8-K: Lincoln Financial Group Reports Mixed 2023 Results, Focuses on Capital Rebuilding and Strategic Realignment

Lincoln Financial Group reported a net loss for 2023, but highlighted progress in capital rebuilding, record annuity sales, and strategic business repositioning.

Summary

• Lincoln Financial Group reported a net loss of $(1.2) billion, or $(7.35) per diluted share, for the fourth quarter of 2023.
• Adjusted operating income was $246 million, or $1.45 per diluted share, for the same period.
• The net loss was primarily due to changes in market risk benefits driven by lower interest rates and a change in the fair value of an embedded derivative related to the Fortitude Re reinsurance transaction.
• The company's risk-based capital (RBC) ratio is estimated to be in the range of 400-410% at year-end, an increase from 375-385% at the end of the third quarter.
• Group Protection delivered record full-year earnings and strong top-line growth, with margins growing over 400 basis points year-over-year to 5.5%, excluding the benefit from the annual assumption review.
• Annuities achieved record sales in the fourth quarter, driven by fixed annuities surpassing $2 billion for the first time.
• Life Insurance sales declined due to a strategic realignment to more accumulation products.
• Retirement Plan Services results were below expectations, but achieved its ninth consecutive year of positive flows, surpassing $100 billion in assets under management.
• The reinsurance transaction with Fortitude Re closed, de-risking the balance sheet and increasing free cash flow.
• The sale of the wealth management business to Osaic, Inc. is expected to close in the first half of 2024, providing at least $700 million of capital benefit.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with significant losses offset by positive strategic moves and improvements in some business segments. The focus on capital rebuilding and strategic realignment is positive, but the overall financial results are weak, leading to a neutral sentiment.

Positives

• The company is making meaningful progress in resetting its businesses for profitable organic growth.
• The company is repositioning product sales to a more capital-efficient and higher risk-adjusted return mix.
• The company is investing in technology and infrastructure to support future growth.
• The Group Protection business delivered record full-year earnings and strong top-line growth.
• Annuities achieved record sales in the fourth quarter.
• The company closed a major reinsurance transaction with Fortitude Re.
• The company announced the agreement to sell its wealth management business to Osaic, Inc.

Negatives

• The company reported a net loss of $(1.2) billion for the fourth quarter of 2023.
• Life Insurance sales declined for the fourth quarter and full year.
• Retirement Plan Services 2023 fourth-quarter and full-year results were below expectations.
• The company experienced a $(0.8) billion net loss primarily due to changes in market risk benefits driven by lower interest rates.
• The company experienced a $(0.6) billion net loss driven by the change in fair value of an embedded derivative related to the Fortitude Re reinsurance transaction.

Risks

• Weak general economic and business conditions may affect demand for the company's products.
• Adverse global capital and credit market conditions may affect the company's ability to raise capital.
• Legislative, regulatory, or tax changes could affect the cost of or demand for the company's products.
• Declines in or sustained low interest rates could reduce investment income.
• Rapidly increasing or sustained high interest rates may negatively affect profitability.
• A decline or continued volatility in the equity markets could reduce sales and increase liabilities.
• Ineffectiveness of risk management policies and procedures could impact results.
• Changes in accounting principles may affect the company's financial statements.
• Lowering of debt or insurer financial strength ratings could adversely affect the company.
• Interruption in telecommunication, information technology, or other operational systems could impact the company.
• The inability to realize the anticipated benefits of acquisitions and dispositions of businesses could impact the company.
• Pandemics, acts of terrorism, war, or other man-made and natural catastrophes could impact the company.
• Competitive conditions could affect the level of premiums and fees the company can charge.
• The unknown effect on the company's businesses resulting from evolving market preferences and the changing demographics of the client base could impact the company.
• The unanticipated loss of key management, financial planners, or wholesalers could impact the company.

Future Outlook

The company will build on its solid foundation and strong momentum to further strengthen its balance sheet, improve free cash flow, and grow profitably as it positions itself to deliver increasing shareholder value. The company is targeting a 420%+ RBC ratio, a 25% leverage ratio, and a 65-75% free cash flow conversion ratio in the longer term.

Management Comments

• The 2023 fourth quarter marked a significant step forward in rebuilding capital, and we expect our year-end risk-based capital ratio to be above our target of 400%, said Ellen Cooper, Chairman, President and CEO of Lincoln Financial Group.
• We delivered improved operating performance led by our Group Protection business, record sales in Annuities, and more stable Life earnings.
• We are making meaningful progress in resetting our businesses for profitable organic growth as we reposition our product sales to a more capital-efficient and higher risk-adjusted return mix supported by our leading distribution.

Industry Context

The announcement reflects a broader trend in the insurance industry of companies focusing on capital efficiency, risk management, and strategic realignment to navigate market volatility and regulatory changes. The move towards accumulation products in life insurance and the emphasis on fixed annuities align with current market preferences for less volatile and more predictable returns.

Comparison to Industry Standards

• Lincoln's RBC ratio target of 400%+ is in line with industry best practices for financial stability, although some peers may target higher ratios depending on their risk profiles.
• The 5.5% margin in Group Protection is competitive, but some peers with more specialized offerings may achieve higher margins.
• The record annuity sales are a positive sign, but the overall performance of the annuity business will need to be compared to peers like Prudential, MetLife, and Jackson Financial to assess its relative strength.
• The strategic shift towards accumulation products in life insurance is a common strategy among insurers like Principal and Voya, who are also focusing on capital-efficient products.
• The reinsurance transaction with Fortitude Re is similar to moves by other insurers to de-risk their balance sheets, such as those seen by Global Atlantic and Athene.
• The sale of the wealth management business is a strategic move to focus on core insurance operations, similar to actions taken by other diversified financial services companies.

Stakeholder Impact

• Shareholders will be impacted by the net loss, but may be encouraged by the strategic moves and capital rebuilding efforts.
• Employees may experience changes due to the strategic realignment and business repositioning.
• Customers may see changes in product offerings and service delivery as the company implements its strategic initiatives.
• Suppliers and creditors may be impacted by the company's financial performance and strategic decisions.

Next Steps

• The company will continue to execute its multi-year journey to transform its business.
• The company will focus on strengthening its balance sheet, improving free cash flow, and growing profitably.
• The company will close the sale of its wealth management business to Osaic, Inc. in the first half of 2024.
• The company will continue to invest in technology and infrastructure to support future growth.

Key Dates

Keywords

Lincoln Financial Group, Financial Results, Reinsurance, Annuities, Life Insurance, Group Protection, Retirement Plan Services, Risk-Based Capital, Capital Rebuilding, Strategic Realignment