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Lincoln National Corporation (LNC): An Underrated Insurance Play

The various insurance and retirement planning companies should see a rise in demand thanks to the aging Baby Boomers. This should come as the need for health and long-term care insurance increases. One interesting find in the sector is Lincoln National Corporation (NYSE:LNC). The company operates multiple insurance and retirement businesses. This includes fixed and indexed annuities, variable annuities, life insurance, retirement plans and group plans.

Lincoln National Corporation (NYSE:LNC)

Lincoln National Corporation (NYSE:LNC)’s largest segment is life insurance, accounting for 44% of revenues–annuities (25% of revenue) and group protection (18%) are other key contributors. Annuities offer tax-deferred investment growth and lifetime income, while group protection includes group non-medical insurance products, such as term life, disability and dental.

The improving economic outlook should boost demand for all Lincoln National Corporation (NYSE:LNC)’s major products, but specifically its group plans. A better economy should help boost business spending for voluntary benefits and group insurance plans.

For 1Q, the insurer posted EPS of $1.02, above $0.99 for the same period last year and beating the consensus estimates. This positive performance comes as its VA business has seen lower volatility than other major peers, and as the company saw marked growth in its annuities business. Although management sees downward pressure on 2013 spreads in the life insurance and retirement plan services, its annuities business is expected to see little spread-pressure.

Management also plans to continue rewarding shareholders; planning to return $400 million to shareholders this year via share buybacks. The insurer still pays investors a modest dividend yield at 1.3%. Its quarterly dividend is $0.12, compared to the $0.41 (yielding 3%) back in 2008. With only a 11% dividend payout of earnings, this insurer could easily boost its dividend yield to more in line with peers over in the interim.

Also, the company’s book value has been improving, but Lincoln National Corporation (NYSE:LNC)’s stock price has failed to follow suit–meaning that I see Lincoln National Corporation (NYSE:LNC) as cheap from a valuation standpoint.

The comps

Manulife Financial Corporation (USA) (NYSE:MFC) is one of the world’s largest life insurers, offering products and services mostly in North America and Asia. Manulife Financial Corporation (USA) (NYSE:MFC) managed to post 1Q EPS of $0.28, compared to $0.63 for the same period last year, thanks in part to investment losses. Going forward, Manulife plans to aggressively expand into Asia, which should lead to increased expenses.

Some of Manulife Financial Corporation (USA) (NYSE:MFC)’s key expansion plans include increasing its distribution network and securing distribution agreements with partners in Japan and Indonesia. As well, Manulife is the first foreign-owned life insurer to do business in Cambodia. One tailwind for Manulife will be solid performance in its wealth and asset management businesses, where Baby Boomers look for guidance in managing their nest egg.

CNO Financial Group Inc (NYSE:CNO) is another insurance company offering health insurance, annuities and life insurance. CNO Financial Group Inc (NYSE:CNO) saw its 1Q results in line with consensus, but the problem is that expenses have been on the rise, accompanying a decline in its key Bankers Life segment.

Indeed, the Bankers Life segment is the company’s workhorse, accounting for almost 60% of revenues. This segment helps serve the retirement market through various products that include health and life insurance products and annuities. Premiums for the unit fell 9.6% in 2009 and 14% in 2010, but remained flat in 2011 before declining 5.5% in 2012.


Going into 1Q there were a total of 27 hedge funds long Lincoln National Corporation (NYSE:LNC). This includes the hedge fund with the top position, Steven Richman’s East Side Capital, having over 11% of its 13F portfolio invested in the stock (check out East Side’s top stocks).

At the end of 1Q, there were only 12 hedge funds long Manulife. However, this was a 33% increase from the previous quarter. Daniel Bubis’ Tetrem Capital had the largest position among major hedge funds in the stock, worth some $62 million (see Terem’s newest stocks).

As for CNO Financial Group Inc (NYSE:CNO), there were a total of 20 hedge funds long the stock. Billionaire John Paulson of Paulson & Co. had the largest position, worth over $150 million (see Paulson’s newest stock picks).

The bottom line

I like Lincoln for its robust presence in the insurance business and the company’s return potential. Lincoln has managed to expand its return on equity, now well above that of Manulife or CNO.

I also like Lincoln National Corporation (NYSE:LNC) for its valuation; it’s trading at 60% of book value. The insurer even pays a modest 1.36% dividend. I think it could be a great time to get into the stock on the back of rising demand from the Baby Boomer population. Worth noting is that while the industry might see a nice influx of capital over the interim due to new premiums and policies, the longer-term fallout should be considered. The Baby Boomers will look to put their insurance premiums to work in the next 10-20 years.

The article An Underrated Insurance Play originally appeared on and is written by Marshall Hargrave.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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