Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Wall Street Sign

Life Health > Life Insurance > Permanent Life Insurance

Lincoln Financial Aims to Rebuild Capital by Changing Sales Mix

Your article was successfully shared with the contacts you provided.

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.

Risk-Based Capital

Regulators use an indicator called risk-based capital ratio to estimate how well prepared an insurer is to pay insurance claims and annuity benefits.

Lincoln started the year with an RBC ratio of 427% and is predicting the ratio will drop to 360% by the end of the year.

That is well above the level that gets regulators’ attention, but Lincoln wants to keep its RBC ratio at or above 400%.

“We are taking swift and targeted actions to rebuild to our 400% target,” Cooper said.

The Response

Lincoln has started its capital rebuilding effort by reducing spending.

The company will continue to pay shareholder dividends but has stopped buying back shares of its own stock.

The company is working to cut costs by $260 million to $300 million per year by late 2024, and it has achieved 45% of the anticipated savings, Cooper said.

She said the company intends to improve capital efficiency by repricing products, shifting products to leaner guarantees, improving hedging, and making a point of focusing on capital efficiency when deciding how to allocate capital to sales of new products.

The company may also issues new debt, stock or hybrid securities, she said.


Cooper declined to say when the company expects to deal with its capital needs to announcing reinsurance deals or other deals.

But she said she sees a large universe of potential buyers.

“There have never been more buyers,” Cooper said.

(Photo: Michael Nagle/Bloomberg)


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.