When Jon Boscia, chairman and CEO of Lincoln Financial Group and Dennis Glass, its COO, rang the closing bell at the New York Stock Exchange to celebrate the $7.5 billion merger of Lincoln and Jefferson-Pilot Corp. on April 3, the ceremony was just the beginning of what they say will be a year of integration.
The combined company has a combined market cap of $16.2 billion as of March 1, 2006, combined revenue of $9.7 billion and combined 2005 income from operations of $1.42 billion.
By first quarter of 2007 there will be an integration of products and distribution channels, according to Glass. Distribution channels will remain largely the same and there will be some cross-selling of products, he continues.
The melding of product offerings includes Lincoln Financial’s variable and fixed annuities, universal life and variable universal life products, term insurance, mutual funds, 529 plans and Jefferson-Pilot’s annuity and life products which include equity index annuities and UL and VUL products, many of which have secondary guarantees.
Approximately 55-60% of sales in JP’s individual products segment over the last three years were attributable to products with secondary guarantee benefits and 75% of sales within its annuities and investment products segment over the last two years were attributable to EIAs, according to JP’s 2006 10K filing.
Through Lincoln Financial Distributors, the company, based in Philadelphia, reaches wirehouses/regional firms, independent financial planner firms, financial institutions, managing general agents and corporate specialty markets, Lincoln’s 2006 10K indicates.
JP uses distribution channels including independent general agents, independent national marketing organizations, agency building general agents, a district agency network, broker/dealers, banks and strategic alliances, according to its 10K.
During the course of 2006, scheduled product introductions will continues because it is necessary to offer products that are competitive in today’s marketplace, Glass says.
The integration of both companies will result in a more comprehensive product portfolio that will enable the combined company to reach out to all market segments from the very affluent to those with more modest incomes, he explains.
That integration will include branding under the Lincoln name, a process that started from the day of the merger and should be fully completed by first quarter 2007, according to Lincoln’s Boscia. Following the merger, visitors to Jefferson-Pilot’s Web site were redirected to the Lincoln Financial Web site.
Branding is a key Lincoln Financial strategy, according to the company’s 10K. The branding focus is on financial intermediaries and the wealthy, the top 11% of the population, it reads.
Boscia says that the field force is looking forward to being able to an expanded number of products that they can offer. Those in the brokerage distribution channel can already offer this expanded product offering, he says.
That field force will need a product array to be able to reach consumers at different points in their lives, he says.
For instance, Boscia says that income planning is going to be an important trend going forward. He notes the field of financial services players who advertised the need for income planning during the recent NCAA tournament. “Boomers are going to have to live off of their income for a very long time to come,” Boscia notes.
Companies will have to recognize the need and to make sure that there is the product portfolio in place to help with that planning as boomer shift from the accumulation to the payout phase, he says.
And, for life insurers to more efficiently meet consumers’ needs, according to Boscia, having the flexibility of an optional federal charter will be important.
He looks at the issue from three perspectives: consumers, producers and companies. Consumers, he says, should have the right to buy the same product in any state and not be denied that option because of specific state requirements.
Producers, Boscia continues, serve consumers who don’t always live in one state and consequently, having a national license for producers would be helpful.
And, according to Boscia, companies have sizeable expenses to meet the requirements of a state regulatory system.
The fact that an OFC bill has been introduced in the Senate is a significant step forward, he says.
The National Insurance Act of 2006, S. 2509, was introduced in April by Sen. John Sununu, R-N.H. and Sen. Tim Johnson, D-S.D.
It is important that there be an option for companies to be regulated by either the federal government or states, adds Glass. The system should be similar to the regulatory structure the banking system uses, he adds.
On principle-based reserving, an issue that both companies supported and the combined company continues to support, Glass says that the concept is one that is being used by financial services regulators worldwide. The new reserving principles would be more economically appropriate, he says. State regulators have been working hard to help establish a principle-based system, Glass notes.
Discussions about regulation of the equity index annuity is focusing more on the equity aspects of the product and whether they should be regulated as such, according to Glass.
Glass says that EIAs can be good products and the ones offered by Lincoln are shorter term and more liquid.
Approximately three-fourths of the former JP’s annuity and investment product sales over the last two years were EIA sales, according to JP’s last 10K filing for 2005. And, approximately 55-60% of sales in its individual products segment over the last three years were attributable to products with secondary guarantee benefits, it adds.
Analysts are reacting positively to the combination. In an April 3 report, Saul Martinez, a Bear Stearns analyst, rated Lincoln National Corp. as an ‘outperform’ because of “its substantial capital flexibility, diversified earnings, and attractive relative valuation.” Lincoln shares, according to Martinez, are trading at only 1.3 times book value, versus 1.9 times for Bear Stearns life insurance index.
In a Feb. 22 report Martinez says that the “ample capital flexibility remains underappreciated” because the combined company will operate at a “AA” financial strength rating freeing up capital that the former Jefferson-Pilot held to maintain its “AAA” rating.
UBS analyst Andrew Kligerman notes in a February 14 report that UBS’ $65 price target is based on a “ROE-adjusted price/book valuation that reflects the pending JP merger and assumes a 12.3% full-year 2007 ROE. In the report which followed the release of Lincoln’s fourth quarter results, Kligerman writes that “overall results were robust–with double-digit year-over-year variable annuity, retail investment management and life insurance sales growth and meaningful bottom-line improvement at Lincoln Financial Advisors and Lincoln Financial Distributors.”
LFA is a financial planning unit of Lincoln Financial and LFD, a broker/dealer unit of the company.