“I want to replicate Citigroup,” declares Jon Boscia, chairman and chief executive of insurer Lincoln National Corp. “My desire is to build an insurance-based financial services powerhouse. I have a real passion to do that.”
Passion is one thing, but doesn’t his ambition sound a tad grandiose for a modest-size financial services company? Let’s face it, Philadelphia-based Lincoln’s $8.6 billion market capitalization doesn’t exactly rival Citi’s $234 billion. But Boscia is unfazed. He wants a full-service financial services firm like Citi, but one with an insurance company rather than banking at its core. “I’m talking about structure, not size,” he clarifies.
Boscia became CEO in 1998 and began to reshape the plodding insurance company. Working closely with his predecessor, Ian Rolland, Boscia has effected an extraordinary transformation: selling off three of Lincoln’s largest profit centers, making and integrating two significant acquisitions, fixing up a third purchase, adding a slew of new products and improving management. Along the way, Boscia, 50, slashed headquarters staff by 75 percent and moved the company’s home office from Fort Wayne, Indiana, to Philadelphia, making Lincoln much more visible to Wall Street.
In the process Lincoln National has dramatically improved its focus and its results. From a regional company with a generic collection of business lines, it has refashioned itself as a financial services provider concentrating on wealth management. Boscia has a three-phase growth plan. The first stage, now largely complete, was to improve management and operating performance. The second, now under way, is to make acquisitions that will build the company’s heft and widen its business base. The third? Ah yes, the third: Boscia’s seemingly impossible dream -- to become another Citigroup, with insurance rather than banking at its heart. That’s going to take a little time.
Despite losing ground in last year’s weak economy, Lincoln has improved enormously over the past four years. Its revenues increased 31 percent, from $4.9 billion in 1997 to $6.4 billion in 2001. In the same period income from operations rose from a measly $59.4 million from $719 million. Lincoln’s return on equity soared tenfold, from 1.4 percent in 1997 to 13.7 percent in 2001. Its stock price has gained as well -- from $39 a share to a recent $46. At the end of 2000 (the most recent year for which rankings are available), Lincoln was the 12th-largest U.S. life insurer, with more than $80 billion in assets. In its other key businesses, annuities and mutual funds, it ranks fourth and 51st, respectively.
Last year, however, was costly. A poor stock market punishes companies like Lincoln that depend heavily on investment income. Lincoln’s chief financial officer, Richard Vaughan, figures a 1 percent swing in the Standard & Poor’s 500 index means 3 cents to the company’s annual earnings per share. In 2001 Lincoln’s revenues slid 7 percent, and income from operations fell 4 percent, from $719 million. In the first quarter of 2002, income from operations rose just under 6 percent, to $162 million, but that was before a $67.5 million charge for investment losses.
Despite Boscia’s grand plans, analysts and investors haven’t accorded the company the same respect they do other insurers. With a price-earnings multiple of just 12.4 times estimated 2002 earnings, Lincoln trails the rest of industry -- which carries a P/E of 14.1 -- and rivals like John Hancock Financial Services (13.2) and Prudential Financial (14.3), according to Goldman, Sachs & Co. insurance analyst Joan Zief. That’s going to make it tough for Boscia to make the additional acquisitions he wants -- a bank and a brokerage business -- to parallel Citi’s mix of businesses.
Moreover, a well-managed company operating in several attractive markets that sports an underpriced stock is sure to gain attention. Boscia may soon find himself the hunted rather than the hunter. “Lincoln is far and away the most desirable, acquirable franchise in the business because of its strong market positions and very well balanced earnings platform,” says Colin Devine, Citigroup/Salomon Smith Barney’s insurance analyst. “Lincoln and Hancock will both probably be sold in the next 18 months. Allianz, American Express, GE Capital and AIG are all possible buyers of Lincoln.” (None of these companies would comment.)
Boscia admits that given the state of the stock market and the insurer’s relatively modest position, Lincoln’s fate is unclear. “Lincoln has been at the top of everybody’s wish list for three or four years,” he acknowledges. “One could not help but feel some disappointment [if Lincoln is bought].”
