Lincoln National Riding On Strong Life And Annuity Business

Lincoln National Corp. (NYSE:LNC) holds a leading market position in Life and Annuity segments. The company has been able to insulate itself from involuntary risk forces such as equity market volatility and interest rate risk by de-risking its product portfolio through curtailing sales of longer-dated products.

Moreover, the company also has a strong enterprise risk management practice in place, with respect to its in-force blocks. It manages risk via strong product and investment cash flow hedging along with regular stress testing of risk-adjusted capital.

The company also uses external reinsurance for a portion of new variable annuity sales, which carry living benefit guarantees. In this vein, the company recently entered into a reinsurance transaction with a subsidiary of Athene Holding Ltd. (NYSE:ATH) , which will reinsure approximately $7.7 billion of Lincoln National’s in-force fixed and fixed indexed annuity products. The freed up capital along with the ceding commission received from this deal will be utilized by Lincoln National for an accelerated share buyback program to the tune of $500 million. The transaction is expected to be accretive to Lincoln Financial's earnings per share in 2019.

Lincoln National’s recent acquisition of Liberty Mutual's group benefits business named Liberty Life Assurance Company, also solidifies the company’s hold in the Group Benefits market. The deal has enhanced the segment’s expertise in Large Case presence and Disability insurance. Going forward, the company expects this transaction to accelerate the already-strong positive momentum in the Group business.

Lincoln National also maintains adequate cash holdings and has good access to additional cash sources, which provides it with enough financial flexibility. For 2019, 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 also returning a significant amount of capital to its shareholders.

However, an increase in debt level due to the funding of the recent acquisition of Liberty Life, has raised interest expense and might weigh on margins. Also, high debt levels have created financial risk.

The company is also faced with increasing operating expenses, which might eat into operating margins.

Moreover, the company's return on assets (ROA), which shows the percentage of how profitable a company's assets are in generating revenues, is 0.56% compared with the industry average of 1.1%. This reflects the company's relative inefficiency in utilizing its assets to generate growth.

Despite these limiting factors, the stock has risen 22.6% year to date compared with the S&P 500’s gain of 12.3%. The company's strong fundamentals should help the stock in the coming quarters.

Lincoln National carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are FGL Holdings (NYSE:FG) and Torchmark Corporation (NYSE:TMK) . Each of these stocks carries a Zacks Rank #2 (Buy) and has surpassed earnings estimates in three of the last four quarters, with an average positive surprise of 6.5% and 2%, respectively.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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