Lincoln Financial talks up rebuilding plan amid $2.6B loss

Lincoln Financial Group took a $2.6 billion loss in the third quarter due mainly to a $2.2 billion charge against its life insurance reserves.

The insurer reassessed its lapse calculations and found reserves far short of what is needed for its block of guaranteed universal life insurance, explained Ellen Cooper, president and CEO of Lincoln Financial, told analysts this morning.

“We are confident we have ample capital to effectively operate the business as we replenish statutory capital back to our targeted level,” she added.

Wall Street took immediate notice of the third-quarter loss. Lincoln's stock price fell more than 30% by midday.

It has been a tough first year for Cooper, who succeeded longtime CEO Dennis Glass in May. Lincoln stock has been steadily dropping, although executives spoke of turning the corner during a second-quarter that saw strong life insurance and annuity sales growth.

Those strong sales continued into the third quarter. Lincoln reported annuity income from operations of $449 million, up 33% compared to the prior-year quarter.

Total annuity deposits of $3.3 billion were up 21% from the prior-year quarter as sales growth in fixed annuities and indexed variable annuities more than offset a decline in traditional variable annuities, Lincoln said in a news release.

Average account values for the quarter of $147 billion were down 13% from the prior-year quarter, primarily driven by a decline in the equity markets. Net flows were $319 million in the quarter, up from net outflows of $841 million primarily due to sales growth in fixed and indexed variable annuities. Annuity account values other than variable annuities with guaranteed living benefits represented 54% of total annuity account values, up  5% over the prior-year quarter.

Life insurance sales were $171 million, up 3% from the prior-year quarter, primarily driven by an increase in indexed universal life sales, the release said. Average life insurance in-force of $1 trillion grew 11% from the prior-year quarter. Average account values for the quarter were $48 billion, down 20% from the prior-year quarter, reflecting last year’s block reinsurance deal and lower equity market levels

'Significantly greater persistency'

With its updated lapse assumptions and funding, Lincoln is projecting about 8%, or an additional 10,000 policies, to remain in-force, said Randy Freitag, chief financial officer.

"Coming into 2022 we had limited policyholder behavior experience," he told analysts. "Combining our own data with a significant amount of experience contained in [an] industry study ... gave us the credible data needed to update our assumptions. With the result being that we now are assuming significantly greater persistency than we had been previously."

The $2.2 billion charge resulted in an estimated $550 million statutory capital impact, equating to a 22-point decline in its risk-based capital ratio. Lincoln also booked a $634 million goodwill impairment related to its life-insurance business.

The moves were viewed unfavorably by analysts and S&P Global Ratings lowered its credit ratings on Lincoln.

Cooper talked up a leadership plan designed to move Lincoln past the down quarters. The insurer will stay the course with its movement away from capital-intensive products to more shared-risk ones, she said.

"We have a clear understanding of the issues and have a plan in place to address them," Cooper said. "Effective execution starts with leadership and our new experienced and talented senior leaders will execute on the strategic objectives I introduced last quarter, which are first maximizing distributable earnings and improving capital generation.

"Second, reducing capital sensitivity to market volatility and improving capital efficiency; and third, further diversifying our earnings mix with durable cash-generative income streams."

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.