Lincoln Financial struggles again in Q1, reports an $881M loss

Lincoln Financial executives say a reinsurance deal inked last week will help the company by freeing up capital.

By John Hilton

Lincoln Financial Group completed another difficult quarter financially, but executives touted last week's $28 billion reinsurance deal as a crucial rebound move for the insurer.

The Radnor, Pa.-based insurer 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," said CEO Ellen Cooper during a Wednesday morning call with analysts.

Christopher Neczypor is the chief financial officer for Lincoln. In response to a question, he conceded that the insurer included the fixed annuity block in the reinsurance deal to get it done.

"Where we landed was the optimal mix for us and the transaction was a combination of MoneyGuard, fixed annuities, and GUL and that's what ended up making the most sense for us," Neczypor said.

Another earnings loss

Lincoln endured several difficult earnings reports in a row, in particular, reporting a $2.6 billion loss in the third quarter 2022 due to a one-time charge against its life insurance reserves. In the quarter ending March 31, Lincoln reported a net income loss of $881 million, compared to a $1.4 billion profit in the year-ago quarter.

It has been a tough first year for Cooper, who succeeded longtime CEO Dennis Glass in May 2022. The Lincoln stock price is down nearly 65% in one year, and dropped 6% Wednesday upon the first-quarter earnings release.

It all led to an existential question posed by Erik Bass of Autonomous Research in the first question of the Q-and-A portion of the call.

"Do you still want to be one of the biggest sellers of life insurance?" Bass asked. "Or do you want to narrow the focus of the products of either what you sell or what you're retaining on your balance sheet?"

Cooper returned to the Fortitude Re deal to frame her response.

"We recognize that we have an in-force business that is legacy," she said. "It has a fair amount of pressure as it relates to free cash flow and also as it relates to our GAAP earnings. At the same time we feel really good about all of the businesses that were putting on the books."

As it relates to life insurance, that "capital-efficient product mix" includes more indexed universal life and less term, Cooper explained.

Lincoln's Life Insurance segment reported a loss of $13 million compared to income of $23 million in the prior-year quarter. The decrease was "primarily driven by the run-rate impact from the company’s third quarter 2022 annual review of DAC and reserve assumptions and lower alternative investment income, prepayment income and base spreads, partially offset by an improvement in COVID-19 mortality experience," the insurer said in a news release.

Total life sales for the quarter were $130 million compared to $155 million in the prior-year quarter.

Annuity sales up

Annuities reported income from operations of $274 million, down 14% compared to the prior-year quarter. The decrease was "primarily due to lower fee income driven by unfavorable capital markets, partially offset by a favorable tax adjustment in the current quarter," Lincoln reported.

Total annuity deposits of $3.2 billion were up 17% from the prior-year quarter as sales growth in fixed annuities and indexed variable annuities "more than offset" a decline in sales of traditional variable annuities, the release said. Net outflows were $331 million in the quarter compared to net outflows of $525 million in the prior-year quarter.

Average account balances for the quarter of $146 billion were down 9% from the prior-year quarter, primarily driven by unfavorable capital markets, the release said. Variable annuities with living benefits represented 46% of total annuity account balances, a decrease of four percentage points compared to the prior-year quarter.

Lincoln reported strong results from its Group Protection segment as well, thanks to declining impacts from COVID-19.

Group Protection reported income from operations of $71 million in the quarter compared to a loss from operations of $46 million in the prior-year quarter. The increase was primarily driven by improved disability underwriting results and lower COVID-19 mortality claims, the insurer said.

Group Protection sales for the quarter were $128 million, up 22% compared to the prior-year quarter. Supplemental Health products represented 24% of total Group Protection sales, compared to 9% in the prior-year quarter, Lincoln reported.

Insurance premiums of $1.3 billion in the quarter were up 7% compared to the prior-year quarter.

InsuranceNewsNet 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.

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.