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Lincoln National Corporation’s (LNC - Analyst Report) third-quarter 2012 operating earnings of $1.18 per share significantly outpaced the Zacks Consensus Estimate of $1.01 and the prior-year quarter’s earnings of $1.03 a share, primarily on lower share count. Yet, operating net income inched up 1.8% year over year to $335 million.

Nevertheless, reported net income stood at $402 million or $1.41 per share as against $147 million or 47 cents per share in the year-ago quarter. This included post-tax realized gain of $25 million, benefit ratio unlocking of $10 million and income from discontinued operation of $29 million.

Lincoln’s total revenue jumped 16.0% over the prior-year quarter to $2.95 billion and also exceeded the Zacks Consensus Estimate of $2.82 billion. The upside was driven by strong distribution expansion and improved pricing.

Segment Analysis

Operating income from Annuities stood at $139 million, dipping from $153 million in the prior-year quarter. While variable annuity deposits grew 2% year over year to $2.2 billion, net inflows slipped to $0.5 billion from $0.6 billion. Additionally, fixed annuity deposits declined 12% year over year to $489 million, reflecting a drop in demand and lower interest rates, while net fixed annuity outflows stood at $110 million against net inflows of $46 million. However, total account balances increased 16% year over year to $94 billion.

Operating income from Retirement Plan Services was $29 million, dropping from $39 million in the prior-year period. However, gross deposits of $1.7 billion were up 18% versus the prior-year period, primarily spurred by 54% increase in small and mid-to-large case sales, along with improved retention and market growth. Consequently, total net inflows surged to $232 million from net outflows of $194 million in the prior-year quarter. Account balance also escalated 16% year over year to $43 billion.

Operating income from Life Insurance of $154 million stood in line with the year-ago period, as life insurance sales declined 28% year over year to $128 million. Life insurance in force improved 2% year over year to $584 billion while aggregate sales of higher return products, including indexed universal life, variable universal life and term insurance, increased 23% over the prior-year quarter. Total account balances increased 5% year over year to $36 billion.

Operating income from Group Protection dipped to $16 million from $27 million in the prior-year period. Non-medical loss ratio deteriorated to 75.7% from 71.8% in the prior quarter. However, non-medical net earned premiums were $450 million, up 10% over the year-ago period, while Group Protection sales of $97 million surged 29% year over year, led by a 25% upsurge in the sales force and a 78% growth in voluntary sales.

Operating earnings in Other operations climbed up to $3 million from a loss of $44 million in the year-ago quarter.

Investment Position

Further, net realized losses included a net gain from account investments of $3 million compared to a loss of $98 million in the prior-year quarter. Additionally, net realized losses included variable annuity net derivatives results of $38 million, including positive hedge program performance of $15 million, a positive unlocking adjustment of $84 million, partially offset by a negative non-economic adjustment of $61 million related to the non-performance risk reserve component, during the reported quarter.

As of September 30, 2012, net unrealized gain was approximately $9.4 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 $55.36, up 19.5% on a year-over-year basis. Excluding accumulated other comprehensive income (AOCI), book value climbed 7.4% year over year to $40.28 per share. The quarterly operating ROE, excluding AOCI and goodwill, was 12.2%, marginally rising from 11.6% at the end of the prior-year quarter.

Additionally, Lincoln bought back 4.2 million shares for $100 million during the reported quarter, while a total share buy-back worth $400 million has been completed in the first nine months of 2012.

Dividend Update

On August 9, 2012, the board of Lincoln announced a regular quarterly dividend of 8 cents per share, which was paid on November 1, 2012, to its shareholders of record as on October 10, 2012.

On August 1, 2012, Lincoln paid a regular quarterly dividend of 8 cents per share to its shareholders of record as on July 10, 2012.

Peer Take

Earlier this week, one of Lincoln’s peers, Genworth Financial Inc. (GNW - Analyst Report) reported third quarter 2012 operating income of 25 cents per share, surpassing the Zacks Consensus Estimate by 31.6%. Results also compared favorably with the year-ago earnings of 13 cents. Operating profit for the quarter stood at $121 million, soaring 95% year over year. Results benefited from better performances at Global Mortgage Insurance and at Insurance and Wealth Management division. Another peer – Manulife Financial Corp. (MFC - Analyst Report) is slated to report its third quarter results on November 8, 2012.

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

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