Fairholme Decreases Its Position in Lincoln National Corporation



Lincoln National Corporation

During the fourth quarter of 2014, Fairholme Capital reduced its stake in Lincoln National Corp. (LNC) through the sale of 68,600 shares. Its current position stands at 181,610 shares, entirely in the form of warrants, which accounts for 0.12% of the fund’s US long portfolio.

Fairholme’s exposure to the financial services sector stands at ~73%, with holdings in American International Group (AIG), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), JPMorgan Chase (JPM), Lincoln National Corporation (LNC), and Berkshire Hathaway (BRK-B).

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Business overview

Lincoln National Corporation (LNC) provides a range of life insurance, annuity, and group protection products. It also offers retirement plan services to the affluent market. LNC has more than 17 million customers who make use of its services to achieve their financial goals.

As of December 31, 2014, Lincoln National had assets under management of $218 billion and common equity of $15.7 billion.

Robust fourth quarter results

Lincoln National’s top line growth remained strong, as revenues grew by more than 18% year-over-year (or YoY) to $3.7 billion in 4Q14, driven by recapture of reinsurance business and positive net flows. The agreement reached with the new reinsurance partner was within current retention limits and related to several life insurance treaties. In a time where reinsurers are aggressive with their pricing assumptions, the transaction is a mutually beneficial resolution, with LNC receiving $500 million from the reinsurer for the recapture of this business.

Prudent expense management created margin expansion, as the increase in G&A (General & Administrative) trailed the growth in revenues, resulting in an improvement in expense ratio (G&A expenses over operating revenues) of 120 bps (basis points). Income from operations was up 15% YoY to $439 million. On a per-share basis, net earnings were up 2.3% over the same period, at $1.32 in 4Q14.

Lincoln National’s balance sheet strength was highlighted by its record statutory capital of $8.8 billion and a risk-based capital ratio of nearly 540%, which provides adequate headroom for financial flexibility.

LNC makes up 0.51% and 0.46% of the Financial Select Sector SPDR Fund (XLF) and the Vanguard Mid-Cap ETF (VO), respectively.


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