Still, he doesn’t plan to give up his aspirations easily. One recent sign: To increase its national profile, Lincoln announced that it will pay almost $140 million over 20 years for the naming rights to the new Philadelphia Eagles football stadium, which opens in August 2003.
AS A BOY, JON BOSCIA FIGURED THAT WHEN he graduated from Pittsburgh’s Central Catholic High School, he would go to work in the steel mills that loomed over his gritty, working-class neighborhood. But his Russian immigrant grandfather, Andrew Weryha, who cleaned blast furnaces at J&L Steel, had been putting money aside from his paycheck for years so that his grandson could go to college.
So Boscia dutifully attended nearby Point Park College, graduating in 1973 with a degree in psychology. He went to work for the local gas company as a records analyst. One day he found himself in the men’s room with a vice president -- the only senior executive he had ever encountered. As it happened, the VP liked to wear white shoes. “I was at such a low level in the organization that we viewed vice presidents as gods,” Boscia recalls today. “Gods didn’t have bodily functions. What I realized -- and this was a defining moment for me -- was that the only thing that made him different from me were those white shoes.”
Boscia went on to get an MBA in 1979 from Pittsburgh’s Duquesne University and stayed in town -- first as a financial sales representative at Westinghouse Credit Corp. and later at Mellon National Corp., where he was an assistant product development officer. In 1983 he finally got his own vice presidency -- but no white shoes -- when he left his hometown to move to Fort Wayne and join Lincoln National Pension Insurance Co., a subsidiary of Lincoln National. He was offered the job of vice president for strategic and financial planning at a salary of $60,000 a year. “My wife and I thought we had died and gone to heaven,” Boscia says.
Over the next eight years, Boscia held a number of investment positions at Lincoln subsidiaries. A growth stock investor, he helped Lincoln steer clear of junk bonds and high-risk real estate. His work caught the eye of Robert Crispin, who was executive vice president and chief investment officer of the parent company. “I could see him doing a great deal more in the businesses that I had responsibility for,” says Crispin, now president and chief investment officer of ING Investment Management-Americas in Atlanta. “The relationship between Jon and I worked as well as it did because I tended to be very big picture. He was a person who would run things very well but wouldn’t be missing what was going on at the microlevel. Our skills were very complementary.” When Crispin left to join Travelers Group in 1991, Boscia got his job.
Lincoln was founded as a life insurance company by a group of Fort Wayne businessmen in 1905 in the wake of a congressional probe into deceptive insurance practices. To emphasize its trustworthiness, the founders got the approval of Robert Todd Lincoln, son of the 16th president, to use Honest Abe’s name and likeness.
To augment its life business, Lincoln added life reinsurance, which syndicates insurance risk, six years after its founding; by the end of World War II, the company had diversified into employee group health as well. “As GIs were returning from the war and entering the workforce, there was strong competition for employees,” says Boscia. “Companies increasingly created health and benefit plans. We eventually became one of the ten largest underwriters of health insurance in the country.” In 1962 Lincoln added property/casualty insurance for small businesses, and personal lines to cover cars and homes. By 1970 the company was a multiline insurance firm competing with the likes of Aetna Life Insurance Co., Cigna Corp. and Travelers.
Lincoln, however, failed to discern the industry’s shift toward more specialized areas like real estate and asset management in the 1980s. Belatedly, it discovered it couldn’t reach its financial goals to grow earnings at 15 percent per year and to have a return on equity of 15 percent. “As we went through the decade and into the early ‘90s,” says Boscia, “our return on equity generally held at between 9 and 11 percent, and our EPS growth rate tended to be low- to mid-single digit. We were not meeting our profitability objectives at all.”
In 1991 consultants from McKinsey & Co. were brought in. They advised CEO Rolland that only two parts of the company could attain his financial targets: annuities and life insurance. The cost of acquiring and maintaining the technology required to keep the group health line competitive, they said, would weigh down what were already unremarkable returns. And if Lincoln failed to invest in the annuity and life businesses, they too would be at risk.
So in 1992 Rolland sold the group health operations, then one of Lincoln’s most profitable businesses. In 1995 he bought Delaware Investments, a value-oriented mutual fund company with $25.9 billion in assets, for $510 million to enhance Lincoln’s life and annuity businesses. In 1997 Rolland sold the property/casualty businesses, another one of Lincoln’s most profitable lines, to Seattle-based Safeco Corp. for $2.7 billion.
