Lincoln Financial CFO: Company Shrinking Percentage of Sales of Products With Longer-Duration Guarantees
May 28, 2014 by Fran Matso Lysiak
NEW YORK – Lincoln Financial Group is focused on trying to bring down the percentage of its sales that come from products with longer-duration guarantees and changing its mix of earnings as the company prepares to launch a new variable annuity product without a guarantee later this year, according to its chief financial officer.
Five years ago, Lincoln was about 50-50 in terms of products the company sold with longer-duration guarantees — variable annuities with living benefits and guaranteed life insurance products, said Randy Freitag, CFO and executive vice president at Lincoln Financial, the marketing name for Lincoln National Corp. He spoke at the Deutsche Bank Global Financial Services Investor Conference on May 27. That 50-50 now stands at 65-35 last year, he said.
Last year, 38% of the company’s earnings came from interest spreads; 32% on fees from assets under management; 25% from mortality/morbidity and 5% from living benefit guarantees. Over time, Lincoln would like the mortality/morbidity component to move up, he said.
Dennis Glass, the company’s chief executive officer, earlier said the company is increasing its emphasis on products without long-dated guarantees and recently completed repricing most of its product portfolio (Best’s News Service, May 5, 2014).
About three years ago, 90% of Lincoln’s sales were on variable annuities with living benefit guarantees, 10% were on non-guaranteed variable annuities, Freitag said, adding last year, the company changed some of its incentives.
Ultimately, Lincoln wants to get to 30% of its overall sales coming from variable annuities that don’t feature a living benefit guarantee, he said. To do that, the company is rolling out a product toward the middle of this year that is more investment- driven, tax deferral-driven, Freitag said, noting some of Lincoln’s competitors have had pretty good success with this product. With this variable annuity, Lincoln is not providing a guarantee.
There will be a number of different investment options wrapped into the underlying separate accounts that will offer investors access to alternative hedge funds and private equity, he said.
Jackson National “probably had the most success with this product,” Freitag said, selling about $4 billion last year.
Meanwhile, the next five to 10 years present “some great opportunities” for the industry to succeed, Freitag said. He pointed to a favorable environment now in terms of economic factors, including interest rates and stock markets; demographics, as well as life insurance companies’ balance sheets.
Head winds have moved to tail winds, Freitag said, noting growth is returning across the globe, which should hopefully drive equity markets. Interest rates will “bounce around” but more than likely, will trend up over time, he said.
The industry also has demographic trends in its favor, in terms of people who are heading into their retirement years when they would be attracted to the products the industry sells, Freitag said.
Finally, balance sheets across the industry are “in very good shape,” he said, adding that product portfolios also have been re-priced to the environment today. “Strong returns for the products the industry is selling.”
But Freitag said the main challenge he sees now for the industry is the “uncertainty” in the regulatory environment. “I don’t think it’s an immediate threat.”
On the afternoon of May 27, Lincoln National’s stock was trading at $48.84 a share, up 1.14% from the previous close.
Lincoln National Life Insurance Co. and Lincoln Life & Annuity Company of New York each currently has a Best’s Financial Strength Rating of A+ (Superior). First Penn-Pacific Life Insurance Co., another subsidiary of Lincoln National, currently has a Best’s Financial Strength Rating of A (Excellent).
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)