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On Nov 22, we downgraded life insurer Lincoln National Corp. (LNC - Analyst Report) to Neutral based on its moderated growth momentum alongside a deteriorating investment portfolio. Yet, core business growth in driving operating leverage.

Why the Downgrade?

Lincoln National has witnessed some moderation since its third-quarter 2013 results on Oct 30. Both operating earnings of $1.34 per share and total revenue of $3.1 billion topped the Zacks Consensus Estimate of $1.23 a share and $3.0 billion, respectively, during the quarter.

Both earnings and revenues also exceeded the year-ago results by 5.5% and 6%, respectively. Overall, Lincoln National delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 4.0%.

Operating growth was driven by improved sales of re-priced products as well as change in the business mix to higher return products. Additionally, consolidated deposits and ending account balances displayed double-digit growth. Higher retention and equity market appreciation also drove net inflows, which surged 76% over the prior-year quarter. Consequently, book value per share and return on equity (ROE) also witnessed accretion.

Following the release of the third quarter results, the Zacks Consensus Estimate for 2013 rose 2.3% to $4.89 per share in the last 30 days. The same for 2014 inched up 0.8% to $5.31 a share. Meanwhile, the current estimates reflect 9.4% year-over-year growth in 2013 and an 8.7% upswing in 2014. With the Zacks Consensus Estimates for both 2013 and 2014 rising steadily, the company now has a Zacks Rank #2 (Buy).

Lincoln National enjoys a strong position in its markets of operation. Fundamentals have also been benefiting from improved product pricing, claims management, diversified insurance products portfolio, risk management and a strong distribution network.

However, deteriorated financial leverage and investment portfolio amid intense competition and low interest rate environment increase operating and financial risks. Nonetheless, Lincoln National’s incremental capital deployment, consistent annual dividend hike and healthy ratings score well with the long-term investors.

Other Insurers That Warrant a Look

Other insurers like Primerica Inc. (PRI - Snapshot Report), American Equity Investment Life Holding Co. (AEL - Snapshot Report) and Manulife Financial Corporation (MFC - Analyst Report) also show slight upward pressure in the near term, , sporting the same Zacks Rank as Lincoln National.

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