When Jon Boscia, chairman and CEO of Lincoln Financial Group, and Dennis Glass, the COO, rang the closing bell at the New York Stock Exchange to celebrate the $7.5 billion merger of Lincoln and Jefferson-Pilot Corp., it was just the beginning of what they say will be a year of integration.
The combined company has a market cap of $16.2 billion as of March 1, 2006, revenue of $9.7 billion and combined 2005 income from operations of $1.42 billion.
By first quarter of 2007, products and distribution channels will be integrated, says Glass. Distribution channels will remain largely the same and there will be some cross-selling of products, he adds.
The melding of product offerings includes Lincoln Financial's variable and fixed annuities, universal life and variable UL 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.
About 55%-60% of sales in J-P'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 J-P's 2005 10K filing.
Lincoln Financial Distributors reaches wirehouses/regional firms, independent financial planner firms, financial institutions, managing general agents and corporate specialty markets, Lincoln's 2005 10K indicates.
J-P's distribution channels include 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, product introductions will continue as scheduled in order to remain competitive, 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, says Boscia. Following the merger, visitors to Jefferson-Pilot's website were redirected to the Lincoln Financial website.
Branding is a key Lincoln Financial strategy, says the company's 10K, with the focus on financial intermediaries and the top 11% of the population.
Boscia says the field force is looking forward to an expanded number of products to offer. Those in the brokerage distribution channel already can offer them, he says.
That field force will need a product array to be able to reach consumers at different points in their lives, Boscia says. For instance, he says, income planning is going to be an important trend going forward and 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 their income for a very long time to come," Boscia says.
Companies will have to recognize the need and make sure the product portfolio is in place to help with that planning as boomers shift from the accumulation to the payout phase, he says.
For life insurers to more efficiently meet consumers' needs, Boscia says, 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.
Finally, Boscia says, companies have sizeable expenses in order 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, says Glass. The system should be similar to the regulatory structure the banking system uses, he adds.
On principle-based reserving, an issue both companies supported and the combined company continues to support, Glass says the concept is one being used by financial services regulators worldwide. The new reserving principles would be more economically appropriate, he says.
Discussions about regulation of equity index annuities are focusing more on the equity aspects of the products and whether they should be regulated as such, according to Glass. He says EIAs can be good products and the ones offered by Lincoln are shorter term and more liquid.
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, Martinez says, are trading at only 1.3 times book value, vs. 1.9 times for Bear Stearns life insurance index.
In a Feb. 22 report, Martinez says the "ample capital flexibility remains underappreciated" because the combined company will operate at an "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 Feb. 14 report that UBS' $65 price target is based on an "ROE-adjusted price/book valuation that reflects the pending J-P 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 is a broker-dealer unit of the company.
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