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Lincoln Beats on High Top Line

Zacks Equity Research

Lincoln National Corporation’s (LNC) 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 (AOCIF), 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) 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) 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.

Read the Full Research Report on GNW

Read the Full Research Report on LNC

Read the Full Research Report on MFC

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