Zacks Investment Research



| Lincoln National Corp. |(LNC – NYSE) |$66.43 |

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: 1Q18 Earnings Results

Prev. Ed.: 4Q17 Earnings Update, Mar 26, 2018

Flash Update [Note: Only highlighted material has been changed.]

On May 2, 2018, Lincoln National Corporation announced first-quarter 2018 earnings of $1.97 per share surpassed the Zacks Consensus Estimate by 1.6%. Also, the bottom line increased about 3% year over year, led by higher fee income.

Operating revenues of $3.61 billion increased 3.1% year over year but missed the Zacks Consensus Estimate by 3.7%.

Insurance premium decreased 3.7% year over year to $777 million, fee income increased 7.5% to $1.46 billion.

Total expenses increased 4.9% to $3.17 billion year over year, mainly led by higher strategic digitization expense and interest and debt expense.

Strong Segment Results

Operating income in the Annuities segment decreased 5% year over year to $267 million. The year-ago quarter benefited from one-time tax adjustments.

Total annuity deposits increased 25.3% from the year-ago quarter to $2.5 billion, driven by growth in variable annuities.

Operating income in Retirement Plan Services increased 16.2% year over year to $43 million, driven by growth in fee income and a lower tax rate. Total deposits grew 4.8% from the prior-year quarter to $2.36 billion.

Operating income in Life Insurance segment was up 10.8% year over year to $144 million due to lower tax rate and growth of policies in-force.

Operating revenues increased 3.4% year over year to $1.66 billion.

Operating income in Group Protection surged 314% from the year-ago quarter to $29 million.  The upside was driven by an improvement in non-medical loss ratio. Operating revenues increased 2.2% year over year to $553 million.

Other Operations

The company incurred a loss of $58 million, wider than the loss of $31 million in the prior-year quarter.

Financial Update

As of Mar 31, 2018, Lincoln National’s book value per share, excluding accumulated other comprehensive income, climbed 7.7% year over year to $62.88.

Operating return on equity (ROE), excluding accumulated other comprehensive income and goodwill, declined 200 bps from the year-ago quarter to 14.4%.

The company ended the quarter with long-term debt of $5.65 billion, up 10.6% year over year.

Business Update

The company has completed the acquisition of Liberty Mutual’s group benefits business. The buyout is expected to create a single, powerful Group Benefits operation with industry-leading products, services and capabilities.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON LNC

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Lincoln National Corporation is a leading provider of life insurance, savings, retirement and supplemental health insurance products to retail and institutional customers throughout the United States. The company also provides radio and television sports programming on a regional basis. The company, founded in 1905, has its executive headquarters in Philadelphia, PA.

Almost 44.4% of the firms in the Digest Group assigned positive ratings while the remaining 55.6% rendered a neutral outlook. None of the firms rated the stock negative. All nine provided target prices ranging from $82.00 (12.3% upside from current price) to $96.00 (31.5% upside from current price).

Neutral or equivalent outlook – 5/9 firms or 55.6% – The cautious firms believe that Lincoln National needs to stabilize earnings from interest-sensitive business in order to improve valuation. Though the firms believe that the company has good valuation and adequate capital deployment, they are concerned about the effect of the low interest rate and the possibility of margin compression in the legacy individual life block. Nonetheless, these firms commend the company’s capital flexibility, which enables it to engage in considerable share repurchases and regular dividend hikes.

These firms are of the opinion that Lincoln National, which has a very strong franchise, has the capacity to generate high returns. However, they believe that due to the company’s exposure to equity market fluctuations, a high amount of capital is required to safeguard results.

Moreover, these firms believe that the strength of Lincoln National’s Variable Annuity (VA) business, particularly the strong wholesale and distribution network should help retain its position as one of the market leaders without having to employ selling techniques such as generous discount and under pricing.

However, the firms are neutral owing to Lincoln National’s equity sensitive business and exposure to interest rate which, according to the firms, makes its results more volatile than its peers.

Firms with cautious outlook state that Lincoln National expects their alternative investment income to get improved in the broader equity and energy market. The firm also plans to reduce the allocation of hedge funds and transfer some hedge funds to private equity.

Cautious firms believe that the tax reform would benefit all segments of Lincoln National. Management has also stated that over time, it expects to invest some of the tax benefits into making the products more competitive.

Positive or equivalent outlook – 4/9 firms or 44.4% – The bullish firms believe that Lincoln National can take valuation close to its peer group on the basis of its ability to accelerate the growth rate of return on equity (ROE).

The company is favored because of strong presence in most of the major insurance product markets, efficient distribution through both wholesaling and wholly owned channels and a strong potential to generate capital. The bullish firms also believe that the company’s strong product balance is responsible for the improvement in operating earnings.

