Producers can take comfort in knowing that Lincoln Financial will be able to meet its policyholder obligations. The management team at Lincoln Financial spent a considerable time talking about its strong capital position and going over all sorts of stress tests that are being conducted to ensure that the firm’s financial strength rating remains strong. In fact, the company’s risk-based capital ratio, which stands at 466% as of the March quarter, would not decline below 325% under a harsh economic scenario, which we describe on the following pages - this would be consistent with an AA rating. Our View: Producers can continue selling Lincoln Financial’s products with good conscience knowing that the company will be able to meet its obligations.
Cash is king and Lincoln Financial seems to have sufficient of it. While there were some concerning news that companies in various sectors, such as gaming, retail or hospitality could not meet their rent obligation or had to furlough employees without pay, don’t expect a call from your client regarding similar headlines about Lincoln Financial. The company has ample liquidity on its balance sheet and access to cash as needed. With $760M of cash at the holding company, an undrawn line of credit to the tune of $2.25B, and $7B of committed borrowing facilities, any concern around liquidity seems overdone. Our View: We do not expect any hiccups that could negatively impact the company’s operations or headline risk.
COVID-19 will change the Lincoln Financial’s product offering and how policies are being sold. With the spread of the virus and economic activity coming to a near halt, the FED cut interest rate in an effort to jump start the economy. The resulting record low interest rates will have implications on multiple fronts for producers. For one, Lincoln Financial is reluctant to sell products with meaningful guarantees as it does not want to hold the required capital to back these products. Think “plain vanilla” as the flavor of the day prospectively. Second, expect Lincoln Financial to take further pricing action to ensure that the products it sells meet the company’s hurdle rates. Think higher premiums for the same benefit. Third, closing a sale could becoming increasingly difficult as the unemployment rate increases and consumers tune down discretionary spent. Think declining volumes. Finally, advisors need to utilize available technology more than they have in the past as face-to-face meetings could be difficult to conduct in the near term. Think longer closing cycles. Our View: Absent of effective vaccines and a return to business-as-usual mentality, producers will have fewer attractive options to meet their clients needs. The way advisors conduct business could dramatically and likely change permanently.
OUTLOOK: The management team at Lincoln Financial made it clear that the company’s results for the March quarter are not reflective of what it expects prospectively. Mortality rates are expected to increase due to COVID-19. The management team will allocate less capital to support organic growth opportunities, i.e., sales are expected to decline in the coming quarters. And from a client’s perspective, products offered will be less attractive than what the company had been offering.
OUR VIEW: While the rally in the equity markets seems to indicate that investors have written off 2020 and are already focused on 2021, there is no doubt that the economic recovery in the near term will be a slow one. As such, producers should expect continued headwinds closing deals. Lincoln Financial’s March quarter earnings call undoubtedly shed light on the difficult environment the firm will have to operate in. The next few quarters will be a period of hunkering down, dialing down sales to preserve capital and changing the sales mix to focus on distributing less interest rate sensitive products. While we do not know how the current conditions will impact the way Lincoln Financial incentivizes future sales, we would expect closing deals to be more difficult.
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