Lincoln National Corp. LNC, with exposure to life insurance, annuities and retirement business, has come under pressure from the ongoing market volatility caused by coronavirus fears.
Lincoln National is being affected by decline in interest rates. Recently, the Federal Reserve slashed interest rates by half a percentage point to a range of 1-1.25%.
Investors are concerned that a sustained period of low interest rates could negatively impact the company’s profitability. Some of its products, principally fixed annuities and Universal Life (UL), including linked-benefit UL, have interest rate guarantees that expose the company to the risk that changes in interest rates will reduce its spread, thereby affecting profitability. Spread is the difference between the amount that is required to be paid by the company under the contract and the amount it can earn on its general account investments intended to support its obligations under the contract.
In addition, low rates increase the cost of providing variable annuity living benefit guarantees, which could affect the company’s variable annuity profitability. As of Dec 31, 2019, 35% of its annuities business, 79% of retirement plan services business and 89% of life insurance business with guaranteed minimum interest or crediting rates were at their guaranteed minimums.
The low interest rate environment has also reduced the yield on the company’s investment portfolio.
Year to date, the stock has lost a significant 60.4% compared with its industry’s decline of 26.2%.Other players in the same space such as FGL Holdings FG has gained 1.13%, while Primerica, Inc. PRI and Brighthouse Financial, Inc. BHF have declined 32% and 49%, respectively.
Nevertheless, the company is taking steps to better face the volatile macroeconomic environment. In this vein, it is working to shift its new business mix to focus on products in line with its long-term growth strategies (including re-pricing actions and shifting its sales mix toward shorter-duration products, which are less sensitive to interest rates). This year, the company expects a further shift to variable annuities (VAs) without guarantees as it continues to expand shelf space and new producers.
The company is also focusing on managing its expenses aggressively through its strategic digitization initiative and expense synergies of acquired businesses combined with continued financial discipline and execution excellence throughout its operations. It is on its way to achieving target of $125 million in expense savings from the Liberty acquisition by the end of 2020.
We believe these initiatives will help the stock to achieve long-term growth. Lincoln National carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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