Moreover, management initiatives to reduce risk within variable annuity business from the reinsurance deal with Union Hamilton Re as well as to increase focus on variable annuity (VA) sales without guaranteed living benefits are likely to generate positive returns.

The firms anticipate that Lincoln National will continue to exhibit strong earnings results and report considerable share buybacks. The firms believe that the company is increasing its capital in alternative investment strategies, which include private placements, middle market loans and hedge funds. Going forward, the company is expected to increase its investments, which will generate positive investment yield.

The firms are of the opinion that in the future there will be an increased demand for products that provide income protection and meet wealth accumulation goals of retiring baby boomers. This will favor the company by enhancing its sales, thereby positively impacting earnings.

Mar 26, 2018

Overview [Note: Only highlighted material has been changed.]

The key positive and negative arguments, as identified by firms, are outlined below:

|Key Positive Arguments |Key Negative Arguments |

|Diverse operations and focus on asset management operations such as |Intensely competitive operating environment. |

|pension plans, trusts and mutual funds. |Increased regulatory scrutiny/requirements. |

|Management is taking action to strengthen its balance sheet and improve |Operating ROE may be affected by weak equity markets and low interest |

|liquidity as reflected in the regular dividend hikes. |rates. |

|Based on management’s efforts to reposition the company, the firms believe|Increased competition in the variable annuities market as more insurers |

|that Lincoln National is preparing to reap benefits from an economic |add Guaranteed Minimum Withdrawal Benefit (GMWB) features to their |

|recovery. |products. |

|. |Lincoln National has limited flexibility to absorb high investment losses |

| |or a severe equity market decline. |

| |Higher exposure to macro volatility than peers. |

Lincoln National, based in Philadelphia, PA, is a holding company that operates in several financial services sectors, including life insurance and annuities, investment management, and the U.K. life insurance. Its insurance products are marketed mostly under the Lincoln Financial Group label, while its investment management activities are marketed by Delaware Investments. It operates in four segments: Individual Annuities, Life Insurance, Defined Contribution and Group Protection. Through these segments, the company sells a wide range of wealth protection and transfer as well as retirement accumulation and distribution products and solutions. The company’s operations are primarily situated in the U.S.

For more information about the company, please visit its website at

Note: Lincoln National’s fiscal references coincide with the calendar year.

Mar 26, 2018

Long-Term Growth [Note: Only highlighted material has been changed.]

The firms believe that Lincoln National witnesses challenges from a low interest rate environment, spread compression and regulatory hurdles. Lincoln National lacks the scope to reduce crediting rates in the fixed annuity book of business as rates are already quite low.

However, according to the firms, Lincoln National is strategically positioned with strong Life Insurance, Annuities and Asset Management businesses. The firms also expect the company’s superior product innovation skills, strong sub-account investment performance (attributable to capital research activities), and wholesaler expansion to enable it to continue to gain shares in the variable annuity market over the long term.

Lincoln National is considered to be well poised with respect to its variable annuities, though its performance is linked to equity markets. The firms expect the improvement in equity markets to result in an increase in the sales of variable products. At the same time, product diversification is expected to help reduce volatility in Lincoln National. This is because variable annuity sales decline when the equity markets perform unimpressively and fixed annuity sales lag when interest rates are low.

In the upcoming decade, the firms expect an increased need for income protection, with the requirement to meet the wealth accumulation goals and needs of retiring baby boomers to be a key driver in shaping the actions of the life insurance industry.

The cautious firms are optimistic about Lincoln National’s retirement plans and group insurance businesses. While they expect growth in the retirement plans business to be constrained in the short-term due to low hiring and absence of wage inflation, its long-term performance is expected to be better with product development efforts, a new record-keeping platform and economic recovery, which should cumulatively offset the disadvantage of the small scale of operation in some portions of the retirement plans business.

Even in the group insurance business, long-term growth and ROE are expected to be strong due to pricing improvements and the ongoing efforts to widen the distribution network and improve business technology. Moreover, acquisitions in the sector will not only enhance operating scale, but also broaden the company’s liability profile and make its returns and balance sheet less sensitive to low interest rates and changes in the equity market. However, the cautious firms are not too optimistic about the individual life business.

Mar 26, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

|Rating Distribution |

|Positive |44.4%↑ |

|Neutral |55.6%↓ |

|Negative |0.0% |

|Average Target Price |$73.11↓ |

|Digest High |$82.00↓ |

|Digest Low |$96.00↑ |

|Number of firms with price target/Total |9/9 |

According to the firms, risks to the target price include compression of investment spread, increasing capital requirement, poor credit market conditions, equity market declines, weak margin in the individual life segment, poor interest rate environment, unfavorable legislation, rating downgrade, adverse mortality/claims rate and peer pressure.

