Lincoln Lags on Higher Charges - Analyst Blog

Lincoln National Corporation's (LNC) fourth quarter operating earnings per share of 82 cents came in way behind the Zacks Consensus Estimate of 88 cents and 90 cents recorded in the prior-year quarter.

Results were primarily impacted by a charge of $41 million or 13 cents per share arising from litigation and settlement expenses. However, favorable investment income results and other items mitigated this decline by $9.0 million or 3 cents per share. Consequently, operating income decreased 10.4% year over year to $265.5 million.

Conversely, net income available to common shareholders was $195.6 million or 60 cents per share compared with $84.1 million or 27 cents per share in the year-ago quarter. GAAP net income for the reported quarter also came in at $195.6 million, though up from $102.3 million in the year-ago period.

Results for the reported quarter were impacted by net realized loss of $77.8 million (after tax) and loss of $1.7 million from early debt extinguishment, which were offset by benefit ratio unlocking (after tax) of $10.7 million and income from reserve changes (after-tax) of $0.3 million.

Lincoln's total revenue increased to $2.66 billion from $2.40 billion in the prior-year quarter. This also came in above the Zacks Consensus Estimate of $2.61 billion. Segment-analysis is as follows:

Retirement Solutions

Operating income from Individual Annuities was $123 million compared with $120 million in the prior-year quarter due to a 16% year over year increase in the average variable annuity account values. Variable annuity deposits were $2.2 billion (up 7% 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 $2 million as compared with $19 million in the year-ago period. However, the reported quarter also included $6 million of alternative investment income and excess premiums, partially offset by unlocking of deferred acquisition costs (DAC). Gross deposits climbed 5% year over year to $2.6 billion.

Operating income from Defined Contributions was $33 million, in line with the prior-year period. Gross deposits of $1.4 billion were up 17% versus prior year due to revived sales growth in mid-to-large and small case markets.

However, total net outflows were $304 million versus $62 million in the year-ago quarter, reflecting the termination of a large case. The reported quarter included a net negative item of $3 million that included $7 million of adverse impact from unlocking of DAC, partially offset by better-than-expected alternative investment income.

Insurance Solutions

Operating income from Life Insurance of $166 million decreased from the $158 million recorded in the year ago period. The life insurance segment's results included net gains of $10 million attributable to alternative investment income and prepayment and make whole premiums in excess of expected levels.

Life insurance sales were $206 million, up 6% 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 74% year-over-year. Besides, increased production was witnessed in the Executive Benefits division.

Operating income from Group Protection decreased to $18 million, compared to $30 million in the prior-year period. Non-medical loss ratio was 76%, up from 69% 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 $424 million, up 7% over the year-ago period and quarterly sales of $156 million decreased 7% year over year due to competitive pressures.

Other

Operating loss was $74 million versus $44 million in the year-ago quarter that included a net negative impact of approximately $41 million, after tax, on the back of Transamerica litigation expenses.

Lincoln reported improved consolidated deposits of $5.5 billion, up 12% year over year. Ending account balances increased 11% year over year to $157.3 billion, primarily driven by positive net flows and equity market appreciation.

 Full Year 2010 Highlights

For the full year 2010, operating earnings per share of $3.13 came in way behind the Zacks Consensus Estimate of $3.23 and $3.18 cents recorded in 2009, due to increased share count in the reported year. However, operating income increased 10.1% year over year to $1.038 billion.

Net income available to common shareholders was $811.7 million or $2.54 per share compared with loss of $519.3 million or $1.85 per share in 2009. GAAP net income came in at $980.3 million, dramatically up from net loss of $484.7 million in the year-ago period.

Results for the 2010 were impacted by net realized loss of $95.1 million (after tax) and loss of $1.7 million from early debt extinguishment, which were offset by benefit ratio unlocking (after tax) of $10.4 million, income from reserve changes (after-tax) of $1.7 million and income from discontinued operations of $28.9 million.

Lincoln's total revenue increased to $10.4 billion from $8.5 billion in the prior-year quarter. This also came in above the Zacks Consensus Estimate of $10.3 billion.

Consolidated deposits were $10.7 billion versus $10.4 billion in 2009. Total net flows at the Retirement Solutions improved to about $3.3 billion from about $2.9 billion in 2009.

As of December 31, 2010, net unrealized gains were approximately $2.9 billion (pre tax) on its available-for-sale securities as compared to a net unrealized loss of $43 million as of December 31, 2009.

Financial Update

For 2010, book value per share came in at $40.54, up from $36.02 at the end of 2009. Excluding accumulated other comprehensive income (AOCI), book value increased 3.5% year over year to $38.17 per share. The quarterly operating ROE, excluding AOCI and goodwill, was 11.9%, up from 13.4% at the end of 2009.

During the reported quarter, Lincoln announced its objective of buying back common equity shares worth approximately $125 million, over the following 15 months. Besides, the company also aims to redeem all of its outstanding 6.75% Series F Trust preferred securities worth $150 million. These preferred securities were issued by Lincoln National Capital VI.

Dividend Update

On November 11, 2010 the board of Lincoln announced a significantly increased quarterly dividend of 5 cents per share from the previous pay out of one cent per share. The hiked dividend was paid on February 1, 2011 to shareholders of record as on January 10, 2011. This marks the first dividend hike since 2007.

Industry Moves

Yesterday, close peer Genworth Financial Incorporation (GNW) reportedly walked out of 2010 with a wider loss based on the underperformance from the mortgage segment.

Besides, while Aflac Inc. (AFL) already reported a modestly strong exit from 2010, early this week, based on strong yen and investment income, Prudential Financial Inc. (PRU) is scheduled to release results after the market closes on February 9, 2011.