When Boscia took over as CEO in 1998, Lincoln had already determined its new strategy, based on McKinsey’s findings. Henceforth it would key on wealth accumulation and management for the “superaffluent,” which Boscia defines as those with $1 million in investable assets. “When you are in the insurance business, your day-to-day existence is understanding demographic trends and the aging of the population,” he says. “So we had very good data about the marketplace, and it was our assumption that when the 81 million people in the baby-boom generation began moving toward retirement, they would want to provide for it themselves.”
With the proceeds from the sale of its p/c businesses, Lincoln bought its way into the high-net-worth market. The company made two crucial acquisitions in 1998. The first was the $1.2 billion purchase of Cigna Life and Annuity in January. “Cigna had expertise in the high-net-worth life insurance business and 550 of the most elite advisers,” says Boscia. The deal took four years to pull off because Cigna was itself rethinking its strategy. But the second transaction followed in short order. In October came a $1.1 billion pact to buy Aetna. “Aetna had the best third-party distribution network,” Boscia says, meaning policy sales through banks, brokerages and independent insurance agencies.
All this gave Boscia a solid base from which to build. Today Lincoln hawks three different kinds of wealth products -- fixed and variable annuities, mutual funds and life insurance -- through two distribution networks -- wholesale (third-party sales) and retail (its own agents). In 1999 Boscia moved corporate headquarters to Philadelphia, where Delaware and Lincoln’s wholesale arms are based. The move made it easier to recruit senior managers. Lincoln Retirement, the annuities operation, remains in Fort Wayne, while Lincoln Life Insurance Co. and the retail network are in Hartford, Connecticut.
To accommodate the changed business, Boscia had to improve management. He dismantled Rolland’s highly centralized headquarters structure, slashing the corporate staff from 240 to 60. He abolished the position of chief operating officer and spread operational authority out to the heads of business lines. “It’s a real treat to work for someone who allows you to run the business, and lets you bring in some of your creative ideas and make changes,” says Lorry Stensrud, chief executive of Lincoln Retirement.
Boscia also hired freely from outside, another departure from Rolland’s practice. He paid below-market salaries for market performance, but lavished large bonuses on those generating above-market results.
Annuities, which contributed 45.6 percent of 2001’s
$590 million in net income, is now Lincoln’s most profitable unit. Stensrud joined in June 2000 from Cova Financial Services, which was Xerox Financial Services Life Insurance Co. “Lorry is an innovative annuity designer,” says Kenneth Kehrer, a Princeton, New Jersey, consultant who tracks banks’ annuity sales. “His difficulty was being with a relatively weak financial player. Now, with Lincoln, he’s able to put together the product and marketing ideas at a company that is more solid financially.”
When he arrived, Stensrud found a business in decline. One of the first companies to sell variable annuities, a product developed in the 1960s, Lincoln had fallen from No. 5 to No. 14 in the industry by 2000. “We had a $2 billion net flow problem, meaning we had to pay out more in annuities than we had coming in,” Stensrud says. The reason: Lincoln wasn’t selling enough product.
“By the early 1990s affluent individuals were saying, ‘I don’t want to deal with one company. I want a long-term relationship with a person who can give me quality advice and access to different products from a whole variety of companies,” says Michael Hemp, who runs Lincoln Financial Advisors, the firm’s retail network.
Stensrud led the transformation back to being a product-rich company within a relationship-driven organization. “My goals were clear: Increase sales, decrease redemptions, change the culture,” he says. “I wasn’t tied in with the old baggage.” His execution was aggressive. Stensrud replaced nine of the 11 managers who reported directly to him and nearly two thirds of the division’s vice presidents. “The company was slow to develop product. We manufactured more product in the last year than in the five prior years.” The new offerings included Income4Life, a variable annuity that starts to pay out immediately; and StepUp, a fixed product whose interest rate rises by 25 basis points every five years. Stensrud quickly enlisted Lincoln’s wholesale distribution network to sell annuities through banks like Wells Fargo & Co. and brokerages like PaineWebber.
