Lincoln Financial earnings dropped by more than half year over year in the first quarter, largely because of pandemic-related losses but also a drop in indexed variable annuity sales, which incoming CEO Ellen Cooper said was in line with the carrier’s shift in sales strategy.
The company's earnings totaled $103 million, $0.58 per share, compared with $225 million, $1.16 per share, in the first quarter of last year. Pandemic-related claims reduced earnings by $150 million or $0.85 per share and unusual items of $19 million or $0.11 per share, primarily related to a group protection customer beginning a backlog of prior year claims. The good news is that working-age claims have been dropping as COVID’s lethality ebbs.
First-quarter adjusted income from operations was $294 million, or $1.66 per diluted share, compared to $350 million, or $1.82 per diluted share, last year.
The company has been shifting from capital-intensive products to more “risk-sharing” ones with the introduction of 13 new products over the past year, said Cooper, who will succeed Dennis Glass this month as he becomes chairman of the board during the company’s shareholder meeting.
“The breadth of our annuity portfolio is enabling our strategic sales shift, and variable annuities with guaranteed living benefits remain under 30% of total annuity sales for the seventh consecutive quarter,” Cooper said during the company’s earnings conference call. “This proportion will continue to decline.”
Besides the introduction of new products, the company is expecting a boost in sales because of better bond rates, with the 10-year Treasury hitting 3%.
“This is an opportunity now to be able to invest new money higher, and that translates into offering customers higher value propositions,” Cooper said. “Across the board, we think that that will benefit the overall industry, and it will benefit Lincoln as well.”
Lincoln has been restructuring, combining the annuity and life insurance business into one department under a single leader, Matthew Grove, slated to join Lincoln in July as executive vice president of individual life and annuities.
In annuities, average account values of $164 billion were up 2%. Operating income was up to $302 million, compared to $290 million of the prior year, primarily because of equity returns. Indexed variable annuity sales were down 30% year over year, which Glass said was a result of repricing.
“In the first half of 2021, you may remember that we saw rates come down pretty significantly and market volatility also come down,” said Glass, adding that forced significant repricing. “We knew when we did that that we were going to see a pullback in sales and that's exactly what happened and so the third quarter really bottomed out in terms of our overall IVA sales and then we started to see sequential rebound.”
Retirement Plan Services generated positive net flows of $946 million. Its operating income of $55 million compared to $57 million in the prior year quarter. Although the segment had strong net flows and a robust equity market, they were offset by lower variable investment income.
Over the past year, the segment produced $1.1 billion in net flows, contributing to a 7% increase in average account values to $96 billion.
Strong Life Sales, High Mortality
Although the life insurance segment had strong sales of $155 million, up 36%, it took a hit with $69 million of pandemic-related mortality in the quarter. That decline was also due to “less favorable alternative investment income, a more normal level of underlying mortality and the impact of the Resolution deal,” said CFO Randy Freitag during the call.
Lincoln did a reinsurance deal with Resolution Life last year of its bank- and company owned life insurance, with Lincoln ceding $9.4 billion in reserves.
“Outside of continued pandemic headwinds and Life results were solid with underlying mortality in line with our first quarter expectations, good expense management and growing sales,” Freitag said.
The group protection insurance premiums of $1.2 billion, were up 4%, but reported a loss from operations of $41 million compared to a loss of $26 million in the prior year quarter. Even though that is a big chunk of change, Freitag said it was an improvement over the $115 million loss in the fourth quarter, reflecting an easing of pandemic-related losses.
The sales improvement shows that as the pandemic’s effect ebbs, Cooper said, mortality awareness is still with the public.
Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]