Lincoln National Corporation’s (LNC) first quarter operating earnings of 83 cents per share lagged behind the Zacks Consensus Estimate of 86 cents but came in way ahead of 64 cents recorded in the prior-year quarter. Results reflected growth in average variable account values and included favorable inflows on investments helped by rallying equity and bond markets. Results also benefited from favorable unlocking of deferred acquisition costs (DAC) in the annuity business and unfavorable mortality in the individual and group life businesses.
 
GAAP net income for the reported quarter was $283 million or 85 cents per share. This compares with a net loss of $579 million or $2.27 a share in the same period a year earlier. Results for the reported quarter were impacted by net realized losses of $27 million (after tax) that were offset by gain from discontinued operations of $28 million.
 
Lincoln reported a 3% year-over-year increase in deposits to $4.7 billion; net flows were up 12% year-over- year to $1.3 billion. Ending account balances increased 27% year-over-year to $146 billion, primarily driven by another quarter of double-digit growth in net flows and equity market appreciation.
 
Total revenue increased to $2.6 billion from $2.3 billion in the prior-year quarter.
 
Segment Analysis
 
Retirement Solutions: Operating income from Individual Annuities was $119 million compared with $74 million in the prior-year quarter due to a 34% year-over-year increase in the average annuity account values. The reported quarter included a positive impact of approximately $19 million after tax, primarily attributed to positive retrospective DAC unlocking of $21 million, after tax. Gross annuity deposits were $2.3 billion (up 4% year-over-year) and net flows were $575 million (up 34% year-over-year). However, gross deposits and net flows declined from the fourth quarter of 2009, driven by fixed and indexed annuities, reflecting the low interest rate environment.
 
Operating income from Defined Contributions was $36 million compared with $30 million in the prior-year period. Gross deposits of $1.3 billion were down 16% from the comparable quarter last year. Total net flows were $109 million versus $657 million in the year-ago quarter, reflecting the bad timing in placing a few large cases.
 
Insurance Solutions: Operating income from Life Insurance of $137 million declined from $142 million recorded in the year-ago period. The Life Insurance segment’s results included net negative flows of $14 million, after tax. Life Insurance sales were $143 million, down 7.3% sequentially, reflecting, in part, first quarter seasonality. MoneyGuard, a linked-benefit UL insurance policy with a long-term care rider and term life insurance continued to post strong results as sales increased in double digits year-over-year.
 
Operating income from Group Protection decreased to $21 million compared with $26 million in the prior-year period. Non-medical loss ratio was 75%, up from 71% year-over-year and 69% sequentially, driven by unfavorable mortality experience in group life. Net earned premiums were $375 million, up 6% over the year-ago period and annualized sales of $63 million increased 16% year-over-year.
 
Alternative Investment Income: Operating income was $9 million compared with operating loss of $2 million in the year-ago quarter. The company’s alternative investment portfolio of approximately $700 million benefited from the favorable performance by limited partnerships, private equity and hedge funds.
 
Other: Operating loss was $37 million versus $109 million in the year-ago quarter. The reported quarter included a net negative impact of approximately $4 million, after tax, which resulted from expenses.
 
Book value per share came in at $36.19, up from $28.59 in the year-ago quarter. However, excluding accumulated other comprehensive income, book value decreased 7.5% year-over-year to $37.19 per share. The quarterly operating return on equity was 9.2%, up from 6.2% in the prior-year quarter.
 
Dividend Update
 
On February 23, the board of Lincoln National declared a quarterly cash dividend of 1 cent per share on the corporation’s common share that will be paid on May 1, to shareholders of record as on April 9.

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