“The company is seeing a nice turnaround in its variable annuity product lines,” says David Lewis, an insurance analyst at SunTrust Robinson Humphrey. In 2001 Lincoln climbed back to ninth in the overall annuity sales rankings. It improved sales through banks by 179 percent, to $1.26 billion last year. With $41.5 billion in variable annuity assets, Lincoln now ranks fourth in that segment, behind TIAA-CREF, Hartford Financial Services Group and American International Group. And in last year’s down market, which saw variable annuity sales off by 18 percent, according to Variable Annuity Research and Data Service, Lincoln’s sales fell by just 5 percent.
John Gotta, now CEO of Lincoln Life Insurance Co., came to Lincoln Life in 1998 through the acquisition of Cigna, where he was a senior vice president. Gotta integrated the Cigna business and, a few months later, the Aetna life business. Thanks to the acquisitions Lincoln Life’s income more than sextupled, from $39.1 million in 1997 to almost $249.3 million in 2000, before falling back to $233.1 million in last year’s tough climate. Still, the life business contributed about 40 percent of net income last year.
Gotta, like Stensrud, fired up the product development process. The life group has launched eight new products per year, on average, since his arrival; 11 in 2001. He has also emphasized speed to market. In the past, he says dryly, “we were a company long on strategy but short on results.” The Aetna acquisition was particularly important to keeping premiums rolling in because 65 percent of life revenues come from the wholesale arm. Now Gotta is focusing on increasing revenues from big retail brokerage firms like Merrill Lynch & Co. Thanks to these efforts Lincoln Life squeaked out 1 percent sales growth in 2001, to $569.3 million, one of the few insurers to actually show a gain in this area last year.
One of Lincoln Life’s most vaunted strengths is the size of its typical policies -- $1.2 million, roughly 6.5 times the industry average. That’s because high-net-worth individuals buy large policies. The premium gap is even wider. Lincoln rakes in $22,924 per policy annually, compared with the $1,433 collected by its peers.
Not surprisingly, analysts are impressed by Lincoln’s life unit. “The life insurance agents they have in-house have always had relationships with high-net-worth clients,” says Fox-Pitt, Kelton insurance analyst Len Savage. “They have insurance products that Citigroup and Merrill Lynch can’t match. They have shelf space with broker-dealers around the country. Most of their competitors have big distribution forces that focus on the middle market. Switching gears to the high-net-worth market is difficult.”
The third leg of Lincoln’s business, its mutual fund unit, Delaware Investments, is lagging. Delaware handles institutional and retail clients as well as the insurance company’s investments. Boscia concedes that the Delaware acquisition hasn’t worked out as planned. A small firm, it had been taken private in 1988 by Castle Harlan, a New Yorkbased leveraged buyout outfit. As with many LBOs, the focus on servicing the debt distracted management from aggressively building the business. When Lincoln bought Delaware it had already suffered $7 billion in net redemptions in four years. Then the company went into free fall. In January 2000 Boscia brought in Charles Haldeman Jr., former president of United Asset Management Corp., to turn the business around.
Haldeman was shocked by what he found. The former CEO had been sacked the previous June, and Delaware had been rudderless since. In July 2000 Smart Money magazine ranked its overall performance 98th out of 101 fund groups and gave it a special citation as one of the ten most “dysfunctional” fund families.
“What I was worried about was whether it would be possible for me to turn the firm around,” says Haldeman. “It is
really difficult to do once you get in a downward spiral. Performance gets bad and some clients leave, and then you lose some good people. Then performance gets worse, and some more clients leave. It is pretty hard to reverse that kind of momentum.” Indeed, in Haldeman’s first year at Delaware, net redemptions hit a new high, $7.2 billion, as the fund suffered its tenth successive year of outflows.
“It wasn’t just a Band-Aid kind of repair job,” he says. “We needed a serious overhaul. Radical change was required.”
Haldeman told Boscia that resuscitation would require at least a year to 18 months. Then he went on the road to try to persuade institutional clients to stay with Delaware. Shortly thereafter he replaced nearly half of Delaware’s 180 traders, security analysts and portfolio managers. He got rid of a star system of powerful fund managers and replaced it with a process-driven approach based on proprietary fundamental research. Now groups of analysts make decisions about investments instead of individual portfolio managers.
