Rating agency A.M. Best has reiterated
Lincoln National Corp.
) by asserting its credit and financial strength ratings (FSR).
This reflects the company's sustained growth fundamentals along
with improved liquidity and book value per share.
Accordingly, A.M. Best affirmed its issuer credit ratings
(ICR) of "aa-" and FSR of "A+" for the major subsidiaries of
Lincoln, and avowed an "a-" on the holding company's long-term
debt. However, the rating agency has scaled down the ICR and FSR
of Lincoln's separate subsidiary - First Penn-Pacific Life
Insurance Co. - to "a+" and "A" from "aa-" and "A+",
respectively. The downgrade was based on the division's
inadequate new business profile. Yet, the outlook for all ratings
Overall, the ratings validate Lincoln's strong and diverse
business profile that benefits from improved underwriting
results, pricing and distribution channels along with steady
investment performance amid the ongoing volatile economic state.
The company has also been able to reduce its credit impairments
while maintaining a modest financial leverage, coverage ratios
and excess liquidity.
These factors have also strengthened Lincoln's risk-adjusted
capitalization and alongside, its competitive leverage against
peers such as
Manulife Financial Corp.
As well, a 50% dividend hike, initiated by Lincoln last month,
reflects its strong capital and liquidity position, thereby
infusing value-added confidence among investors. Lincoln is
expected to further improve its financial leverage in the next
12-18 months, given its prudent capital management.
However, A.M. Best's optimistic outlook is partially mitigated
by some concerns over Lincoln's declining premiums in fixed
annuities and contracting sales in the life insurance business.
Moreover, the spread-based business is expected to be
consistently hit by the wrath of low interest rate environment
that has been shrinking equity returns and constricting the
Additionally, the company has an above-average exposure to
variable annuity business, which creates a downward-cyclic effect
under the current economic volatility. These factors also limit
the growth of alternative investment income. Nevertheless, the
rating agency believes that the company's hedging program is
well-placed and an improvement in interest rates and equity
markets should enhance its financials.
Last month, Lincoln reported third-quarter 2012 operating
earnings of $1.18 per share significantly surpassing the Zacks
Consensus Estimate of $1.01 and the prior-year quarter's earnings
of $1.03 a share, primarily on lower share count.
The modest upside was spurred by improved top line that jumped
16.0% over the prior-year quarter, which was driven by strong
distribution network and improved pricing. Moreover, its
investment portfolio reflected modest gains, which also drove the
book value by 19.5% year over year and return on equity (ROE) to
12.2% from 11.6% in the year-ago period. Lincoln holds excess
cash of $600 million as of September 30, 2012.
Based on the pros and cons, the Zacks Consensus Estimate pegs
Lincoln's fourth-quarter 2012 earnings at $1.06 per share, which
is about 6% higher than year-ago quarter. For 2012, earnings are
expected to grow about 4% over 2011 to $4.33 per share. Over the
last 30 days, 14 out of 16 firms have raised their estimates for
2012, while no downward revision was witnessed.
We maintain a Neutral recommendation on Lincoln over the long
term. The stock carries a Zacks Rank #2, which implies a Buy
rating and indicates slightly improved performance in the near
GENWORTH FINL (GNW): Free Stock Analysis
LINCOLN NATL-IN (LNC): Free Stock Analysis
MANULIFE FINL (MFC): Free Stock Analysis
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