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Lincoln National Corporation’s (LNC - Analyst Report) first-quarter 2012 operating earnings of $1.00 per share edged past the Zacks Consensus Estimate of 98 cents but were in line with prior-year quarter’s earnings. However, operating net income dipped 8.1% year over year to $295.7 million.

Consequently, reported net income plummeted to $245 million or 83 cents per share against $314 million or 97 cents per share in the year-ago quarter. Results were primarily impacted by post-tax realized loss of $73.4 million and loss from discontinued operations of $0.8 million. These were partially offset by benefit ratio unlocking of $23.4 million and income from reserve changes of $0.4 million. Operating income also included $34 million of positive notable items during the reported quarter.

Lincoln’s total revenue was almost in line with prior-year quarter at $2.71 billion. However, operating revenue climbed 3.2% year over year to $2.83 billion and also surpassed the Zacks Consensus Estimate of $2.78 billion. Total account balances increased 5% year over year to $170 billion, primarily driven by positive net flows and equity market appreciation.

Segment Analysis

Operating income from Individual Annuities was $137 million, down from $144 million in the prior-year quarter. Both variable annuity deposits and net inflows were flat year over year at $2.2 billion and $0.5 billion, respectively, aided by strong equity market appreciation. However, fixed annuity deposits declined 35% year over year to $295 million, reflecting a drop in demand and lower interest rates, while net fixed annuity outflows stood at $170 million against net inflows of $31 million.

Operating income from Retirement Plan Services was $35 million, dropping 27.1% from $48 million in the prior-year period. Gross deposits of $1.5 billion were up 13% versus the prior-year period, primarily spurred by 74% increase in small case sales, along with improved retention and market growth. Consequently, total net inflows surged 58% year over year to $212 million.

Operating income from Life Insurance of $142 million was in line with the year-ago period, as life insurance sales declined 22% year over year to $122 million. Life insurance in force grew 2% year over year to $580 billion while aggregate sales of higher return products, including indexed universal life, variable universal life and term insurance, increased 11% over prior-year quarter.

Operating income from Group Protection decreased to $16 million from $24 million in the prior-year period. Non-medical loss ratio deteriorated to 75% from 74% in the year-ago quarter. However, non-medical net earned premiums were $431 million, up 7% over the year-ago period, while Group Protection sales of $67 million surged 47% year over year. Results reflected higher claims and lower sales in the prior-year quarter.

Operating loss in Other operations slightly reduced to $34 million from $37 million in the year-ago quarter.

Besides, net realized losses included a gain from account investments and soared to $6 million compared to a loss of $3 million in the prior-year quarter. Additionally, net realized losses included a variable annuity net derivatives gain of $19 million that was offset by a negative non-performance risk factor unhedged adjustment due to narrowing credit default spreads of $84 million, during the reported quarter.

As of March 31, 2012, net unrealized gain was approximately $6.4 billion (pre-tax) on its available-for-sale securities as compared with $6.5 billion at the end of 2011.

Financial Update

During the reported quarter, Lincoln issued 4.20% senior notes worth $300 million, which are set to mature in 2022. The proceeds from this offering will be utilized to redeem the $300 million of 5.65% senior debt that are due to mature in August this year.

At the end of the reported quarter, book value per share came in at $46.43, up 20.8% on year-over-year basis. Excluding accumulated other comprehensive income (AOCI), book value climbed 4.4% year over year to $37.25 per share. The quarterly operating ROE, excluding AOCI and goodwill, was 14.2%, reducing from 16.0% at the end of prior-year quarter.

Additionally, Lincoln bought back 6.0 million shares for a cost of $150 million during the reported quarter, while a total share buy-back worth $575 million was completed in 2011.

Dividend Update

On May 1, 2012, Lincoln paid a regular quarterly dividend of 8 cents per share to its shareholders of record as on April 9, 2012.

Previously, on November 10, 2011, Lincoln significantly increased its quarterly dividend by 60% to 8 cents per share from the previous payout of 5 cents per share. The hiked dividend was paid on February 1, 2012 to shareholders of record as on January 10, 2012. This marked the second dividend hike since 2007.

Peer Take

Earlier this week, one of Lincoln’s peers, Genworth Financial Inc. (GNW - Analyst Report) reported its first quarter 2012 operating income of 6 cents per share, missing the Zacks Consensus Estimate by 6 cents. Moreover, results lagged year-ago earnings of 15 cents. Operating profit for the quarter stood at $31 million, plummeting 59% from $75 million, reported a year ago. Another peer – Manulife Financial Corp. (MFC - Analyst Report) is slated to report its financial results today.

Lincoln carries a Zacks Rank #2, implying a short-term Buy recommendation. We currently have a long-term Neutral rating on the stock.

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