Lincoln Nat’l Initiated as Neutral – Analyst Blog

We have recently initiated coverage on Lincoln National Corp. (LNC) with a Neutral recommendation. The company’s fourth quarter earnings were substantially ahead of the Zacks Consensus Estimate due to increased operating income across revenue segments. Lincoln National achieved expanded distribution relationships, strong top- and bottom-line growth and net inflows, thereby surviving a challenging operating environment. However, the near term outlook remains cautious given the poor ratings and the volatile economic conditions that restricted desired growth.

 

Lincoln National is focused on product development to increase its competitive position in small to mid corporate markets and to capitalize on the opportunities provided by the new regulatory changes that came into effect in 2009. As a result of these changes in its business profile, the company’s consolidated deposits and ending account balances propped up margins in 2009, driven by equity market appreciation that drove net inflows. Besides, insurance premiums were boosted to $1.6 billion in 2009 from $1.5 billion in 2008 and $1.4 billion in 2007. We believe these revenue drivers will continue to enhance the top line and help attain profitable growth.

 

Despite the challenging operating environment, Lincoln National’s restructuring initiatives are paying off well. While the sale of Delaware Investments has helped to shore up capital, the acquisition of Jefferson-Pilot continues to add the bank channel and life agents to Lincoln National’s network of regional brokers and independent financial planners. This business diversification helped in reducing volatility in earnings, enhancing its service offering and providing a competitive edge in the market. Going ahead, the company has the capacity to increase its leverage once the economy rebounds to historical highs.

 

However, Lincoln National continues to experience weak life insurance sales due to a low demand and reduced client activity, given the ongoing market volatility that has created a sense of caution on both macro and micro levels. The company has been also hurt by the pricing, faced investment losses as well as higher costs on investment-linked retirement products that guarantee returns in order to retain and develop new customers. Moreover, the company’s recently expanded wholesale business will take some time before it gains traction. Until now, Lincoln National has been lagging behind with its hybrid product (combination of life insurance with health insurance).

 

Besides, the global market crisis has significantly impacted the investment returns of Lincoln National that restricts growth opportunities. The poor debt ratings for the company at such a critical juncture only adds to the woes of the insurance business of the company, which is purely based on the market goodwill. In 2009, all of the rating agencies, namely, A.M. Best, S&P, Fitch and Moody’s Corp. (MCO), generated a negative outlook on Lincoln National’s debt obligations. The poor debt and credit ratings reflect a low earnings visibility and further investment losses, which may restrict the company’s liquidity and financial flexibility in future.

 

Overall, although the company’s near term growth projections remain tepid given the challenging operating environment, Lincoln National’s comprehensive capital plan and the receipt of financial support from the Treasury during the peak of the economic crisis is expected to mitigate balance sheet risk and provide liquidity cushion to its long term growth.

 

On Friday, the shares of Lincoln National closed at $31.66, down 0.8% on the New York Stock Exchange.