Lincoln National (LNC) Up 23% YTD: Will the Rise Continue?

Lincoln National Corp. LNC has exhibited favorable operating performance over the years, driven by its powerful retail franchise, expansion of its product portfolio in attractive, fast-growing segments of the market and increase in the effectiveness of its distribution force.

These tactics drove solid growth for all four businesses in 2018 and continue to position Lincoln National strongly in the marketplace. In 2018, Annuities sales increased significantly, Individual Life Insurance sales were the highest in a decade, Group Protection sales increased for the third straight year. The company expects further momentum led by expansion in distribution, which includes its new annuity distribution arrangement with Allstate.

The company’s share price is up by 23.6% year to date, compared with the industry’s rise of 14%. We expect the momentum to continue as it gains from the following factors:

Strong Performance in Group Benefits: Sales at this line of business have been increasing since 2016 and more than doubled in the first quarter of 2019. This growth has been achieved on the back of the recently acquired Liberty Mutual's group benefits business, increased scale, broader distribution access and expanded capabilities.

The acquisition also accelerated the company’s goal of increasing sources of earnings from traditional insurance risks.  As a result, 32% of the company’s total earnings in 2018 came from insurance risks, and this percentage is expected to rise over time.

Gaining Ground in Annuity Business: After net flows in Annuities business turned negative for the first time in 2016, the company established an action plan to return to positive flows.  This included a strategic decision to participate in more segments of the marketplace to reach wide variety of customers and advisers while also diversifying its sales mix. It faced success in this strategy with annuity cash flows turning positive in the fourth quarter and continuing into first quarter of 2019.

The company expects growth in its balanced mix of sales to continue. Increase in sales combined with equity market strength, should further position the company’s operating income to improve.

Expense Savings Initiatives: A few years ago, Lincoln National made a strategic decision to accelerate investments in digital, with a focus on enhancing the customer experience while also realizing expense savings. This initiative is progressing well, and the company expects savings to largely offset expenses in 2019, consistent with its prior target, and material bottom-line savings to begin emerging in 2020. Thus a decline in operating costs will aid margin growth. The company expects $250 million (pre-tax) in expense savings by 2020.

Strong Capital Deployment: Capital generation and deployment remain important drivers of enhancing shareholder value. For 2019, the company remains well capitalized, with steady free cash flow (the company expects free cash flow generation of approximately $850 million to $950 million in 2019), which makes it  well positioned to fund new business growth at attractive returns, while returning a significant amount of capital to its shareholders.

Lincoln National carries a Zacks Rank# 3 (Hold). Some better-ranked stocks in the same space are FGL Holdings FG, Reinsurance Group of America, Inc. RGA and Torchmark Corp. TMK. Each of these stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

FGL Holdings beat estimates in each of the four quarters with an average positive surprise of 13.05%, Reinsurance Group surpassed estimates in two of the four reported quarters with an average positive surprise of 5.62%.Torchmark posted better than expected numbers in three of the four reported quarters with an average positive surprise of 2.27%.

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Reinsurance Group of America, Incorporated (RGA): Free Stock Analysis Report

Torchmark Corporation (TMK): Free Stock Analysis Report

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FGL Holdings (FG): Free Stock Analysis Report

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