Lincoln National Posts 4Q Net Loss of $514M on Life Insurance, Media Charges

Lincoln National Corp. posted fourth-quarter 2011 net loss of $514 million, driven by a $747 million non-cash goodwill impairment charge on the life insurance and media businesses. This is compared with net income of $196 million for the 2010 fourth quarter.

Based on the dynamics in the life insurance market, along with lower sales due to pricing changes on policies, Lincoln National (NYSE: LNC) recorded a $650 million impairment on goodwill on this business.</p>

"Although the shares may trade down as a result of the impairment, we believe this is a net positive for the company as it removes an overhang on valuation," wrote equity analysts with Sandler O'Neill, in a research note.

The Federal Reserve's Jan. 25 announcement it plans to keep short-term interest rates near zero at least through late 2014 continued the financial and profit pressures plaguing the U.S. life insurance industry (Best's News Service, Jan. 27, 2012).

Fourth-quarter earnings for Lincoln also were hurt by a $42 million loss on derivatives for its stock market-linked variable annuities, including a $47 million adjustment on narrowing credit default spreads.

Life insurance sales of $229 million increased 11% over the prior-year quarter and sales for the full year of $700 million rose 10% from 2010. However, both periods' results reflect a decline in sales of universal life insurance policies with a secondary death benefit guarantee as Lincoln adjusted pricing to de-emphasize single premium policies and shifted to other products.

Full-year net income dropped sharply to $290 million from $812 million.

The company's 2011 operating results "reflect continued strength in flows and deposits across our businesses, ongoing product repricing to achieve targeted returns, and significant capital management activities," said Dennis R. Glass, Lincoln National's president and chief executive officer, in a statement. Total operating revenues for 2011 rose slightly to $11 billion.

In November, A,M. Best Co. said that although persistent low interest rates may act as a headwind to pretax earnings interest coverage, Lincoln currently maintains solid cash coverage for its holding company needs (Best's News Service, Nov. 8, 2011).

However, equity market risk and interest rate risk from Lincoln's legacy books of variable annuities and ULSG business continue to partially offset these strengths. Lincoln has used its expertise in commercial mortgages and hedging to help offset some of the interest rate risk, which when coupled with product levers, helps mitigate spread compression. But the company has a large in-force block of UL policies at higher guaranteed interest rate minimums well in excess of the value of newer, low guarantee products currently being written, Best said at that time.

Lincoln National Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).

At midday of Feb. 8. Lincoln National Corp.'s stock was trading at $23.87 a share, up 0.21% from the previous close.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])