In an effort to de-risk its balance sheet, Lincoln National Corp. LNC has entered into an annuity reinsurance transaction with a subsidiary of Athene Holding Ltd. ATH. Per the deal, Athene will reinsure approximately $7.7 billion of Lincoln National’s in-force fixed and fixed indexed annuity products.
Annuity reinsurance is an ultimate form of asset intensive reinsurance, which means the reinsurance of liabilities that are heavily weighted on asset/interest rate risk. The benefits of reinsuring annuities are more than one. First, reinsurance of annuities can result in powerful balance sheet benefits for the ceding insurer. Second, the risk-based capital ratio of the ceding insurer improves as these assets and liabilities come off the books. Insurers resort to such deals in order to reduce their business and balance sheet risk.
Earlier this year, another insurer Voya Financial Inc. VOYA, got its $19 billion of fixed and fixed indexed annuity liabilities reinsured via Athene.
Fixed annuity products require the issuer to offer its consumers guaranteed lifetime withdrawal riders thereby giving them longevity protection by providing an income stream and the ability to participate in equity markets with downside protection for their principal. This is however, a strain on insurers as irrespective of the equity market performance (with which these products are linked) the obligation of a fixed payout needs to be maintained.
As a result of this transaction, Athene will shoulder the risk involved in the business reinsured and Lincoln National will be able to free up the capital, which it would otherwise have to keep as reserve for backing this business. Lincoln National will, however, continue to look toward the administrative services of the policies.
Lincoln National, having freed itself of this risk will be able to focus on continued growth of both its fixed and variable annuity businesses. It has plans to introduce new products and further expand distribution partners to achieve successful long-term growth.
The capital freed up along with the ceding commission received from this deal will be utilized by Lincoln National for share buyback, which the company plans to achieve via an accelerated share buyback program to the tune of $500 million. The transaction is expected to be accretive to Lincoln Financial's earnings per share in 2019.
The company has a disciplined capital management strategy. This is evident from the deployment of $6.5 billion (representing 72% of operating earnings) capital through buybacks, dividends, and mergers and acquisitions since 2012.
In a year’s time, the stock has lost 27% matching the industry’s decline. But the company’s progress on fundamentals should drive its stock going forward.
Lincoln National carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Genworth Financial, Inc. GNW, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Genworth Financial, Inc. (GNW) : Free Stock Analysis Report
Athene Holding Ltd. (ATH) : Free Stock Analysis Report
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