Lincoln National Corporation’s (LNC) third quarter operating earnings per share of 63 cents came in 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. The current low interest rate environment 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. GAAP net income came in at $246 million, up from $153 million in the year-ago period. Results were impacted by net realized gains of $16.5 million (after-tax) and benefit ratio unlocking (after-tax) of $25.1 million, income from reserve changes of $0.5 million (after-tax) which were offset by a loss of $1.7 million from discontinued operations.
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.
Segment Analysis
Retirement Solutions: Operating income from Individual Annuities was $126 million compared with $95 million in the prior-year quarter due to a 14% year-over-year increase in the average annuity account values. Variable annuity deposits were $2.0 billion (up 11% year over year) while net flows were $1.3 billion (down 18.8% year over year) due to reduced fixed annuity flows. The reported quarter included net positive adjustments of about $12 million.
Operating income from Defined Contributions was $50 million compared with $43 million in the prior-year period due to a 10% year-over-year increase in the average annuity account values. Gross deposits of $1.3 billion were up 14% versus the prior year. However, total net outflows were $278 million versus net inflows of $144 million in the year-ago quarter, reflecting the bad timing in placing few large cases. The reported quarter included an $11 million favorable benefit from unlocking of deferred acquisition costs (DAC) and model review work.
Insurance Solutions: Operating income of $60 million from Life Insurance decreased from $137 million recorded in the year-ago period. The Life Insurance unit’s results included net charges of $82 million attributable to the comprehensive review at Lincoln, $114 million of charges due to lower long-term portfolio yields and unfavorable net mortality of approximately $10 million, due primarily to the low reinsurance on claims.
Life insurance sales were $148 million, up 2% year over year. MoneyGuard, a linked-benefit universal life (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. While variable UL insurance posted a modest upside, it was offset by a decline in overall UL sales on the back of a change in consumer preferences and economic conditions.
Operating income from Group Protection decreased to $9.5 million, compared to $35 million in the prior-year period. Non-medical loss ratio was 79%, up from 68% in the year-ago quarter, surpassing the projected range of 71%−74% due to the elevated incidence of disability income claims. Net earned premiums were $383 million, up 9% over the year-ago period. Annualized sales of $68 million decreased 14% year over year due to competitive pressures.
Alternative Investment Income: Operating income included alternative investment income of $7 million (after DAC and tax), compared to a loss of $1 million in the year-ago quarter. The company’s Alternative Investment portfolio of approximately $725 million benefited from the favorable performance based on limited partnerships, private equity and hedge funds.
Other: Operating loss was $40 million versus $33 million in the year-ago quarter, including a net negative impact of approximately $4 million, after tax, on the back of increased expenses.
Lincoln reported improved deposits of $5.5 billion, while 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.
Financial Update
Book value per share came in at $42.78, up from $35.91 in the year-ago quarter. Excluding accumulated other comprehensive income (AOCI), book value increased 2.5% year over year to $37.54 per share. The quarterly operating ROE, excluding AOCI, was 7.0%, down from 9.7% in the prior-year quarter.
During the reported quarter, Lincoln acquired $48 million of warrants from the U.S. Treasury, reflecting strength in excess capital position. The company paid $16.60 per warrant for 2.9 million warrants acquired, representing 22.3% of the 13 million outstanding warrants. The warrants have an average exercise price of $10.92 and expire on July 10, 2019.
Dividend Update
On November 1, the board of Lincoln paid a quarterly cash dividend of 1 cent per share on its common stock to shareholders of record as of October 8, 2010.
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
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