Friday, FBR Capital Markets initiated coverage of Lincoln National Corp. (LNC) stock with an Outperform rating and a price target of $35.
Analyst Randy Binner noted that Lincoln is a diversified provider of life insurance and retirement services, with the long-term potential to grow by serving the aging population. Despite improvements in credit spreads, capital, and variable annuity guarantee exposures, Lincoln remains a levered macroeconomic play, in the analyst's view.
However, the analyst believes that Lincoln is adequately capitalized against credit exposures, has a good mix of stable operating segments and retirement segment growth potential, and offers a better risk-adjusted return relative to peers.
Based on the analyst's proprietary credit analysis, he estimates after-tax credit losses for Lincoln of $2.0 billion for the remainder of the credit cycle, or 3.0% of the portfolio, compared with 2.8% for peers.
The analyst estimates excess capital at $3.0 billion. The analyst views this $1 billion capital buffer between credit exposure and capital as available to repay the $950 million CPP obligation. Lincoln should be able to maintain a year-end 2010 RBC ratio of 350%-400% while repaying CPP.
The analyst believes that Lincoln may gradually seek to average its way into a macro hedge, while preserving the 3 Greek approach, as a large macro hedge could be expensive. With the S&P 500 above 1,000, this strategy has likely worked but may leave Lincoln exposed to a major equity market sell-off.
Currently, LNC is down $0.25 or 0.95% and trading at $26.17.
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