Last week, Fitch Ratings affirmed the debt and credit ratings of
Lincoln National Corp.
(
LNC
) along with a stable outlook. The ratings and outlook were based
on the company's steady improvement in liquidity and book value per
share, a solid balance sheet and sustained growth fundamentals.
Accordingly, Fitch asserted its long-term issuer default rating
(IDR) of "A-" and insurer financial strength (IFS) of "A+" on
Lincoln and its subsidiaries. Besides, the short-term IDR remains
intact at "F2", while senior notes continue to be rated "BBB+".
Thus, all the ratings carry decently high positions in the Fitch
rankings.
The latest ratings affirmation follows the cyclic review of
Lincoln's fundamentals, which paved the way for Fitch's long-term
optimistic outlook from the Fitch. In June last year, Fitch had
revised its outlook on Lincoln's insurance subsidiaries to stable
from negative, while affirming the financial strength of the
company.
Reviewing Lincoln's performance over the past year, the rating
agency remains optimistic about the company's long-term growth
prospects. This is also validated by Lincoln's adequate statutory
capital of $7.6 billion at 2011-end, up 7.3% on year-over-year
basis.
Healthy capital adequacy has also enhanced the company's
risk-based capital (RBC) ratio to 505% at 2011-end from 491% at
2010-end, which is also supported by the excess life reserves and
variable annuity guarantees. Further, by securing a 5-year credit
facility worth $2 billion in June 2011, Lincoln has established a
long-term solution to finance its statutory reserves and shore up
its life insurance operations, thereby attaining additional capital
buffer.
Additionally, despite incurring consolidated asset impairments
of about $750 million, with a net income of $294 million in
full-year 2011, Lincoln fared decent well in 2011. The company
continued a healthy pace of growth stride and reported net earnings
of $245 million for the first quarter of 2012, although it came in
lower than $314 million reported in the year-ago quarter. Overall,
Lincoln remains well-capitalized by achieving expanded distribution
relationships, improved deposits and net inflows, generating higher
book value.
However, the rating agency remains concerned about the impact of
the ongoing low interest rate environment, as Lincoln's vast
spread-based business is being adversely affected by the tightening
of spreads. The company's variable annuity business has an
above-average exposure to the volatile equity markets, although
Lincoln management practices disciplined hedging to minimize risk.
Yet the economic volatility and competitive pressures restrict the
desired investment income growth.
Moreover, Lincoln's financial leverage of 31% at the end of
March 2012 remains higher than Fitch's estimate of 25% for the
current ratings. While the increase was primarily due to the costs
related to the accounting changes adopted by the company, another
$300 million was raised through senior notes to pre-redeem a set of
senior notes that were to expire in August 2012.
Nonetheless, Fitch believes that Lincoln has the capability to
improve its financial leverage to range within 20-25% by embracing
various strategies to reduce its debt and borrowing costs, thereby
augmenting shareholders' equity. The rating agency also expects the
company to maintain its earnings before interest and tax (EBIT)
coverage to be within 8x-10x, in the long run.
Hence, barring some concerns, Fitch casts an optimistic
long-view on Lincoln. The rating affirmation also validates the
company's disciplined capital management that helped the company
weather the storm of the global economic downturn.
Additionally, it also aided in generating healthy earnings and
growth from its core operations during the critical period that
lasted over the last several quarters. Going ahead, enhanced
liquidity and risk-adjusted capitalization will further boost the
company's competitive position against arch rivals such as
Manulife Financial Corp.
(
MFC
) and
Genworth Financial
(
GNW
).
As a result of its strong capital leverage, efficient debt
restructuring and sound ratings, Lincoln is poised to consistently
return incremental capital to its shareholders. Its comprehensive
capital plan is also helping it to mitigate balance sheet risk and
provide liquidity cushion to its long-term growth.
Lincoln carries a Zacks Rank #2, implying a short-term Buy
rating. We currently have a long-term Neutral recommendation on the
stock.
GENWORTH FINL (GNW): Free Stock Analysis Report
LINCOLN NATL-IN (LNC): Free Stock Analysis
Report
MANULIFE FINL (MFC): Free Stock Analysis Report
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