Lincoln Financial Aims to Rebuild Capital by Changing Sales Mix

What You Need to Know

Lincoln posted a $2.6 billion net loss Wednesday, with $2.3 billion of the impact related to life insurance.
The risk-based capital ratio could fall to 360% at year-end, from 430% at the start of the year.
The company intends to rebuild capital by suspending share buybacks, cutting expenses and emphasizing low-guarantee products.

Lincoln Financial is counting on agents, advisors and other distributors to help it recover from a $2.6 billion third-quarter net loss, by increasing sales of products that can generate the most profits per dollar of capital.

Ellen Cooper, the Radnor, Pennsylvania-based company’s CEO, told securities analysts Thursday that the company plans to increase capital levels by cutting costs and reducing its exposure to benefits guarantee risk.

The Lincoln distribution organization and existing product menus are strong enough that the company should be able to reposition without much disruption, Cooper said.

The company is also hoping to make reinsurance deals or other deals.

“We’re looking at all options,” Cooper said. “Everything’s on the table.”

Cooper spoke during a call Lincoln held to go over earnings for the latest quarter with securities analysts. The loss was due mainly to a guaranteed universal life reserving update and other value updates at the individual life unit.

What It Means

Lincoln may be more interested in offering your clients products such as variable annuities without significant benefits guarantees, life insurance without rich guarantees and other products that minimize capital use.

The Life Operations

Lincoln is having a wide range of problems with the individual life business, Cooper said.

Problems with an old block of universal life policies that offer guarantee benefits are responsible for much of the net loss.

The company has 128,000 guaranteed universal life policies in force, and those policies are backed by about $23 billion in reserves, based on the accounting rules that state insurance regulators use.

New life insurance industry studies have indicated that customers are much more likely than originally expected to keep their policies in place well past age 75. The change in policy lapse assumptions had a $1.8 billion impact on company results, according to Randy Freitag, the chief financial officer.

Reviews also led to changes in assumptions about how sick policyholders will be, how long older policyholders will live, and how much the longevity of all policyholders will improve, and those changes reduced earnings by another $330 million, Freitag said.

Freitag noted that the impact calculations include a factor based on average interest rates for the past 12 months. If interest rates stay the same, or increase, that will cut the estimated impact of the assumption changes.

Cooper said the individual life insurance business is also having problems because of the lingering effects of COVID-19 claims; rising reinsurance costs; reserving rule changes that affect the performance of blocks of term life insurance business; the effects of investment market volatility on annuity risk management arrangements; and past reinsurance deals that have reduced the company’s cash flow.