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Lincoln National Corporation’s (LNC - Analyst Report) second-quarter 2012 operating earnings of $1.09 per share surpassed the Zacks Consensus Estimate of $1.00 and the prior-year quarter’s earnings of $1.01 a share, primarily on lower share count. However, operating net income inched down 1.2% year over year to $322 million.

Nevertheless, reported net income stood at $324 million or $1.10 per share as against $304 million or 95 cents per share in the year-ago quarter. Results were primarily impacted by post-tax realized gain of $12 million. This was more than offset by benefit ratio unlocking of $10 million and adjustment for deferred units of stock in the deferred compensation plan of $4 million.

Lincoln’s total revenue climbed 3.3% over the prior-year quarter to $2.9 billion and also breezed past the Zacks Consensus Estimate of $2.82 billion. Total account balances increased 2.9% year over year to $126 billion.

Segment Analysis

Operating income from Annuities was $158 million, growing from $145 million in the prior-year quarter. While variable annuity deposits grew 3% year over year to $$2.4 billion, net inflows climbed slightly to $0.7 billion from $0.6 billion, both aided by strong equity market appreciation.

Total account balances increased 2% year over year to $90 billion. However, fixed annuity deposits declined 22% year over year to $445 million, reflecting a drop in demand and lower interest rates, while net fixed annuity outflows stood at $32 million against net inflows of $134 million.

Operating income from Retirement Plan Services was $38 million, dropping from $41 million in the prior-year period. Gross deposits of $1.5 billion were up 8% versus the prior-year period, primarily spurred by 18% increase in small case sales, along with improved retention and market growth. Consequently, total net inflows surged to $194 million from net outflows of $178 million in the year-ago quarter.

Operating income from Life Insurance of $138 million improved marginally from $136 million in the year-ago period, as life insurance sales declined 18% year over year to $128 million. Life insurance in force improved 2% year over year to $581 billion while aggregate sales of higher return products, including indexed universal life, variable universal life and term insurance, increased 20% over the prior-year quarter. Total account balances increased 5% year over year to $36 billion.

Operating income from Group Protection crept up to $27 million from $26 million in the prior-year period. Non-medical loss ratio improved to 72.7% from 75% in the prior quarter. However, non-medical net earned premiums were $441 million, up 8% over the year-ago period, while Group Protection sales of $89 million surged 33% year over year, led by strong results in life and dental products.

Operating loss in Other operations climbed up to $39 million from $22 million in the year-ago quarter.

Further, net realized losses included a net loss from account investments of $45 million compared to a loss of $22 million in the prior-year quarter. Additionally, net realized losses included variable annuity net derivatives results of $48 million, including a positive non-economic adjustment of $86 million related to the non-performance risk reserve component, during the reported quarter.

As of June 30, 2012, net unrealized gain was approximately $7.8 billion (pre-tax) on its available-for-sale securities as compared with $6.5 billion at the end of 2011.

Financial Update

At the end of the reported quarter, book value per share came in at $50.77, up 24.7% on a year-over-year basis. Excluding accumulated other comprehensive income (AOCI), book value climbed 5.3% year over year to $38.68 per share. The quarterly operating ROE, excluding AOCI and goodwill, was 12.0%, marginally rising from 11.6% at the end of the prior-year quarter.

Additionally, Lincoln bought back 6.5 million shares for $150 million during the reported quarter, while a total share buy-back worth $300 million has been completed in the first half of 2012.

Dividend Update

On May 24, 2012, the board of Lincoln announced a regular quarterly dividend of 8 cents per share, which was paid on August 1, 2012, to its shareholders of record as on July 10, 2012.

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.

Peer Take

Earlier this week, one of Lincoln’s peers, Genworth Financial Inc. (GNW - Analyst Report) reported its second-quarter 2012 operating income of 16 cents per share, missing the Zacks Consensus Estimate by 1 cent. Results, however, reversed the year-ago loss of 23 cents, benefiting from substantial lower loss at Global Mortgage Insurance.

However, declines in Insurance and Wealth Management were partial offsets. Another peer – Manulife Financial Corp. (MFC - Analyst Report) is slated to report on August 9, 2012.

Lincoln carries a Zacks Rank #3, implying a short-term Hold rating. We currently have a long-term Neutral recommendation on the stock.

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