Lincoln National Corporation (LNC) reported third-quarter 2014 operating earnings of $1.56 per share, keeping its earnings streak alive with a trailing four-quarter average beat of 7.6%. The figure exceeded the Zacks Consensus Estimate of $1.42 and improved from the year-ago earnings of $1.34 per share.
Further, Lincoln National’s operating net income climbed 12.8% year over year to $414 million. Meanwhile, reported net income, including extraordinary items, stood at $439 million or $1.65 per share against $337 million or $1.23 per share in the year-ago quarter.
The year-over-year improvement stemmed from the distribution strength and expansion of product portfolio which resulted in high new business returns.
Lincoln National’s total revenue increased 13.4% from the prior-year quarter to $3.4 billion, beating the Zacks Consensus Estimate of $3.3 billion. Consolidated total account balances of Lincoln National increased 9% year over year to $215 billion, while net flow tumbled 33.1% to $1.5 billion, reflecting underperformance within Annuities and Retirement Plan Services segment. Total deposits fell 13% to $1.6 billion. Total expenses climbed 9.5% to $2.8 billion.
Segment Analysis
Operating income from the Annuities segment increased 24% year over year to $245 million on account of higher fees on assets under management and equity market performance. Even account values grew 13.9%, although net flows and gross deposits plunged 54.3% and 5%, respectively, from the prior-year quarter. However, variable annuity deposits declined 5% and fixed annuity deposits declined 3%.
Operating income from Retirement Plan Services was $40 million, higher than $33 million in the prior-year quarter. Favorable equity market performance and retention mainly led to the upside.
Operating income from Life Insurance was $150 million, up 7% year over year, driven by robust alternative net investment income. Life insurance sales reduced 4.8% year over year to $160 million. Life insurance in force improved 5% year over year to $632 billion, while account values surged 7% to $41 billion.
Operating income from Group Protection plunged 65.2% to $8 million in the prior-year period primarily due to higher disability claims. Non-medical loss ratio deteriorated to 77.6% from 73.4% in the year-ago quarter mainly due to an increase in disability claim costs. Further, non-medical net earned premiums were $528 million, up 7% from the year-ago period, while Group Protection sales declined 12% to $94 million, mainly due to pricing changes.
Operating loss in Other operations was $29 million, wider than a loss of $27 million in the prior-year quarter.
Investment Position
Lincoln National’s net realized gains included a net loss from general account investments of $16 million compared with $7 million in the prior-year quarter. Additionally, net realized gains included variable annuity net derivatives gain of $32 million in the reported quarter.
As of Sep 30, 2014, pre-tax net unrealized gain on Lincoln National’s available-for-sale securities was approximately $6.9 billion, up from $4.3 billion in the year-ago period.
Net investment income increased 2.7% to $1.2 billion in the reported quarter.
Financial Update
At the end of Sep 2014, Lincoln National’s book value per share came in at $59.48, up 17% year over year. Excluding accumulated other comprehensive income (AOCI), book value climbed 9% year over year to $48.23 per share. Operating ROE stood at 13.4% at the end of the third quarter of 2014, up from 12.7% in the year-ago period.
Additionally, Lincoln National bought back 2.8 million shares for $150 million in the reported quarter, bringing the year-to-date repurchase to 8.9 million shares worth $450 million.
Dividend Update
Lincoln National raised its quarterly dividend by 25% to 20 cents per share. This increased dividend will be paid on Feb 1, 2015 to shareholders of record on Jan 12, 2015.
Zacks Rank
Lincoln National currently carries a Zacks Rank #3 (Hold). However, better-ranked stocks in the life insurance space that look attractive at current levels include Fidelity & Guaranty Life Common (FGL), China Life Insurance Co. Ltd. (LFC) and StanCorp Financial Group Inc. (SFG). While Fidelity & Guaranty Life sports a Zacks Rank #1 (Strong Buy), China Life and StanCorp Financial have a Zacks Rank #2 (Buy).
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