Lincoln Beats, Growth Across Board - Analyst Blog

Lincoln National Corporation’s (LNC) second quarter operating earnings per share of 86 cents came in way ahead of the Zacks Consensus Estimate of 76 cents and 79 cents recorded in the prior-year quarter. Results reflected growth in average account values that drove asset-based revenue 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 loss ratios in the group life business.

Net income available to common shareholders was $104 million or 33 cents per share. This included unamortized discount on preferred stock of $131 million, which was written off to repurchase all the preferred shares issued to the U.S. Treasury under the Capital Purchase Program (CPP) during the recent financial crisis along with accrued dividend and accretion of discount on preferred stock of $18.3 million.

GAAP net income for the reported quarter came in at $255 million. This compares favorably with a net loss of $161 million or 62 cents a share in the year-ago period. Results for the reported quarter were impacted by net realized losses of $7.3 million (after tax) and benefit ratio unlocking (after tax) of $30.9 million, which were offset by gain from discontinued operations of $28 million.

Lincoln’s total revenue increased to $2.6 billion from $1.9 billion in the prior-year quarter. Segment-analysis is as follows:

Retirement Solutions

Operating income from Individual Annuities was $116 million compared with $65 million in the prior-year quarter due to a 24% year-over-year increase in the average annuity account values. Gross annuity deposits were $2.8 billion (up 8% year over year) and net flows were $1.2 billion (up 11% year over year).

Operating income from Defined Contributions was $36 million compared with $28 million in the prior-year period due to a 19% year-over-year increase in the average annuity account values. Gross deposits of $1.4 billion were up 22% versus prior year. Total net flows were $182 million versus $256 million in the year-ago quarter, reflecting the bad timing in placing a few large cases.

Insurance Solutions

Operating income from Life Insurance of $151 million increased from $133 million recorded in the year-ago period. The life insurance segment's results included a loss on alternative investments. Life insurance sales were $140 million, up 13% year over year. 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. However, Universal life sales declined 8% year over year to $78 million on the back of change in consumer preferences and economic conditions.

Operating income from Group Protection decreased to $23 million, compared to $34 million in the prior-year period. Non-medical loss ratio was 76%, up from 68% in the year-ago quarter, driven by a ramp-up in the disability product line. Net earned premiums were $383 million, up 8% over the year-ago period and annualized sales of $65 million increased 10% year over year.

Alternative Investment Income

Operating income included alternative investment income of $11 million (after DAC and tax), compared to a loss of $29 million in the year-ago quarter. The company's alternative investment portfolio of approximately $700 million benefited from the favorable performance based on limited partnerships, private equity and hedge funds.

Other

Operating loss was $36 million versus $52 million in the year-ago quarter that included a net negative impact of approximately $19 million, after tax, which resulted from expenses.

Lincoln reported improved deposits of $5.3 billion and net flows were $2.0 billion. Ending account balances increased 12% year over year to $140 billion, primarily driven by strong growth in net flows and equity market appreciation.

Financial Update

Book value per share came in at $39.89, up from $30.02 in the year-ago quarter. Excluding accumulated other comprehensive income (AOCI), book value increased 3.5% year over year to $36.93 per share. The quarterly operating ROE was 9.8%, up from 7.9% in the prior year quarter.

During the reported quarter, Lincoln announced the closure of its bank credit facility worth $2 billion. This includes a 4-year credit agreement of $1.5 billion and a 364-day credit agreement of $500 million.

Further, in an attempt to repay its $950 million government bailout fund, Lincoln raised money through equity and debt offering. As a result, the company publicly offered its common stock and raised approximately $368 million. Lincoln also issued $250 million of 5-year senior notes.

Besides, the company completed the 30-year note offering of $500 million, which was used as part of a long-term financing plan to support reserves for the life insurance policies issued by its insurance subsidiaries. By securing the credit facility, Lincoln has established a long-term solution to finance its statutory reserves, thereby attaining additional capital buffer.

Overall, we believe that Lincoln’s business fundamentals, sale of Lincoln UK and Lincoln Delaware, a reduction of its common stock dividend and other cost savings initiatives bode well for long-term growth.

Moreover, as a result of its strong capital leverage, efficient debt restructuring and rating upgrades, Lincoln is poised to return the capital to its shareholders in the near future, thereby retaining investors’ confidence. Further, the complete repayment of TARP money has liberated Lincoln from government intervention in its internal affairs and pay restrictions.
 
 

 
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