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Lincoln Financial Group Reports Second Quarter 2011 Results

Second quarter income from operations was $349 million, or $1.09 per diluted share available to common stockholders, compared to $290 million, or $0.86 per diluted share available to common stockholders, in the second quarter of 2010.

                                                              For the Quarter
                                                                   Ended
                                                              ---------------
    ($ in millions except per share data)                       2011     2010
    -------------------------------------                       ----     ----
    Net Income (Loss)                                           $325     $255
    Net Income (Loss) Available to Common Stockholders           324      104
    Net Income (Loss) Per Diluted Share Available to Common
     Stockholders                                               1.01     0.33
    Income (Loss) from Operations                                349      290
    Income (Loss) from Operations Per Diluted Share Available
     to Common Stockholders                                     1.09     0.86
    Average Diluted Shares                                     319.9    314.6
    ----------------------                                     -----    -----

"We're pleased with the results in the second quarter, which reflected strong revenue growth and solid operating performance in our businesses," said President and CEO Dennis R. Glass. "Sales across our businesses continued to benefit from broad product offerings and consistent distribution presence while margins in the group protection segment improved over the prior-year period," added Glass. "Solid results in the first half of 2011, a strong capital position and accelerated share repurchases in the quarter underscore our confidence in the outlook for Lincoln Financial."

Second Quarter 2011 Operating Highlights:

    --  Total account balances of $164 billion up 17%
    --  Annuity deposits of $2.9 billion up 4%
    --  Life insurance sales of $157 million up 12%
    --  Defined Contribution pre-tax operating margin increases to 23%
    --  Group Protection non-medical loss ratio improves to 73%
    --  Consolidated deposits of $5.4 billion
    --  Consolidated net flows of $1.4 billion

The quarter included approximately $34 million or $0.11 per share of net favorable items. The details are included in the segment commentary below.

Second Quarter 2011 - Segment Results

Retirement Solutions

Individual Annuities

The Individual Annuities segment reported income from operations of $150 million in the second quarter of 2011 versus income from operations of $116 million in the year-ago period, reflecting a 21% increase in annuity account values.

Total annuity deposits of $2.9 billion were up 4% over the prior-year quarter. Total net flows in the current quarter were $0.7 billion as compared to $1.2 billion in the 2010 quarter.

The quarter included better than expected investment income of $4 million primarily from alternative investments and prepayment premiums, $8 million of favorable DAC adjustments and $2 million of tax adjustments.

Defined Contribution

Defined Contribution reported income from operations of $42 million, versus income from operations of $36 million for the same period a year ago, reflecting a 15% increase in account values.

Gross deposits of $1.2 billion were down 13% versus the prior-year quarter. Total net flows in the current quarter were $(178) million as compared to $182 million in the 2010 quarter. Deposits and flows in the quarter reflect the uneven nature of the mid-large case business, and are expected to turn around in the second half of 2011.

The quarter included better than expected investment income of $4 million primarily from prepayment premiums partially offset by $2 million of other expenses.

Insurance Solutions

Life Insurance

Life Insurance income from operations was $152 million, compared to $151 million in the second quarter of 2010.

Life insurance sales of $157 million increased 12% over the prior-year quarter. Life insurance in force of $571 billion grew 3% and account values of $35 billion increased 8% over the prior-year quarter.

The quarter included better than expected investment income of $5 million primarily from alternative investments and prepayment premiums offset by $4 million of other items.

Group Protection

Group Protection's income from operations was $26 million, compared to $23 million in the prior-year period. The non-medical loss ratio of 73% in the current quarter declined from 75% in the second quarter of 2010.

Non-medical net earned premiums were $409 million in the second quarter, up 7% over the year-ago period. Annualized sales of $67 million increased 3%.

The current quarter benefited from $3 million related to better than expected net investment income, DAC adjustments and other expenses.

Other Operations

The operating loss in Other Operations was $22 million in the quarter versus a loss of $36 million in the prior-year quarter. Results in the quarter benefited from $14 million of favorable items including lower than expected expenses and taxes of $9 million and $2 million, respectively.

