Early Christmas for Lincoln Investors - Analyst Blog

After successfully reconstructing its debt, Lincoln National Corp. (LNC) made yesterday eventful by outlining a number of ways to return wealth to shareholders, which includes a dividend hike, resumption of share repurchase program and redemption of preferred securities.

The board of Lincoln has announced a significantly increased its quarterly dividend of 5 cents per share from the previous pay-out of one cent per share. The hiked dividend will be paid on February 1, 2011 to shareholders of record as on January 10, 2011. This marks the first dividend hike since 2007.

Lincoln has announced its objective of buying back common equity shares worth approximately $125 million over the following 15 months. Besides, the company also aims to redeem all of its outstanding 6.75% Series F Trust preferred securities worth $150 million. These preferred securities were issued by Lincoln National Capital VI.

Rating updates

Alongside, on Thursday, A.M. Best rating agency has also affirmed its financial strength rating (FSR) of “A+” (Superior) and issuer credit ratings (ICR) of “aa-” for the major subsidiaries of Lincoln, thereby validating a stable outlook. Previously, in June 2010, Fitch revised its outlook on Lincoln's insurance subsidiaries to stable from negative, affirming its insurer financial strength (IFS) rating of “A+”, given the company's improvement in liquidity, a solid balance sheet and strong growth fundamentals. Besides, in May 2010, Moody's Investors Service of Moody's Corp. (MCO) revised its outlook on Lincoln and its operating subsidiaries to stable from negative.

Riding the optimistic drive…

The company's restructuring initiatives have been paying off well. Further, by securing the $2 billion credit facility in the second quarter of 2010, Lincoln has established a long-term solution to finance its statutory reserves and shore up its life insurance operations, thereby attaining additional capital buffer and modest accretion in return on equity. This has also helped the company in repaying its government bailout loan ahead of schedule and buying back its stock through the purchase of its warrants from the U.S. Treasury. Going ahead, these efforts will help Lincoln scale down its financial risk and develop better growth avenues.

Besides, with a net unrealized gain position exceeding $5 billion in its investment portfolio, as on September 30, 2010, Lincoln has been able to significantly reduce its credit impairments, which could otherwise adversely impact the company's capital position. Despite being well capitalized, Lincoln's third quarter results underperformed primarily due to a $72 million charge related to long term actuarial assumptions, although fundamentally the company continued to maintain its positive momentum.

Moreover, eliminating significant debt while strengthening its reserve levels and returning value to shareholders has further provided its investors with much-needed assurance that the company is taking positive measures in order to improve its long term capital and operating leverage. Stability in ratings at this point came in as a cherry on the cake.

Thus, this is a major turning point in Lincoln's growth phase that reflects its ability to rebound with the gradual equity market appreciation coupled with narrowing credit spreads. The overall positive impact has also helped generate long term growth through its defined contribution operations, increased fee income and strong balance sheet.

Risks on the path…

However, Lincoln's exposure to individual variable annuities with living benefits and no-lapse guarantee universal life policies leaves room for some concern since such guarantees are exposed to sufficient equity market risk and the low interest rate environment.

Nevertheless, Lincoln has successfully practiced strong asset and liability management practices, including equity and interest rate hedging programs, which would partially mitigate such risk exposures. We believe that Lincoln's comprehensive capital plan is firm enough to mitigate credit and interest rate risk, while providing liquidity cushion to its growth strategy in the long run.

Industry moves

Most of the insurers in the industry are engaged in share repurchase activity, given the global market recovery that helped the growth of new business along with retention of existing ones. While insurers such as Aflac Inc. (AFL), Marsh & McLennan Companies Inc. (MMC) and Amerisafe Inc. (AMSF) have announced new share repurchase sanctions in the second half of 2010, on Tuesday, The Allstate Corp. (ALL) and Prudential Financial Inc. (PRU) also announced new stock buyback programs.

Besides, Aflac, Prudential and PartnerRe Ltd. (PRE) are among the insurers who have also increased their dividend payouts, thereby flagging a modest long-term growth momentum across the industry.

On Thursday, the shares of Lincoln closed at $25.00, up 0.5% on the New York Stock Exchange.