Buried within the sunny pronouncements and optimistic projections of Lincoln National's Q1 2024 earnings call lies a subtle but potentially seismic shift in the company's strategic thinking. While analysts focus on immediate capital benefits from the Wealth Management sale and anticipated RBC ratios, a more nuanced story is unfolding - one that hints at a bolder, more complex capital strategy involving a "Bermuda Triangle" of interconnected maneuvers.

Lincoln National has historically been conservative in its capital approach, relying primarily on its domestic LNBAR subsidiary for managing variable annuity guarantees. However, the Q1 transcript reveals a growing fascination with the potential of affiliated reinsurance in Bermuda. Chris Neczypor, CFO, mentions it not once, but multiple times, highlighting the potential of a Bermuda domicile as a tool for "profitable growth across a variety of other products." This repeated emphasis suggests that Bermuda is not just a passing consideration, but a key component of Lincoln's evolving capital strategy.

The company is exploring this option "actively," with Neczypor hinting at its potential for "meaningful positive" impact on free cash flow in the coming years. He acknowledges that Lincoln is one of the few companies in the industry that haven't yet fully utilized other domiciles for affiliated reinsurance. This is a clear signal that Lincoln intends to catch up, potentially shifting a significant portion of both new and existing business to a Bermuda entity.

The allure of Bermuda is obvious. Its regulatory regime is well-regarded, offering greater flexibility and efficiency in managing capital compared to its US counterpart. By establishing a Bermuda presence, Lincoln can potentially lower its capital requirements, release trapped capital from in-force business, and generate higher risk-adjusted returns on new products.

Here's where the "Bermuda Triangle" gets intriguing. Lincoln is simultaneously pursuing several other capital initiatives that, when combined with the Bermuda strategy, could unlock a considerable amount of capital.

First, there's the ongoing optimization of its general account portfolio. The company has reduced the duration of its liabilities, creating room to add incremental yield through investments in less liquid assets and structured products. This initiative, Neczypor states, will start showing results "in the upcoming quarters," creating an upward trajectory for both earnings and product competitiveness.

Second, Lincoln is actively exploring the optimization of its legacy life liabilities. While specifics are scarce, the transcript mentions hedging, asset allocation adjustments, and potential policy buyouts. Each of these strategies, if executed effectively, can further enhance capital efficiency and release trapped capital.

The third point of this Bermuda Triangle is, of course, the imminent sale of the Wealth Management business. With a net capital benefit of $700 million expected upon closing, Lincoln gains a considerable injection of capital that can be deployed strategically to further bolster its Bermuda operations and other capital optimization initiatives.

"Hypothetical Scenario: If Lincoln shifts just 10% of its existing $250 billion Annuity block to a Bermuda entity with a lower capital requirement (let's say 80% of the US requirement), this could release approximately $5 billion of capital upfront. Add to this the potential capital release from legacy life optimization and the $700 million from the Wealth Management sale, and Lincoln could be looking at a total capital unlock exceeding $6 billion in the next few years."

This "Bermuda Triangle" strategy, if fully realized, could significantly alter Lincoln's financial profile. The company can strengthen its balance sheet, surpass its RBC targets, potentially resume share buybacks, and invest more aggressively in growth areas like Group Protection.

However, this is a complex, multi-faceted strategy with inherent risks. Setting up and managing a Bermuda entity involves significant upfront costs and operational complexities. The success of legacy life optimization depends on market conditions and transaction execution. And while a Bermuda domicile can be advantageous, it also comes with heightened regulatory scrutiny and potential reputational risk.

Annuities Earnings Growth

The following chart depicts the year-over-year growth in adjusted operating income for Lincoln National's Annuities segment, excluding significant items, based on data from the Q1 2024 earnings call transcript.

The transcript offers glimpses, but not guarantees. Investors will need to carefully track Lincoln's progress on these interconnected initiatives, looking for concrete details and tangible results. If this "Bermuda Triangle" strategy takes shape, it could be a defining chapter in Lincoln National's ongoing transformation. If not, the company may need to find alternate routes to navigate its course toward sustainable value creation.

"Fun Fact: The term "Bermuda Triangle" was first coined in 1964, referring to a region in the North Atlantic Ocean where ships and aircraft have allegedly disappeared under mysterious circumstances. In the context of Lincoln National, it metaphorically represents the convergence of three strategic initiatives that could have a significant impact on the company's future."