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Lincoln National Rides on Group Benefits & Annuity Business

Zacks Equity Research

Lincoln National Corp. LNC has exhibited favorable operating performance over the years, driven by its powerful retail franchise, benefits from expansion of the product portfolio in attractive, fast-growing segments of the market and increase in the breadth and effectiveness of its distribution force.

These strategies drove solid growth within all four businesses and continue to position the company strongly in the marketplace. In 2018, Annuities sales increased significantly, Individual Life Insurance sales were the highest in a decade, Group Protection sales rose for the third straight year and RPS deposits were a record. The company expects further momentum led by expansion in distribution, including its new annuity distribution arrangement with Allstate.

Year to date, the stock has gained 1%, compared with the industry’s growth of 3.6%.

We expect the momentum to continue as the company gains from the following factors:

Strong Performance in Group Benefits: Sales at this line of business have been increasing since 2016 and continued through the first half of 2019. This sales growth have been achieved on the back of the recently acquired Liberty Mutual's group benefits business, increased scale, broader distribution access and expanded capabilities. The acquisition also accelerated the company’s goal of increasing sources of earnings from traditional insurance risks.  

Gaining Ground in Annuity Business: After net flows in Annuity business turned negative for the first time in 2016, the company established an action plan to return to positive flows.  This included a strategic decision to participate in more segments of the marketplace and reach more customers and advisers while diversifying its sales mix. It faced success in this strategy with annuity cash flows turning positive in the fourth quarter of  2018 and continuing into first half of 2019. Looking ahead, the company expects growth in its more balanced mix of sales to continue. Increase in sales combined with equity market strength should further position its operating income to improve.

Expense Savings Initiatives: A few years ago, the company made a strategic decision to accelerate investments in digital, with a focus on enhancing the customer experience while also realizing expense savings. This initiative is progressing well, and it expects savings to largely offset expenses in 2019, consistent with its prior target, and material bottom-line savings to begin emerging in 2020. Thus, a decline in operating costs will aid margin growth. The company expects $250 million (pre-tax) in expense savings by 2020.

Strong Capital Deployment: Capital generation and deployment remain important drivers of enhancing shareholder value. For 2019, the company remains well capitalized, with steady free cash flow. It 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 returning a significant amount of capital to its shareholders.

Lincoln National carries a Zacks Rank# 3 (Hold). Some better-ranked stocks in the same space are Health Insurance Innovations, Inc. HIIQ, Primerica, Inc. PRI and Torchmark Corp. GL.  While Heath Insurance and Primerica both carry a Zacks Rank #1 (Strong Buy), Torchmark has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Health Insurance and Torchmark beat estimates in three of the four quarters with an average positive surprise of 24.69% and 2.24%, respectively.

Primerica surpassed estimates in each of the four reported quarters with an average positive surprise of 3.64%.

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