Investors in Lincoln National Corporation (NYSE:LNC) have had quite a bumpy ride over the past year. Indeed, even though shares have lost about 45% of their value over the past 12 months, they have doubled since their March low. As a consequence, some may well ask whether they should be glad to have enjoyed the rally back and exit their investment. However, I would caution against this, and I would actually be a buyer of shares at these levels because the Federal Reserve's actions have been greatly beneficial to LNC. Rather than try to fight the Fed, I would buy LNC to profit from their policies.
At the end of the first quarter, book value excluding accumulated other comprehensive income (AOCI) was $70.24. When analyzing an insurer like LNC, it is best to look at book value ex-AOCI rather than headline book value (which is $85.79) because AOCI includes unrealized gains largely due to the decline in interest rates. However, the fair value of its life insurance policies, LNC's liabilities, is also worth more when rates fall but aren't accounted for on the same mark to market basis. The losses on these policies would largely offset the AOCI gains as LNC closely manages the overall interest rate sensitivity of its balance sheet. As such, $70 per share is the fairest estimate of its true economic book value. Now, its private equity holdings, about 1% of its investment portfolio, are not marked to market at the same speed. Adjusting for this, book value at the end of Q1 was about $68 per share.
That is nearly double today's share price. This disconnect speaks to the market's concerns about two primary issues, the integrity of that book value, and the future earnings of LNC in a low interest rate world. On the first issue, the Fed is