Realized Gains and Losses

In the quarter, net realized losses and impairments totaled $27 million, pre-DAC and pre-tax, compared to a gain of $3 million in prior-year quarter.

Unrealized Gains and Losses

The company reported a net unrealized gain of approximately $3.6 billion, pre-tax, on its available-for-sale securities at June 30, 2011. This compares to a net unrealized gain of approximately $3.0 billion at June 30, 2010.

Stock Repurchase

During the quarter the company repurchased 5.1 million shares of stock at a cost of $150 million.

Book Value

As of June 30, 2011, book value per share of common stock, including accumulated other comprehensive income ("AOCI"), increased 10% to $44.04 from a year ago. Book value per share, excluding AOCI, was $40.43 up 9% from $36.93 a year ago.

This press release may contain statements that are forward looking, and actual results may differ materially, especially given the current economic and credit conditions. Please see the Forward Looking Statements - Cautionary Language that follow for additional factors that may cause actual results to differ materially from our current expectations.

The tables attached to this release define and reconcile income from operations, return on equity ("ROE"), and book value per share excluding AOCI, non-GAAP measures, to net income, ROE, and book value per share including AOCI calculated in accordance with GAAP.

Lincoln Financial Group will discuss the company's second quarter results with investors in a conference call beginning at 11:00 a.m. (ET) on Wednesday, August 3, 2011. Interested persons are invited to listen through the internet. Please go to www.LincolnFinancial.com/webcast at least fifteen minutes prior to the event to register, download and install any necessary streaming media software. Interested persons may also listen to the call by dialing the following numbers:

    Dial:        (877) 776-4049 (Domestic)
                 (914) 495-8602 (International)

                  -Ask for the Lincoln National
                  Conference Call.

The company will also post its second quarter 2011 statistical supplement on its Web site, www.LincolnFinancial.com/earnings.

Lincoln Financial Group is the marketing name for Lincoln National Corporation (NYSE: LNC) and its affiliates. With headquarters in the Philadelphia region, the companies of Lincoln Financial Group had assets under management of $164 billion as of June 30, 2011. Through its affiliated companies, Lincoln Financial Group offers: annuities; life, group life, disability and dental insurance; 401(k) and 403(b) plans; savings plans; and comprehensive financial planning and advisory services. For more information, including a copy of our most recent SEC reports containing our balance sheets, please visit www.LincolnFinancial.com.

Definition of Income (Loss) from Operations and Return on Equity

Income (loss) from operations and return on equity, as used in the earnings release, are non-GAAP financial measures and are not substitutes for net income (loss) and ROE, calculated using GAAP measures. We exclude the after-tax effects of the following items from GAAP net income (loss) to arrive at income (loss) from operations: realized gains and losses associated with the following ("excluded realized gain (loss)"): sale or disposal of securities; impairments of securities; change in the fair value of derivative investments; embedded derivatives within certain reinsurance arrangements and the change in the fair value of our trading securities; change in the fair value of the derivatives we own to hedge our guaranteed death benefit ("GDB") riders within our variable annuities, which is referred to as "GDB derivatives results"; change in the fair value of the embedded derivatives of our guaranteed living benefit ("GLB") riders within our variable annuities accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification(TM) ("ASC") ("embedded derivative reserves"), net of the change in the fair value of the derivatives we own to hedge the changes in the embedded derivative reserves, the net of which is referred to as "GLB net derivative results"; and changes in the fair value of the embedded derivative liabilities related to index call options we may purchase in the future to hedge contract holder index allocations applicable to future reset periods for our indexed annuity products accounted for under the Derivatives and Hedging and the Fair Value Measurements and Disclosures Topics of the FASB ASC ("indexed annuity forward-starting option"); change in reserves accounted for under the Financial Services - Insurance - Claim Costs and Liabilities for Future Policy Benefits Subtopic of the FASB ASC resulting from benefit ratio unlocking on our GDB and GLB riders ("benefit ratio unlocking"); income (loss) from the initial adoption of new accounting standards; income (loss) from reserve changes (net of related amortization) on business sold through reinsurance; gain (loss) on early extinguishment of debt; losses from the impairment of intangible assets; and income (loss) from discontinued operations.

