The U.S. life insurer Lincoln National Corp. (LNC) is scheduled to release its fourth quarter earnings results after the market opens on February 2, 2011. The Zacks Consensus Estimate for the fourth quarter is 88 cents per share, representing a loss of about 2.2% over the year-ago quarter.

Following the third quarter trends, improvement in deposits, net flows and ending account balances could continue to accelerate the book value growth. This fundamental strength will also help drive the top line expansion. However, continuous increase in expenses and charges along with the low interest rate milieu could hamper the bottom line recovery.

Previous Quarter Performance

Lincoln reported third quarter operating earnings per share of 63 cents came way behind the Zacks Consensus Estimate of 87 cents and 84 cents recorded in the prior-year quarter.

Results were primarily impacted by the company’s annual comprehensive review of actuarial assumptions and model work, which resulted in a net charge of $72 million or 22 cents per share. Besides, the current low interest rate environment also added to the adverse results.

Consequently, operating income declined 25.4% year over year to $206 million. However, net income available to common shareholders was $245 million or 75 cents per share compared with $137 million or 44 cents per share in the year-ago quarter.

Lincoln’s total revenue increased to $2.61 billion from $2.08 billion in the prior-year quarter. This also came in above the Zacks Consensus Estimate of $2.53 billion.

While growth from annuities and defined contributions remained modestly strong under the Retirement Solutions’ segment, these were partially offset by continued weakness in life insurance sales.

Gross deposits of $1.3 billion were up 14% versus prior year. However, total net outflows were $278 million versus net inflow of $144 million in the year-ago quarter, reflecting the wrong timing in placing few large cases.

Lincolnreported improved deposits of $5.5 billion and net flows were $1.7 billion. Ending account balances increased 10% year over year to $150 billion, primarily driven by positive net flows and equity market appreciation. Book value per share came in at $42.78, up from $35.91 in the year-ago quarter.

Agreement with Analysts

Ahead of the earnings release, we did see some variation in analyst estimates over the past 30 days. However, only minor changes were noticed over the past 7 days. Hence, the estimate revision trends and the magnitude of such revisions justify moderate changes in the sentiment.

In the last 30 days, 9 of the 17 analysts have raised their estimates for the fourth quarter and 8 raised the same for 2010. Further, 11 of the 18 analysts raised its estimate for 2011, overall providing a strong directional movement. This implies that the analysts have provided a positive outlook and indicate chances of some upward pressure on the results.

With the repayment of the government bailout amount last year, Lincoln is focused on keeping its balance sheet at low risk, a positive that could increase operational efficiencies by deploying capital through share repurchases and dividend payments.

Magnitude of Estimate Revisions

In the last 90 days, estimates for the fourth quarter moved only by a couple of cents following the third quarter results. However, earnings per share dropped by 22 cents to the current level of $3.23 per share for full year 2010.

Meanwhile, for fiscal 2011, estimated earnings per share remained constant at $3.74, over the past 90 days. This trend reveals lack of clarity in the analysts’ opinion about Lincoln over the near-to-intermediate term.

Earnings Surprise

Going by past trends, we have a slightly mixed opinion about Lincoln outperforming its peer group in the near term. The company’s reported earnings per share exceeded its expectations for two of the last four quarters and has a negative four-quarter average surprise of 2.09%.

Our Take

Lincoln remains well-capitalized by achieving expanded distribution relationships, improved deposits and net inflows, generating higher ROE and book value. However, the near-term outlook remains cautious, with volatile economic conditions, competitive pressures and low interest rate environment restricting desired investment income growth.

Prime peers such as Aflac Inc. (AFL) and Prudential Financial Inc. (PRU) are performing equally well in the life insurance sphere.

Overall, as a result of its strong capital leverage, efficient debt restructuring and sound ratings, Lincoln is poised to return capital to its shareholders in the near future, thereby retaining investors’ confidence. Lincoln aims to buy back common equity shares worth approximately $125 million, over the following 15 months.

The company also aims to redeem all of its outstanding 6.75% Series F Trust preferred securities worth $150 million. Its comprehensive capital plan is also helping it to mitigate balance sheet risk and provide liquidity cushion for its long-term growth.

Hence, we currently provide Neutral recommendation on Lincoln, given the risk-reward balance in the intermediate term. Thisalso corresponds to the Zacks #3 Rank (short-term Hold).

 
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