By 2001 Haldeman had stanched the bleeding. Although net income was down by more than 68 percent because of a lousy stock market, relative performance was up because of the funds’ value orientation. Of Delaware’s 25 largest mutual funds, 20 ranked in the top half of their Lipper peer group last year and eight in the top quartile. Delaware’s six international equity funds outperformed their peer group by 11.06 percent on average. “We are incredibly strong in international equity,” Haldeman says. “We have a very strong asset management team in London, with consistently good results, and it’s attracting clients.” Indeed, international assets grew $700 million in the first quarter of 2002.
Other areas are doing better as well. In early 2002 Frank Russell Co., the global investment company, hired Delaware to handle $700 million of its fixed-income funds. All told, Delaware added $1.9 billion in assets in the first quarter, the first time it has had a net inflow since September 1999. Today the firm has $49.4 billion of client money under management, 58 percent in fixed income, the rest in equity. “Delaware had just a spectacular first quarter,” says Salomon analyst Devine. “They totally knocked the cover off the baseball.”
IN DECEMBER 2001 LINCOLN SOLD OFF LINCOLN Reinsurance to Swiss Reinsurance Co. for $2.5 billion. The business was second only to annuities in profits, but reinsurance did not fit into Boscia’s strategy of high-net-worth money management. Three months after the deal closed, Swiss Re announced it was contesting the amount Lincoln had set aside as reserves to cover preexisting claims. According to Prudential Securities analyst John Hall, “The worst-case scenario is that Lincoln will have to put up $770 million in additional reserves” as a result. CFO Vaughan plays down this possibility. “I really don’t think $770 million is at risk,” he says.
With the reinsurance sale, Boscia has more time -- and money -- to try to realize his dream. Doing so, he says, “will require some defining type of acquisition going forward.” But his $8.6 billion market cap doesn’t translate into much equity currency. Even with $1.2 billion in cash, after taxes and share repurchases, Boscia doesn’t have enough to pull off a major transaction. What can he possibly acquire that is “defining”?
The Lincoln chief acknowledges that, given his weak share price and middling market capitalization, anything “defining” would have to be a reverse merger in which a bigger rival willingly ceded its company, possibly in return for a major role in running the combined entity. Although Boscia declines to discuss specific targets, recently demutualized Prudential Financial would be one such possibility. The Newark, New Jersey, insurer’s brokerage arm, Prudential Securities, is one of Lincoln Life’s largest distributors. Pru’s big international insurance business, which contributes 35 percent of its profits, would also boost Lincoln’s troubled overseas position (see box), and its huge sales force would fit Lincoln’s distribution needs. Still, Prudential’s $18.4 billion market cap -- not to mention its appeal to other, larger competitors -- would be a tough hurdle to negotiate. Unless Pru falters badly over the next few quarters and wants a friendly transaction in which it has substantial control, it seems like a long shot. Prudential would not comment on such speculation.
If Boscia really wants to think big, he could consider a superregional bank. He won’t name names, but he doesn’t shy away from discussing the possibilities: “Say you went to one of these banks that really can’t grow beyond their region and you say, ‘How would you like to become the banking platform of this company, instead of a notch on someone else’s belt where you don’t exist anymore?’ I think you’d have a fairly good number of superregional banks that would find that a highly appealing alternative.”
Of course, contemplating possibilities is much easier than securing such a megadeal. Still, those who know him say it would be a mistake to dismiss Boscia’s musings. “Jon has overachieved in almost everything he has done,” says onetime mentor Crispin. “I worked for Sandy Weill at Travelers, pre-Citigroup, from 1991 to 1995. I know Sandy very well. I know Jon very well. Sandy is incredibly successful at finding value where others don’t. This is what Jon is aspiring to. It’s not unreasonable. But the equity will have to perform better over the next few years.”
Otherwise Boscia might find himself a bit player in someone else’s dream.
Mind the gap
When several of its major competitors, such as Metropolitan Life Insurance Co. and Prudential Insurance Co. of America, started to open foreign operations in the 1980s, Lincoln National Corp. decided it too should venture abroad. Like many American tourists on their first overseas jaunt, the insurer chose the U.K. as its destination. Unfortunately, Lincoln executives have learned that political risk exists even in a wealthy democratic country with a familiar tongue and a related legal system.