Return on equity measures how efficiently we generate profits from the resources provided by our net assets. Return on equity is calculated by dividing annualized net income (loss) by average equity, excluding accumulated other comprehensive income (loss) ("AOCI"). Management evaluates return on equity by both including and excluding average goodwill within average equity.

The earnings used to calculate ROE, as used in the earnings release, are net income (loss) and income (loss) from operations. Income (loss) from operations is an internal measure used by the company in the management of its operations. Management believes that this performance measure explains the results of the company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the company's current business because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in most instances, decisions regarding these items do not necessarily relate to the operations of the individual segments.

The company uses its prevailing corporate federal income tax rate of 35% while taking into account any permanent differences for events recognized differently in its financial statements and federal income tax returns when reconciling non-GAAP measures to the most comparable GAAP measure.

                          Lincoln National Corporation
             Reconciliation of Net Income to Income from Operations
    ($ in millions, except per share data)

                               For the Three          For the Six Months
                                Months Ended                Ended
                                 June 30,                 June 30,
                                 --------                 --------
                               2011           2010        2011           2010
                               ----           ----        ----           ----
    Net Income (Loss)
     Available to
     Common
      Stockholders -
       Diluted               $324.4         $104.4      $664.9         $369.4
    Less:
      Preferred stock
       dividends and
       accretion of
       discount (1)               -          (18.3)          -          (36.7)
      Write-off of
       unamortized
       discount on
       preferred stock
        at redemption (1)         -         (130.6)          -         (130.6)
      Adjustment for
       deferred units of
       LNC stock in our
        non-director
         deferred
         compensation
         plans (2)             (1.0)          (1.9)        0.1           (1.9)
                               ----           ----         ---           ----
    Net Income (Loss)        $325.4         $255.2      $664.8         $538.6
    Less:
      Excluded realized
       gain (loss),
       after-tax              (22.5)          (7.3)      (37.8)         (33.8)
      Benefit ratio
       unlocking, after-
       tax                     (1.3)         (30.9)        3.5          (25.4)
      Income (loss) from
       reserve changes
       (net of related
        amortization) on
         business sold
         through
        reinsurance,
         after-tax              0.4            0.5         0.8            0.9
      Income (loss) from
       discontinued
       operations,
       after-tax                  -            2.7           -           30.6
    Income (Loss) from
     Operations              $348.8         $290.2      $698.3         $566.3
                             ======         ======      ======         ======


    Earnings (Loss)
     Per Share
     (Diluted)
    Income (loss) from
     operations               $1.09          $0.86       $2.17          $1.68
    Net income (loss)          1.01           0.33        2.07           1.18

    Average
     Stockholders'
     Equity
    Average equity,
     including average
     AOCI                 $13,337.7      $12,502.9   $13,142.8      $12,268.6
    Average AOCI              947.3          620.0       856.3          320.2
      Average equity,
       excluding AOCI      12,390.4       11,882.9    12,286.5       11,948.4
    Average goodwill        3,019.4        3,013.5     3,019.4        3,013.5
        Average equity,
         excluding AOCI
         and goodwill      $9,371.0       $8,869.4    $9,267.1       $8,934.9
                           ========       ========    ========       ========

    Return on Equity,
     Excluding AOCI
    Net income (loss)
     with average
     equity including
     goodwill                  10.5%           8.6%       10.8%           9.0%
    Income (loss) from
     operations with
     average equity
     including
     goodwill                  11.3%        9.8%    11.4%        9.5%
    Income (loss) from
     operations with
     average equity
     excluding
     goodwill                  14.9%       13.1%    15.1%       12.7%

    (1) When arriving at income (loss) or income (loss) from operations
    available to common stockholders, which is the numerator used in
    earnings (loss) per share, we have included the Series B preferred
    stock dividends and accretion of discount, but have excluded the
    acceleration of the discount as a result of redemption prior to five
    years from date of issuance.

    (2) The numerator used in the calculation of our diluted EPS is
    adjusted to remove the mark-to-market adjustment for deferred
    units of LNC stock in our non-director deferred compensation plans
    if the effect of equity classification would be more dilutive to our
    diluted EPS.

