Lincoln Financial execs reassure analysts on delayed Fortitude Re deal

Near the end of an hour-long call with analysts, Lincoln Financial CEO Ellen Cooper delivered a four-minute answer on why the insurer is not see the same explosive annuity and life insurance sales as competitors.

"I want to be really clear that we are not seeing any pushback from anybody as it relates to the sale of our products," Cooper said. "We are doing exactly what we intended to do. We are shifting to a product mix with more capital efficiency and enhanced value creation."

Lincoln endured several difficult quarters in a row as its executive team works to improve the insurer's capital position and free up cash flow. The Radnor, Pa.-based insurer reported net income of $502 million for the quarter, compared to net income of $367 million in the second quarter of 2022.

"In our two retail businesses, annuities and life insurance, the new business shift under way will take time to fully gain traction," Cooper assured analysts. "But we are benefiting from a diversified product mix that is meeting our capital efficiency targets."

Cooper touted talks with distribution partners that are expected to increase Lincoln sales in the coming quarters.

"We've entered into some new distribution agreements with completely new channels related to field marketing organizations," she said. "And I want to emphasize also that, as it relates to our distribution, we have a proven track record of pivots."

Fortitude Re update

Lincoln's strategy is heavily dependent on a reinsurance deal struck with Fortitude Re in May. That deal was expected to close during the second quarter but it didn't. Analysts had several questions about it.

Lincoln will cede approximately $28 billion of in-force [guaranteed universal life], MoneyGuard and fixed annuity statutory reserves to Fortitude Re. Lincoln will continue to service and administer the reinsured policies. The deal is expected to improve Lincoln's capital position and help free up cash flow.

Lincoln expects "to generate $300 to $500 million of free cash flow this year, before the impact of the reinsurance transaction and to execute on initiatives to further improve ongoing free cash flows in 2024 and beyond," Cooper during a May call with analysts.

"We want to be very clear around our continued confidence in closing this transaction," Cooper said Wednesday. "The transaction does require regulatory approvals and ... we are continuing to work on focusing on the transaction close, and that's as much as we can say."

Lincoln segment results

Annuities. Annuities reported income from operations of $271 million, down 8% compared to the prior-year quarter, Lincoln reported in a news release. The decrease was primarily due to higher expenses and lower prepayment income.

Total annuity deposits of $2.6 billion were down 5% from the prior-year quarter as "sales growth in fixed annuities was more than offset by a decline in sales of variable annuities," the release said. Net outflows were $1.1 billion in the quarter compared to net outflows of $285 million in the prior-year quarter.

Average account balances, net of reinsurance, for the quarter of $148 billion were down 1% from the prior-year quarter, while end-of-period account balances, net of reinsurance, increased 7%, Lincoln said. Variable annuities with living benefits represented 45% of total annuity account balances net of reinsurance, a decrease of three percentage points compared to the prior-year quarter.

Life Insurance. Life Insurance reported income from operations of $33 million compared to $63 million in the prior-year quarter. The decrease was primarily driven by the run-rate impact from  company’s third quarter 2022 annual review of DAC and reserve assumptions and higher expenses, partially offset by higher alternative investment income, the release said.

Total life sales of $123 million were down 36% from the prior-year quarter, driven in part by a decline in Executive Benefits, "which are primarily large deals that can be highly variable quarter to quarter," the release said. In addition, term products and variable universal life sales were lower and indexed universal life were higher given the shift to "a more capital-efficient product mix," Lincoln said.

Average life insurance in-force of $1.1 trillion increased 7% over the prior-year quarter. For the quarter, average account balances, net of reinsurance, were $50 billion, up 1% compared to the prior-year quarter.

Group Protection. Group Protection reported income from operations of $109 million in the quarter compared to income from operations of $49 million in the prior-year quarter. The increase was primarily driven by improved disability and life underwriting results.

Total loss ratio was 71% in the current quarter compared to 79% in the prior-year quarter with the decrease "driven by better disability incidence and resolutions and lower mortality in life," the release said.

The operating margin expanded 450 basis points from the prior-year quarter to 8.6%. Insurance premiums of $1.3 billion in the quarter were up 6% compared to the prior-year quarter. Group
Protection sales for the quarter were $96 million, down 24% compared to the prior-year quarter. Year-to-date Group Protection sales were down 3% compared to the prior-year period.

Supplemental health products grew 52% and represented 20% of total Group Protection sales, compared to 10% in the prior-year quarter.

Retirement Plan Services. Retirement Plan Services reported income from operations of $47 million, down 15% compared to the prior-year quarter. The decrease was primarily driven by higher expenses and lower prepayment income, partly offset by the earnings impact related to positive net flows and higher base spreads, Lincoln reported.

Total deposits for the quarter of $2.9 billion were down 9% compared to the prior-year quarter, which included a large stable value sale that accounted for about $700 million of the prior-period total deposits.

Net flows totaled $201 million for the quarter, contributing to trailing-twelve months’ net flows of $1.6 billion. Average account balances for the quarter of $94 billion were up 4% from the prior-year quarter primarily driven by favorable equity markets.

Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.