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Lincoln National (LNC)

Q1 2011 Earnings Call

April 28, 2011 11:00 am ET

Executives

Will Fuller -

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Dennis Glass - Chief Executive Officer, President, Director, Member of Executive Committee, Member of Committee on Corporate Action and Head of Lincoln Financial Distributors

Randal Freitag - Chief Financial Officer and Executive Vice President

Mark Konen - President of Retirement Solutions and Insurance Solutions

Jim Sjoreen -

Analysts

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Jay Gelb - Barclays Capital

Darin Arita - Deutsche Bank AG

John Nadel - Sterne Agee & Leach Inc.

Jamminder Bhullar - JP Morgan Chase & Co

Steven Schwartz - Raymond James & Associates, Inc.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

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Presentation

Operator

Good morning, and thank you for joining Lincoln Financial Group's First Quarter 2011 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to the Vice President of Investor Relations, Jim Sjoreen. Please go ahead, sir.

Jim Sjoreen

Thank you, operator, and good morning and welcome to Lincoln Financial Financial's first quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, trends and market conditions, including comments about liquidity and capital resources, premiums, deposits, expenses and income from operations, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties are described in the cautionary statement disclosures in our earnings release issued yesterday, and our reports on Forms 8-K, 10-Q and 10-K filed with the SEC.

We appreciate your participation today and invite you to visit Lincoln's website at www.lincolnfinancial.com, where you can find our press release and statistical supplement, which include a full reconciliation of the non-GAAP measures used in the call, including income from operations and return on equity, to the most comparable GAAP measures.

Presenting on today's call are Dennis Glass, President and Chief Executive Officer; and Randy Freitag, Chief Financial Officer. After their prepared remarks, we will move to the question-and-answer portion of the call.

I would now like to turn the call over to Dennis.

Dennis Glass

Thanks, Jim, and good morning. In aggregate, we had another good quarter of operating results. Gross deposits of $5 billion plus and net flows of $1.4 billion were both up in the 12% to 13% range, and along with rising equity markets drove account balances to $162 billion, up 11%. Interest margins across lines are strong. Life and Annuity mortality margins were very strong, and our G&A expense ratio improved modestly over the fourth quarter.

Operating revenues of $2.7 billion were up 7%. We were a little more aggressive on capital management, repurchasing $75 million of equity during the quarter, about the same amount as we did all of last year. In summary, strengthening fundamentals, steady to somewhat improving margins and capital management drove the strong ongoing operating earnings that we reported. Net income per share came in close to operating income as we saw less investment loss, hedge fluctuation and other noise.

Looking at the pieces, sales in our individual Life Insurance business of $159 million were up 12% over the year ago quarter, driven by our well rounded product portfolio and multichannel distribution system. MoneyGuard's sales helped overall growth, benefiting from increased shelf space and wholesaler support. Other recent actions to strengthen the Life business and build sales included repricing our survivorship product and increasing our maximum mortality retention for new business.

Turning to annuities. Individual Annuity sales were up 16% over the prior year quarter with VA sales up 17%. Our strategy in the Annuity market is to lead with strong distribution, maintain a diverse suite of products that provide good consumer value but not the most aggressive features and to remain consistently in the market. As an example, our living benefit guarantees remained among the lowest of those offered by top-selling VA writers, a solid guarantee that provide good consumer value. Also, we have been ranked in the top 5 for VA sales since 2006, and we are the only top VA provider that is also ranked in the top 5 for indexed annuities.

Less reach and well priced VA product features lower the product's risk. Multiple products and distribution reach allow us to pivot to the best solution for the consumer in different market environments, and market consistency pays off in better profitability and stronger distribution relationships. We continue to make progress on this strategy in the quarter. We launched our repriced income rider, introduced a fee-based variable product into a major planning firm, prepared for our second quarter launch of VA long-term care and substantially enhanced our B2B technology for fixed and indexed annuities in the wider channel.

Our Defined Contribution business produced a solid quarter with account balances of more than $40 billion, total deposits up 3% over the prior year period and positive net flows. Net flows in this business fluctuate based on the timing of larger plans, growing on to our platform and rolling off over the course of the year, and we expect that to continue in 2011. We are implementing our strategic investment plan in DC, including building out distribution support for our small- and mid- to large market business, and we'll begin to add plans to our new recordkeeping platform in the fourth quarter. We believe these investments will increasingly contribute to DC's results through 2011 and 2012.

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