Lincoln Acquires Treasury Warrants - Analyst Blog

Moving ahead with its debt restructuring initiatives, on Friday, Lincoln National Corp. (LNC) announced that it purchased warrants worth approximately $48.14 million in order to buy back its common stock. The warrants were acquired in an auction, conducted a day before, on behalf of the US Treasury, and carry a strike price of $10.92 per warrant, expiring on July 10, 2019.

Accordingly, Lincoln bought 2.9 million warrants in the auction for $16.60 per warrant, standing for 22.3% of the 13.05 million outstanding warrants. These warrants were issued to the US Treasury in 2009 against the bailout loan taken by the company under the Capital Repurchase Program (CPP). Post the recent $950 million full government bailout fund repayment by Lincoln, the US Treasury has now put all the 13.05 million warrants on sale.

While the warrant sale is expected to close on September 22, 2010, the US Treasury expects to earn about $213 million in net proceeds from the transaction. This is due to the fact that the current 22.3% warrants that were acquired by Lincoln for $16.60 per warrant, which exceeds the minimum bid price of $13.50 per warrant.

While the US Treasury is seeking to put Hartford Financial Services Group Inc.'s (HIG) warrants on auction in the near future, it has now earned back over $7 billion in gross proceeds from the warrant sales.

Earnings Recap

Lincoln's second quarter operating earnings per share of 86 cents came in ahead of the Zacks Consensus Estimate of 76 cents and 79 cents recorded in the prior-year quarter. Results reflected growth in average account values that drove asset-based revenue and included favourable inflows on investments helped by rallying equity and bond markets. Results also benefited from favourable unlocking of deferred acquisition costs (DAC) in the annuity business and unfavourable loss ratios in the group life business.

Overall, we believe that Lincoln's business fundamentals, purchase of warrants from the Treasury after successful government bailout loan repayment, a recent reduction of its common stock dividend and other cost savings initiative bode well for long-term growth. Further, the acquisition of warrants not only releases the company from future operational limitations but also reduces the risk of share dilution in future, thereby retaining the confidence of the shareholders.

Moreover, as a result of its strong capital leverage, efficient debt restructuring and rating upgrades, Lincoln is poised to return the capital to its shareholders in the near future, thereby retaining investors' confidence. Further, the complete repayment of TARP money has liberated Lincoln from government intervention in its internal affairs and pay restrictions.