Lincoln Financial Reports Strong Sales, Declining Income In 3Q

Annuity sales provided a third-quarter bright spot for Lincoln Financial Group, although earnings declined and missed Wall Street analysts' estimates.

Overall, operating revenue increased in all four business segments, CEO Dennis Glass said: annuities, life insurance, group protection and retirement plan services.

The good news: Annuities reported income from operations of $338 million, up 72% compared to the prior-year quarter, and total deposits hit $2.7 billion.

"Great results for the annuity business with another quarter of high quality earnings, strong returns and solid risk metrics, leaving us well positioned to finish the year with another excellent quarter," said Randy Freitag, chief financial officer and head of individual life.

The bad news: Lincoln reported net income of $318 million, or $1.68 per share, down from $393 million, or $2.01 per share, in last year's third quarter.

Mortality claims were a drag on earnings in the quarter, Freitag said.

"This quarter's results were impacted by pandemic-related claims, which reduced earnings by $180 million or 95 cents per share," he explained. "Additionally, we experienced some unfavorable non-pandemic mortality in the life insurance segment."

The Vaccination Effect

In the life insurance segment, Lincoln reported $93 million in income, reversing a loss during the third quarter 2020. However, life insurance sales declined from $186 million to $166 million.

Elevated mortality claims related to the COVID-19 pandemic totaled $60 million in the quarter, Freitag said. Mortality claims were down year-over-year as expected, he explained, but increased from the second quarter as Lincoln was hit with "a few larger COVID-19 claims in the quarter."

Apart from the pandemic, underlying mortality accounted for a $34 million impact, Freitag said, which he attributed to two reasons:

"First, over the course of the pandemic, when COVID-19 cases have been increasing, which they did in the third quarter, we have seen elevated non-COVID-19 mortality as well," Freitag said. "And second, normal quarterly volatility."

In tracking COVID-19 claim data, it is clear that vaccinations are having an impact, Freitag explained. In the beginning the average age of a COVID-19 claim was "in the low 80s," he said, but that number came down to 72 in the third quarter.

"This factoid speaks to the power, by the way, of the vaccinations in having a very favorable impact on mortality," Freitag said.

Lincoln offered the following highlights of its four business units:

Annuities

Impacts from the company’s annual review of DAC and reserve assumptions were unfavorable in both periods. Not including the impacts from the company’s annual reviews of DAC and reserve assumptions, income from operations increased from the prior-year period primarily driven by higher account values from strong equity market performance.

Total annuity deposits of $2.7 billion were up 7% from the prior-year quarter as sales growth in fixed annuities and variable annuities with guaranteed living benefits more than offset a decline in variable annuity sales without guaranteed living benefits. Despite these movements in sales, the percentage of total annuities end-of-period account values from variable annuities without guaranteed living benefits continues to grow as it has done for the past several quarters.

Net outflows were $841 million in the quarter. Average account values for the quarter of $170 billion were up 17% over the prior-year quarter, with 49% of total annuities account values without guaranteed living benefits, up 2 percentage points over the prior-year period.

The current quarter included net unfavorable notable items of $5 million related to the company’s annual review of DAC and reserve assumptions while prior-year results included net unfavorable notable items of $101 million related to the company’s annual review of DAC and reserve assumptions.

Retirement Plan Services

Retirement Plan Services reported income from operations of $60 million, up 20% compared to the prior-year quarter with the increase driven by higher account values from strong equity market performance, favorable returns within the company’s alternative investment portfolio, and continued expense efficiency.

Total deposits for the quarter of $2.4 billion were up 2% compared to the prior-year quarter driven by growth in recurring deposits that more than offset a decline in first-year sales. Net outflows totaled $21 million for the quarter while over the trailing twelve months, net flows were positive $1.2 billion. Average account values for the quarter of $97 billion were up 21% over the prior-year quarter.

There were no notable items in the current quarter while prior-year results included net unfavorable notable items of $3 million related to the company’s annual review of DAC and reserve assumptions.

Life Insurance

Life Insurance reported income from operations of $93 million compared to a loss from operations of $311 million in the prior-year quarter. Impacts from the company’s annual review of DAC and reserve assumptions were unfavorable in both periods, and the current quarter also included a legal expense.

Not including the impacts from the company’s annual reviews of DAC and reserve assumptions and the legal expense, income from operations increased from the prior-year period driven by favorable returns within the company’s alternative investment portfolio, which were partially offset by unfavorable mortality results.

While total life insurance sales were $166 million compared to $186 million in the prior-year quarter, sales increased 32% sequentially. Average life insurance in-force of $935 billion grew 7% over the prior-year quarter, and average account values of $60 billion increased 9% over the same period.

The current quarter included net unfavorable notable items of $45 million related to the company’s annual review of DAC and reserve assumptions and legal expenses while prior-year results included net unfavorable notable items of $440 million related to the company’s annual review of DAC and reserve assumptions.

Group Protection

Group Protection reported a loss from operations of $32 million in the quarter compared to income from operations of $6 million in the prior-year quarter. Not including the impact from the annual review of reserve assumptions, this decrease was primarily driven by higher mortality impacts related to the pandemic.

The total loss ratio was 88% in the current quarter compared to 83% in the prior-year quarter with the increase driven primarily by unfavorable pandemic-related life mortality. Group Protection sales were $48 million in the quarter in line with $49 million in the prior-year quarter.

Employee-paid sales represented 50% of total sales. Insurance premiums of $1.1 billion in the quarter were up 5% compared to the prior-year quarter. The current quarter included net favorable notable items of $16 million related to the company’s annual review of reserve assumptions while prior-year results included net unfavorable notable items of $3 million related to the company’s annual review of reserve assumptions.

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.

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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.