Lincoln National (LNC) Plunges 40% YTD: Will It Bounce Back?

Shares of Lincoln National Corporation LNC have exhibited a downtrend so far this year owing to lower interest rates triggered by the COVID-19 pandemic, and escalated costs. The company has a negative four-quarter earnings surprise history of 9.9%.

Year to date, shares of this life insurer have lost 39.9% compared with the industry’s decline of 19%.

What’s Deterring the Stock?

The interest rate cut by the Federal Reserve in the United States following the coronavirus outbreak has dealt a severe blow to the life insurance industry. Most of the life insurers with investments in fixed-income securities have been affected by lower interest rates. In the prevailing lower interest rate environment, the income from investments of life insurers become insufficient to meet the contractually guaranteed obligations of policyholders, which cannot be lowered.

Notably, Lincoln National with a Zacks Rank #3 (Hold) is no exception to the abovementioned trend, since the company’s portfolio itself offers products backed by guarantees. Lower rates can not only potentially harm the company’s liquidity position but can also render life insurance products unattractive and result in lower premium generation. It is worth mentioning that insurance premiums have witnessed a decline of 4.6% in the second half of 2020, thereby adversely impacting the company’s revenues as well.

Moreover, the prevailing low interest rate environment is likely to keep investment yields under pressure. Net investment income — an important driver of the company’s top-line growth — has declined 2.3% in the second half of 2020, primarily due to investment losses incurred on alternative investments.

Furthermore, Lincoln National anticipates near-term sales to remain under pressure as it re-prices business for the current environment. The COVID-19 induced disruptions will only aggravate the issue. The company’s loss ratio has remained elevated so far this year due to higher incidence of claims stemming from COVID-19 related mortality and is expected to remain so in the days ahead.

Additionally, elevated costs, which increased 6.4% in the second half of 2020, can put pressure on the company’s bottom line. Case in point, its net margin of 1.4% at second-quarter end contracted 370 basis points (bps) from 2019 end and 740 bps year over year. Also, its bottom line will be deprived of the cushion provided by share buybacks, which has been temporarily put on hold in a bid to preserve capital amid the volatile economic environment.

Will the Stock Regain Strength?

Although a rebound in the stock price looks difficult in the near term, the same is expected over the medium term as Lincoln National has been shifting focus toward non-guaranteed products, which is likely to reduce the company’s risk profile in the days ahead.

It has to be noted that Lincoln National has been making every effort to digitize the life insurance purchase process, which has helped it in transitioning to a virtual sales environment. Increased use of digital tools is likely to minimize impact to sales due to adoption of the virtual sales environment.

Also, the company has undertaken consistent efforts to boost retirement business. It has been committed to providing a comprehensive financial planning for the retirees by rolling out enhanced retirement solutions.

The company’s strong cash flows have, in fact, paved the way for a robust capital position, which will enable the company to navigate through the turbulent operating environment. To keep its strong capital position intact, Lincoln National has been lowering the amount of capital deployed towards new sales this year by around $400 million.

Stocks to Consider

Some better-ranked stocks in the insurance space include Manulife Financial Corporation MFC, Sun Life Financial Inc. SLF and First American Financial Corporation FAF, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Manulife, Sun Life and First American Financial have a trailing four-quarter earnings surprise of 6.79%, 11.58% and 20.84%, respectively, on average.

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