The major ratings agencies; A.M. Best, Fitch and Moody’s have casted their ratings on Lincoln National Corp.’s (LNC - Analyst Report) proposed issue of 10-year fixed rate notes worth $350 million. These notes will yield an interest of 4.1%.
Accordingly, A.M. Best, Fitch and Moody’s have assigned a long-term debt rating of “a-”, “BBB+” and “Baa1”, respectively. In Jun 2013, Moody’s had raised its long-term debt rating to “Baa1” from “Baa2” and also upped its financial strength rating to “A1” from “A2” on Lincoln National and its subsidiaries.
Lincoln projects to utilize the proceeds of the notes to partly fund the prepayment of debt worth $500 million, which is slated to mature in the first quarter of 2014. Nonetheless, the ratings agencies have shown confidence in the company’s de-leveraging strategy.
Moreover, Lincoln’s financial leverage of mid-20% range at the end of Jun 2013 remains within the ratings agencies’ benchmark of 30%. Further, the company has witnessed steady improvement in its financials based on organic growth, which also instils confidence among the ratings agencies.
Meanwhile, all the ratings bear a stable outlook, assuring Lincoln’s potential for improving capital position, which exceeded the NAIC risk-based capital requirements over the last 3 years.
The company’s respectable statutory capital, capable management and diverse distribution network have driven its operating leverage, according to the rating agencies, who further validate Lincoln’s healthy growth outlook. However, lingering concerns regarding economic volatility, competitive pressures and low interest rate environment restrict desired growth in investment income and variable annuities.
Overall, we believe that Lincoln is poised to consistently return incremental capital to its shareholders, as reflected by the consistent dividend hike, strong capital leverage and sound ratings.
While Lincoln carries a Zacks Rank #2 (Buy), other insurers that are outperforming the peer group include Everest Re Ltd. (RE - Analyst Report), HCI Group Inc. and EMC Insurance Group Inc. . All these stocks carry a Zacks Rank #1 (Strong Buy).