Credit Suisse cuts Lincoln National, Reinsurance Group of America

Credit Suisse analyst Andrew Kligerman downgraded Lincoln National Corp. to "underperform" from "outperform" and lowered the target price to $45 from $56 based on valuation and potential mortality pressures.

The analyst wrote in a research note that Lincoln National, among other primary carriers and reinsurers that wrote universal and term life from 1998 to 2004, could face earnings pressures and recapture charges resulting from reinsurer repricing actions on in-force business. During the 1998-2004 period, direct writers were offered aggressive pricing that contributed to mispricing at the primary level.

Considering the size of Lincoln National's exposure due to problematic lines of business and Scottish Re, it is expected to take charges of over $1.0 billion, Kligerman estimates. Additional risk factors for the company include credit losses, equity/interest rate sensitivity, as well as impact resulting from the COVID-19 pandemic.

Separately, Kligerman also downgraded Reinsurance Group of America Inc. to "underperform" from "neutral" and cut the target price to $76 from $96.

The analyst action considers valuation, continuing unfavorable mortality results, and potential for further deterioration in the company's Australia business.

The company is expected to face over $600 million of baseline pretax charges, supposing that it is able to convince primary insurers to recapture unprofitable business written during 1998 to 2004. There is a possibility of larger mortality charges and underperformance over a period of five to 10 years if Reinsurance Group of America retains the business.

The analyst said the company's growth and return metrics have worsened over the past decade and it is no longer seen as the "pure play protection company."

The company also continues to face balance sheet pressure resulting from COVID-19 mortality and credit impacts, with a potential of additional earnings pressure if interest rates remain lower for longer.