Definition of Book Value Per Share Excluding AOCI

Book value per share excluding AOCI is calculated based upon a non-GAAP financial measure. It is calculated by dividing (a) stockholders' equity excluding AOCI by (b) common shares outstanding, assuming conversion of Series A preferred shares. We provide book value per share excluding AOCI to enable investors to analyze the amount of our net worth that is primarily attributable to our business operations. Management believes book value per share excluding AOCI is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per share is the most directly comparable GAAP measure. A reconciliation of book value per share to book value per share excluding AOCI as of June 30, 2011 and 2010 is set forth below.

                                                     As of June 30,
                                                     --------------
                                                    2011       2010
                                                    ----       ----
    Book value per share, including AOCI          $44.04     $39.89
    Per share impact of AOCI                        3.61       2.96
    Book value per share, excluding AOCI          $40.43     $36.93

                       LINCOLN NATIONAL CORPORATION
                            DIGEST OF EARNINGS
    ($ in millions, except per share data)

                                                   For the Three Months
                                                          Ended
                                                        June 30,
                                                        --------
                                                      2011             2010
                                                      ----             ----

    Revenues                                      $2,803.8         $2,604.5

    Net Income (Loss)                               $325.4           $255.2
    Preferred stock dividends and accretion of
     discount                                            -            (18.3)
    Write-off of unamortized discount on
     preferred stock
      at redemption                                      -           (130.6)
    Adjustment for deferred units of LNC stock
     in our
      non-director deferred compensation plans
       (1)                                            (1.0)            (1.9)
                                                      ----             ----
    Net Income (Loss) Available to Common
      Stockholders - Diluted                        $324.4           $104.4

    Earnings (Loss) Per Common Share - Basic         $1.04            $0.35
    Earnings (Loss) Per Common Share - Diluted        1.01             0.33

    Average Shares - Basic                     311,391,263      304,483,369
    Average Shares - Diluted                   319,915,069      314,611,633

                                                   For the Six Months
                                                          Ended
                                                        June 30,
                                                        --------
                                                      2011             2010
                                                      ----             ----

    Revenues                                      $5,517.7         $5,131.9

    Net Income (Loss)                               $664.8           $538.6
    Preferred stock dividends and accretion of
     discount                                            -            (36.7)
    Write-off of unamortized discount on
     preferred stock
      at redemption                                      -           (130.6)
    Adjustment for deferred units of LNC stock
     in our
      non-director deferred compensation plans
       (1)                                             0.1             (1.9)
    Net Income (Loss) Available to Common

      Stockholders - Diluted                        $664.9           $369.4

    Earnings (Loss) Per Common Share - Basic         $2.12            $1.22
    Earnings (Loss) Per Common Share - Diluted        2.07             1.18

    Average Shares - Basic                     313,192,667      303,358,882
    Average Shares - Diluted                   321,781,163      313,356,069

    (1) The numerator used in the calculation of our diluted EPS is
    adjusted to remove the mark-to-market
    adjustment for deferred units of LNC stock in our non-director
    deferred compensation plans if the
    effect of equity classification would be more dilutive to our diluted
    EPS.

Forward Looking Statements - Cautionary Language

Certain statements made in this press release and in other written or oral statements made by Lincoln or on Lincoln's behalf are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: "believe", "anticipate", "expect", "estimate", "project", "will", "shall" and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in Lincoln's businesses, prospective services or products, future performance or financial results, and the outcome of contingencies, such as legal proceedings. Lincoln claims the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements include, among others:

