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Lincoln National Corp. (LNC - Analyst Report) reported second-quarter 2014 operating earnings of $1.47 per share, keeping alive its earnings streak with a trailing four-quarter average beat of 7.4%. The figure exceeded the Zacks Consensus Estimate of $1.37 and was higher than $1.27 a share earned in the prior-year quarter.

Further, Lincoln National’s operating net income climbed 12.3% year over year to $394 million. Meanwhile, reported net income, including extraordinary items, stood at $399 million or $1.48 per share against $317 million or $1.15 per share in the year-ago quarter.

The year-over-year improvement was driven by growth in total account balances and improved revenues from double-digit growth in premiums and fee income. Further, sales growth of re-priced products as well as change in the business mix to higher return products aided the upside. These were partially offset by lower net flows and deposits from Annuities segment, decreased revenue from Retirement Plan services, reduced income from Group Protection and higher expenses.

Lincoln National’s total operating revenue increased 9.4% over the prior-year quarter to $3.28 billion, edging past the Zacks Consensus Estimate of $3.25 billion. Consolidated total account balances of Lincoln National increased 14.6% year over year to $216.2 billion, while net flow tumbled 27.8% to $2.12 billion, reflecting underperformance within Annuities segment. Total deposits fell 5.1% to $6.69 billion. Total expenses climbed 6.4% to $2.75 billion.

Segment Analysis

Operating income from the Annuities segment came in at $227 million, surging 16.4% from $195 million in the prior-year quarter. Account values grew 17.6%, although net flows and gross deposits declined 51.2% and 14.7%, respectively, from the prior-year quarter. However, a 19% decline in variable annuity sales, partially offset by higher fixed annuity deposit sales, resulted in 14.7% decrease in total segment sales.

Operating income from Retirement Plan Services was $39 million, unchanged from the prior-year period. The results benefited from growth in deposits, net flows, equity market appreciation, lower withdrawal rates and account balances. Strong sales were witnessed in both the small and mid-large markets.

Operating income from Life Insurance was $148 million, up 9.6% year over year, although life insurance sales reduced 7.5% year over year to $172 million. Life insurance in force improved 5% year over year to $626 billion, while aggregate sales of higher return products, including indexed universal life, variable universal life, flexible premium MoneyGuard and term life insurance, increased 7.5% from the prior-year quarter. These resulted in higher deposits and net flows.

Operating income from Group Protection plunged 90.9% to $2 million from $22 million in the prior-year period primarily due to higher disability claims. Non-medical loss ratio deteriorated to 80.3% from 73.5% in the year-ago quarter. Further, non-medical net earned premiums were $528 million, up 10% from the year-ago period, while Group Protection sales declined 23.2% to $73 million.

Operating loss in Other operations was $22 million, narrower than a loss of $40 million in the prior-year quarter.

Investment Position

Lincoln National’s net realized gains included a net gain from account investments of $5 million compared with $22 million in the prior-year quarter. Additionally, net realized gains included variable annuity net derivatives gain of $7 million in the reported quarter.

As of Jun 30, 2014, pre-tax net unrealized gain on Lincoln National’s available-for-sale securities was approximately $7.5 billion, up from $4.8 billion in the year-ago period.

Total investment portfolio was $100.96 billion at the end of Jun 2014, up from $95.29 billion at 2013-end.

Financial Update

At the end of Jun 2014, Lincoln National’s book value per share came in at $59.24, up 18% year-over- year. Excluding accumulated other comprehensive income (AOCI), book value climbed 9% year over year to $46.97 per share. Operating ROE stood at 13.0% at the end of Jun 2014, up from 12.4% in the year-ago period.

Additionally, Lincoln National bought back 3.1 million shares for $150 million during the reported quarter. In May 2014, the company expanded the buyback of shares and securities to $1.0 billion.

Dividend Update

On Aug 1, Lincoln National will pay a regular quarterly dividend of 16 cents per share to shareholders of record as on Jul 10.

On May 1, 2014, the company paid a regular quarterly dividend of 16 cents per share to shareholders of record as on Apr 10. Earlier this year, the dividend was hiked by 33% from the prior payout of 12 cents a share, marking the 4th dividend hike since 2007.

Lincoln National has a Zacks Rank #2 (Buy).

Other Stocks that Warrant a Look

Other stocks to consider in the same sector include Symetra Financial Corp. (SYA - Snapshot Report), Arch Capital Group Ltd. (ACGL - Snapshot Report) and MetLife Inc. (MET - Analyst Report), all of which have the same Zacks Rank as Lincoln Financial.  

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