Recent Events [Note: Only highlighted material has been changed.]

On Feb 14, 2018, A.M. Best has affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “aa-” of The Lincoln National Life Insurance Company and its wholly owned subsidiary, Lincoln Life & Annuity Company of New York, known as Lincoln Financial Group. Concurrently, A.M. Best has affirmed the Long-Term ICR of “a-” and all existing Long- and Short-Term Issue Credit Ratings of Lincoln National. The outlook of these Credit Ratings (ratings) is stable. In addition, the rating giant has also assigned Long-Term IRs of “a-” to the company’s $500 million 3.8% senior unsecured notes due 2028 and $450 million 4.35% senior unsecured notes due 2048. The outlook assigned to these ratings is stable. The ratings reflect Lincoln National’s strong balance sheet, solid operating performance, favorable business profile and prudent enterprise risk management.

On Jan 31, 2018, Lincoln National Corporation announced its 4Q17 and 2017 earnings results. Fourth-quarter 2017 earnings of $1.98 per share surpassed the Zacks Consensus Estimate by 2.06%. Also, the bottom line increased about 12% year over year, led by higher premium and fees.

Financial Update

As of Dec 31, 2017, Lincoln National’s book value per share excluding accumulated other comprehensive income, climbed 13% year over year to $64.62.

Operating return on equity (ROE) excluding accumulated other comprehensive income and goodwill, declined 70 bps from the year-ago quarter to 14.7%.

The company ended the quarter with long-term debt of $4.89 billion, down 10% year over year.

Share Buyback

During the quarter under review, the company repurchased 1.7 million shares of stock at a cost of $125 million.

Revenues [Note: Only highlighted material has been changed.]

Lincoln National’s operating revenues of $3.78 billion increased 7.3% year over year, beating the Zacks Consensus Estimate of $3.67 billion.

Insurance premium and fee income increased 18.8% and 9.4% each, from the prior-year quarter to $874 million and $1.47 billion, respectively.

Segment Analysis

Retirement Solutions

Annuities: Total annuity deposits increased 54% from the year-ago quarter to $2.8 billion, driven by growth across all its major products

Retirement Plan Services: Total deposits grew 1% from the prior-year quarter to $2.4 billion owing to 29% increase in the first year coupled with growth in recurring deposits.

Insurance Solutions

Life Insurance: Total Life insurance sales rose 5% from the year-ago quarter to $242 million, driven by growth in Executive Benefits, Term and VUL products.

Group Protection: Sales in this segment remained unchanged year over year at $265 million, driven by growth across all product lines and in both employer and employee-paid sales.

Margins [Note: Only highlighted material has been changed.]

Total expenses surged 32.7% to $4.06 billion year over year, mainly led by higher strategic digitization expense, partly offset by lower interest and debt expense.

Operating income in each segment except Life insurance has been reportedly higher compared with the prior-year quarter.

Segment Analysis

Annuity

Operating income increased 10% year over year to $265 million due to higher fees income and average account values

Retirement Plan Services

Operating income increased 21% year over year to $41 million, driven by growth in fee income from higher average account values and expense ratio improvement.

Life Insurance

Operating income declined 1.3% year over year to $152 million due to higher variable investment income in the prior-year quarter.

Group Protection

Operating income rose 25% from the year-ago quarter to $20 million. This upside was attributed to an improvement in non-medical loss ratio.

Other Operations

The company incurred a loss of $38 million, almost equal to the loss of $37 million in the year-earlier quarter.

Earnings per Share [Note: Only highlighted material has been changed.]

Lincoln National announced fourth-quarter 2017 earnings of $1.98 per share, outpacing the Zacks Consensus Estimate by 2.06%. Also, the bottom line improved about 12% year over year, led by higher premium and fees.

Outlook

A cautious firm raised 2018 and 2019 earnings per share estimates to reflect higher asset levels in Annuities and Retirement Plan Services.

Another firm with neutral outlook lowered 2018 EPS estimate due to suspension in the company’s buyback program in the first half of 2018 for the pending acquisition of Liberty Mutual’s Group.

|Analyst |Srijita Guha |

|Copy Editor |Pramita Bose |

|Content Editor | Sapna Bagaria |

|Lead Analyst | Sapna Bagaria |

|QCA | Tanuka De |

|No. of brokers |9/9 |

|reported/Total | |

|brokers | |

|Reason for Update |1Q18 Flash Update |

-----------------------

May 3, 2018

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download