    --  Deterioration in general economic and business conditions that may
        affect account values, investment results, guaranteed benefit
        liabilities, premium levels, claims experience and the level of pension
        benefit costs, funding and investment results;
    --  Adverse capital and credit market conditions could cause us to realize
        impairments on investments and certain intangible assets, including
        goodwill and a valuation allowance against deferred tax assets, which
        may reduce future earnings and/or affect our financial condition and
        ability to raise additional capital or refinance existing debt as it
        matures;
    --  Because of our holding company structure, the inability of our
        subsidiaries to pay dividends to the holding company in sufficient
        amounts could harm the holding Company's ability to meet its
        obligations;
    --  Legislative, regulatory or tax changes, both domestic and foreign, that
        affect the cost of, or demand for, our subsidiaries' products, the
        required amount of reserves and/or surplus, or otherwise affect our
        ability to conduct business, including changes to statutory reserves
        and/or risk-based capital, or "RBC," requirements related to secondary
        guarantees under universal life and variable annuity products such as
        Actuarial Guideline 43, or "AG43" (also known as Commissioners Annuity
        Reserve Valuation Method for Variable Annuities or "VACARVM");
        restrictions on revenue sharing and 12b-1 payments; and the potential
        for U.S. Federal tax reform;
    --  Uncertainty about the effect of rules and regulations to be promulgated
        under the Dodd-Frank Wall Street Reform and Consumer Protection Act on
        us and the economy and financial services sector in particular;
    --  The initiation of legal or regulatory proceedings against us, and the
        outcome of any legal or regulatory proceedings, such as: adverse actions
        related to present or past business practices common in businesses in
        which we compete; adverse decisions in significant actions including,
        but not limited to, actions brought by federal and state authorities and
        extra-contractual and class action cases; new decisions that result in
        changes in law; and unexpected trial court rulings;
    --  Changes in or sustained low interest rates causing reductions in
        investment income, estimated gross profits to our variable annuity and
        universal life products, the margins of our subsidiaries' fixed annuity
        and life insurance businesses and demand for their products;
    --  A decline in the equity markets causing a reduction in the sales of our
        subsidiaries' products, a reduction of asset-based fees that our
        subsidiaries charge on various investment and insurance products, an
        acceleration of amortization of deferred acquisition costs, or "DAC,"
        value of business acquired, or "VOBA," deferred sales inducements, or
        "DSI," and deferred front end sales loads, or "DFEL," and an increase in
        liabilities related to guaranteed benefit features of our subsidiaries'
        variable annuity products;
    --  Ineffectiveness of our various hedging strategies used to offset the
        effect of changes in the value of liabilities due to changes in the
        level and volatility of the equity markets and interest rates;
    --  A deviation in actual experience regarding future persistency,
        mortality, morbidity, interest rates or equity market returns from the
        assumptions used in pricing our subsidiaries' products, in establishing
        related insurance reserves and in the amortization of DAC, VOBA, DSI and
        DFEL, which may reduce future earnings;
    --  Changes in accounting principles generally accepted in the United
        States, or "GAAP," including convergence with International Financial
        Reporting Standards, as well as the methodologies, estimations and
        assumptions thereunder, that may result in unanticipated changes to our
        net income;
    --  Lowering of one or more of our debt ratings issued by nationally
        recognized statistical rating organizations and the adverse effect such
        action may have on our ability to raise capital and on our liquidity and
        financial condition;
    --  Lowering of one or more of the insurer financial strength ratings of our
        insurance subsidiaries and the adverse effect such action may have on
        the premium writings, policy retention, profitability of our insurance
        subsidiaries and liquidity;
    --  Significant credit, accounting, fraud, corporate governance or other
        issues that may adversely affect the value of certain investments in our
        portfolios as well as counterparties to which we are exposed to credit
        risk requiring that we realize losses on investments;
    --  The effect of acquisitions and divestitures, restructurings, product
        withdrawals and other unusual items, including our ability to integrate
        acquisitions and to obtain the anticipated results and synergies from
        acquisitions;
    --  The adequacy and collectibility of reinsurance that we have purchased;
    --  Acts of terrorism, a pandemic, war or other man-made and natural
        catastrophes that may adversely affect our businesses and the cost and
        availability of reinsurance;
    --  Competitive conditions, including pricing pressures, new product
        offerings and the emergence of new competitors, that may affect the
        level of premiums and fees that our subsidiaries can charge for their
        products;
    --  The unknown effect on our subsidiaries' businesses resulting from
        changes in the demographics of their client base, as aging baby-boomers
        move from the asset-accumulation stage to the asset-distribution stage
        of life; and
    --  Loss of key management, financial planners or wholesalers.

The risks included here are not exhaustive. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other documents filed with the SEC include additional factors which could impact our business and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the impact of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, Lincoln disclaims any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this release.

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SOURCE Lincoln Financial Group