In 1984 the insurer shelled out $60 million for Cannon Assurance, a 21-year-old Wembley-based firm. Jon Boscia, now Lincoln’s CEO, notes that Cannon “sold unit-linked business that was similar to our variable life insurance, and they did pensions, which we did. They used a tide agency system that was equivalent to the captive agency system we had.” Upping its
U.K. exposure, Lincoln bought three more companies, Citicorp Insurance Services in 1993, and Liberty Life Assurance Co. and Laurentian Life in 1995, for a combined $387 million.
Michael Tallett-Williams, former finance director of Laurentian Financial -- the last and largest of these acquisitions -- is now managing director of the combined entity, Lincoln National (UK). Under his direction the company combined sales forces and shuttered overlapping branches, driving to make the deals pay off fast. One third of the employees were laid off.
Merging the insurance policy systems took longer. There were nine different platforms used by the four merged companies. “We were down to two by 1998,” Tallett-Williams says.
These business challenges, however, were minor next to contending with regulatory changes. After Tony Blair’s election in 1997, the Labour Party reviewed Margaret Thatcher’s policy of encouraging workers to shift from company-sponsored pension plans to private schemes. When a government study released after the election concluded that private plans had not performed as well as employer-sponsored schemes, the Blair government required the private plan administrators, Lincoln included, to make up the difference. The total cost? Lincoln had to set aside $200 million in 1997 and an additional $194 million in 1999 to pay plan members.
In 1998 the Blair government decided to take a look at mortgage endowment insurance, an investment product that homeowners buy to cover balloon payments when principal comes due. Because these products are vulnerable to interest rates, policyholders may not earn enough to cover the balloon payment. Again, the government is considering forcing insurance companies to make up the difference.
Although the issue remains unresolved, the threat of millions of dollars in further liabilities convinced Lincoln that the U.K. wasn’t hospitable to insurers. “We thought we understood the U.K. market, but it changed in ways we didn’t think possible,” says Boscia. Adds Prudential Securities insurance analyst John Hall, “It’s a bleeding sore.”
Certainly, profits in the U.K. division have been far from predictable. From 1992 through 2001 Lincoln UK earned a total of just $154.4 million, almost $69 million of it last year. Based on recent experience, there’s no assurance 2001’s success can be sustained. In 1996, for example, the unit contributed $66 million to Lincoln’s overall net income. The following year, when Lincoln UK took the hit on pension earnings, it lost $106.8 million. “Lincoln wasn’t getting the value it saw in the U.K. operation,” says Tallett-Williams.
In 1999 Boscia reviewed Lincoln UK’s operations and decided to put it up for sale in an auction run by Lehman Brothers. None of the offers were acceptable, according to Boscia. “It was thought that Lincoln was trying to sell in a fire sale,” says Tallett-Williams. The regulatory environment made other market participants reluctant to increase their exposure. “The attraction for a buyer would have been to put two books of business together, generating cost savings,” says Jonathan Sheehan, London-based insurance analyst with Dresdner Kleinwort Wasserstein. “There have been relatively few buyers around for this kind of business.”
With Lincoln UK’s 95 percent retention of policyholders, compared with the 89.7 percent industry average, and its 1 million policies, 550,000 customers and 12 percent contribution to net income last year, Boscia says he’s in no rush to sell. Staff cuts have brought the payroll down from 1,200 to 550. The shuttering of a satellite location in Uxbridge meant consolidation in one office in Gloucester, about 80 miles west of London. Lincoln UK was among the best in the industry last year in terms of expenses per policy, according to Tallett-Williams. “We have an asset in the U.K. that provides an immediate income stream going forward,” he says. “I don’t want to be running a company where the parent company doesn’t want to own us. I want Jon to be very happy with the operation he has in the U.K.” But, Tallett-Williams acknowledges, “Jon sees value primarily as being in the U.S.”
“We’re managing this as a declining book of business,” says Boscia. “Our operating costs and margins have remained very attractive. If somebody wanted to pay the right price for it, we would have to take a look at it. But we’re not going to give it away.” -- J.S.G.
