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Shares of Lincoln National Corp. (LNC - Analyst Report) edged up 0.42% to $50.69 on Nov 25, following the reiteration of the credit and financial strength ratings (FSR) by the ratings agency – A.M. Best, on Nov 22. This reflects the company’s sustained operating leverage along with improved liquidity and book value per share.

Accordingly, A.M. Best affirmed its issuer credit ratings (ICR) of “aa-” and FSR of “A+” for the major subsidiaries of Lincoln, and avowed an “a-” on the holding company’s long-term debt. The rating agency also asserted the ICR and FSR of Lincoln’s separate subsidiary – First Penn-Pacific Life Insurance Co. – to “a+” and “A”, respectively. These were downgraded by one notch in Dec 2012. Meanwhile, the outlook for all ratings remains stable.

Rationale Behind Affirmation

Overall, the ratings validate Lincoln’s strong and diverse business profile that benefits from improved pricing and distribution channels, along with steady asset-liability management amid the ongoing volatile economic state.

The company has also been able to enhance its operating profitability, while maintaining a modest financial leverage, return on equity (ROE) and excess liquidity of about $500 million, after prepayment of debt that was due in 2014.  

Lincoln National’s strict interest rate management is actively mitigating risks and reflects favorable interest coverage ratios within the investment portfolio. These factors have also strengthened Lincoln’s risk-adjusted capitalization and along with its competitive leverage in the peer group.

The latest 33% dividend hike further reflects its capital adequacy and minimal balance sheet risks, thereby infusing value-added confidence among investors. Lincoln National is expected to further improve its financial leverage in the next 12-18 months, given its prudent enterprise management.

However, A.M. Best’s optimistic outlook is partially mitigated by some concerns over moderate results from core MoneyGuard products and heightened mortality rate that adversely affects life insurance profits. Furthermore, a high fraction of interest and equity-sensitive liabilities raise caution. Alongside, the persistent low interest rate environment has been hampering investment returns and the spread-based business.

Nevertheless, the rating agency believes that the company’s hedging program is well-placed and an improvement in interest rates and equity markets should enhance its financials. It will facilitate a shift toward higher return businesses, which will further boost the company’s clientele and add new synergies to its business operations.

Lincoln National presently carries a Zacks Rank #3 (Hold). However, other better-ranked stocks in the insurance sector include American Equity Investment Life Holding Co. (AEL - Snapshot Report), Manulife Financial Corporation (MFC - Analyst Report) and StanCorp Financial Group Inc. (SFG - Analyst Report). While StanCorp Financialsports a Zacks Rank #1 (Strong Buy), both American Equity and Manulife Financial hold a Zacks Rank #2 (Buy).

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