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Last week, Moody’s Investors Service of Moody’s Corp. (MCO - Analyst Report) upgraded the financial and credit ratings of life insurer Lincoln National Corp. (LNC - Analyst Report). The ratings were raised based on the life insurer’s strong business profile as well as the ability to withstand and recover amid a fluctuating economic scenario.

Accordingly, Moody’s elevated its credit rating on Lincoln’s senior debt to “Baa1” from “Baa2”, whereas the financial strength rating (FSR) of Lincoln and its subsidiaries was upped to “A1” from “A2”. Meanwhile, the short-term rating for commercial paper was avowed at “P-2”. The outlook for all ratings remained stable. In May 2010, Moody’s had revised its outlook on Lincoln and its operating subsidiaries to stable from negative.

According to Moody’s, Lincoln has come a long way since the financial crisis and its strong capital and asset position reflect a healthy recovery for the company. The ratings agency also commended the company’s superior risk management skills through a well-placed hedging program in order to combat the volatile equity markets and low interest rate environment, thereby enhancing Lincoln’s credit profile.

Additionally, operating growth has been strengthened by a de-risked product portfolio, an expanded distribution network and a shift away from capital-intensive and interest-sensitive products. Diversification into individual life insurance, annuities, retirement services and group protection products further mitigates market risk and boosts the competitive edge for the company.

Moody’s also elucidated on Lincoln’s improved financial leverage, which stood at 23.5% at the end of Mar 2013, in line with the expectations of the ratings agencies. The improved financial leverage will likely continue to tread in the low-to-mid 20% band in 2013. Moreover, the company remains well-funded to redeem debt worth $200 million due Jul 2013 and cover interest charges for more than a year. This should further improve the financial leverage going ahead.

Moody’s is concerned over Lincoln’s relatively weak cash flow coverage ratios. However, the rating agency is confident about the company’s resilient and proactive measures to deleverage its balance sheet and deliver higher earnings, thereby improving its cash flow coverage ratios and reserve levels over time.

We believe that Lincoln’s comprehensive capital plan is firm enough to mitigate credit and interest rate risks, while providing liquidity to its growth strategy in the long run. The company’s consistently efficient capital deployment plans also instill confidence among investors and ratings agencies.

While Lincoln carries a Zacks Rank #3 (Hold), Moody’s holds a Zacks Rank #2 (Buy). Other outperforming insurers include Reinsurance Group of America Inc. (RGA - Analyst Report) and StanCorp Financial Group Inc. (SFG - Analyst Report). Both these stocks carry a Zacks Rank #2 (Buy).

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