-end.
- The company raised approximately $2.1 billion through common stock, debt, and a $950 million U.S. Treasury TARP Capital Purchase Program preferred-stock investment. The preferred stock carries a 5% annual dividend for five years, increasing to 9% thereafter if outstanding; the Treasury also received a warrant for up to 13,049,451 common shares.
- Annual common dividends were reduced to $0.04 per share in 2009 from $1.455 in 2008; the quarterly rate was $0.01. Share repurchases remained suspended. The company said domestic insurance subsidiaries could pay approximately $730 million in 2010 without prior regulatory approval, subject to applicable constraints.
- Realized losses totaled $1.146 billion, including $392 million of net other-than-temporary impairment losses recognized in earnings. Intangible impairment charges were $730 million, including a $600 million Annuities goodwill impairment. These impairments were non-cash.
- The company completed the sale of Lincoln UK in October 2009 for $307 million after tax and sold Delaware in January 2010 for approximately $405 million after tax, subject to post-closing adjustments. Lincoln UK’s pension assets and liabilities were retained; Delaware continued under long-term investment-advisory agreements.
- Operating cash flow declined from 2008. Separately, the balance sheet showed $4.025 billion of cash and invested cash; the cash-flow statement’s year-end amount of $4.184 billion includes discontinued operations.
Outlook, risks, and contingencies
Management did not provide a specific 2010 earnings forecast. It expected earnings to remain affected by the prior equity-market decline, and identified low interest rates, possible renewed credit or equity volatility, reserve financing, and ratings as significant issues. Planned priorities included reducing risk in variable-annuity guarantees, investing selectively in defined contribution and group protection, controlling expenses, and managing capital and liquidity. Management expected the 2010 group non-medical loss ratio to be approximately 70%–71%, while noting that favorable 2009 claims experience was not expected to persist indefinitely.
- Variable-annuity guarantees expose results and capital to equity markets, interest rates, volatility, policyholder behavior, and hedge mismatch. Hedging may not fully offset guarantee liabilities.
- Ratings were on negative outlook at A.M. Best, Fitch, and Moody’s; S&P’s outlook was stable. LNC’s disclosed long-term debt ratings were BBB/Baa2/A- across Fitch, Moody’s, and S&P, respectively.
- Reinsurance collectibility is a material exposure: reinsurance recoverables were $6.4 billion, including $3.0 billion from Swiss Re. The company also disclosed a 2009 rescission of a Swiss Re disability-income treaty; related reserve and receivable adjustments reduced net income by approximately $66 million after tax.
- Commercial real-estate conditions remain a risk. At year-end, nine mortgage loans were impaired and eight were at least two payments delinquent; the delinquent loans had a $36 million carrying value.
- Other exposures include statutory-reserve requirements for guaranteed products, limits on insurance-subsidiary dividends, collateral and securities-lending liquidity needs, potential further impairments, legal proceedings, and possible changes to regulation and tax law.
- Contingent commitments totaled $4.527 billion, including bank lines of credit and $220 million of standby real-estate purchase commitments. Management stated that it had no off-balance-sheet arrangements reasonably likely to have a material effect on the company.
Most important facts for investors to verify
- Reconcile GAAP losses to the company’s operating-income measure and assess the recurring versus nonrecurring components of 2009 results.
- Review insurer statutory capital and RBC ratios, the effect of VACARVM, and the capacity of subsidiaries to remit dividends to the holding company.
- Assess variable-annuity guarantee exposure, hedge effectiveness, and sensitivity to market movements and customer behavior.
- Review investment credit quality, impairment assumptions, commercial mortgage performance, and the concentration and recoverability of Swiss Re balances.
- Confirm the final proceeds and adjustments from the Delaware sale, continuing advisory obligations, TARP preferred-stock terms, and potential warrant dilution.
The filing reports an unqualified audit opinion and states that internal control over financial reporting was effective as of December 31, 2009.