Business Description
Lincoln National Corporation (LNC), also known as Lincoln Financial Group, is a holding company that operates multiple insurance and retirement businesses through its subsidiary companies. The company, organized under the laws of Indiana in 1968, is headquartered in Radnor, Pennsylvania. LNC offers a wide range of products and services, including annuities, life insurance, group protection, and retirement plan services, marketed under the brand name "Lincoln Financial Group".
- Annuities - Offers variable annuities, fixed annuities (including indexed), and registered index-linked annuities (RILA).
- Life Insurance - Provides universal life insurance (UL), variable universal life insurance (VUL), linked-benefit UL and VUL, indexed universal life insurance (IUL), and term life insurance.
- Group Protection - Supplies group life, disability, and dental insurance products.
- Retirement Plan Services - Delivers employer-sponsored retirement plans and services.
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Q3 2024 Summary
What went well
- Lincoln Financial is generating free cash flow above expectations and is on track to meet or exceed their 2026 targets, including improving free cash flow conversion ratios from 35% in 2023 toward 45%-55% by 2026, and they have repaid $100 million of debt this year, reducing leverage ratios.
- The company is experiencing strong annuity sales, particularly in Registered Index-Linked Annuities (RILA), with $1.2 billion in RILA sales—the strongest in nearly two years—driven by the launch of Lincoln Level Advantage 2.0 with new features that are resonating with customers.
- Their annual assumption review resulted in a favorable $8 million impact on operating income in the life business, indicating that policyholder behavior and mortality assumptions are now in line with experience and expectations.
What went wrong
- The company lacks specific guidance on future free cash flow, creating uncertainty about meeting 2026 targets.
- Sustainability of annuity sales growth is uncertain, especially if current sales reflect a pull-forward effect or if interest rates change.
- Remaining exposure to universal life secondary guarantee (ULSG) products without plans for further reinsurance transactions may pose risks.
Q&A Summary
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Free Cash Flow Progress
Q: How is free cash flow tracking toward 2026 targets?
A: Management feels confident, with free cash flow conversion exceeding expectations and tracking well toward the 45-55% target by 2026. They generated above-expected free cash flow, repaid $100 million of debt, spent $140-150 million on severance and legal charges, and are on track to pay a $300 million dividend. Actions like expense reductions and capitalizing the Bermuda subsidiary are supporting this progress. -
Share Buyback Outlook
Q: When might share buybacks resume?
A: Management prioritizes repaying preferred securities and deleveraging before resuming share buybacks. The leverage ratio decreased by 50 basis points this quarter, and $100 million of debt has been repaid this year. No update was provided beyond existing guidance, but they feel they are tracking well toward their targets. -
ULSG Block Disposition
Q: Any plans to sell remaining ULSG exposure?
A: While acknowledging an attractive market for these liabilities, management is not relying on another deal and believes they can improve free cash flow from the Legacy Life Block without selling. They continue to evaluate options but focus on priorities like operating the Bermuda affiliate and deleveraging. -
Annuity Sales Drivers
Q: What's driving strong annuity sales?
A: Broad-based annuity sales remain strong due to higher rates and demographics with more individuals approaching retirement. Despite a rate pullback in Q3, rates have risen again, and there's increased advisor focus on annuities as solutions for clients. -
RILA Market Position
Q: How is the new RILA product performing?
A: The refreshed RILA product, Lincoln Level Advantage 2.0, led to $1.2 billion in sales—the strongest quarter in nearly two years. New features enable competition on product features rather than price, and despite increased competition, they see a growing market. -
Assumption Review Impact
Q: Why were there no significant assumption changes?
A: The assumption review resulted in a modest $8 million positive impact on operating income. Mortality and policyholder behavior assumptions align with experience, and individual items were less significant than in prior years.
Key Metrics
Revenue by Segment - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Annuities | - | - | - | - | 3,002 | 1,269 | 1,511 | - | ||||||||||||||||||||||||||||||||||||||||||||||
Life Insurance | - | - | - | - | 6,907 | 1,541 | 1,511 | - | ||||||||||||||||||||||||||||||||||||||||||||||
Group Protection | - | - | - | - | 5,563 | 1,425 | 1,441 | 1,432 | ||||||||||||||||||||||||||||||||||||||||||||||
- Life | - | - | - | - | 1,938 | 9 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
- Disability | - | - | - | - | 2,892 | 73 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
- Dental | - | - | - | - | 184 | -2 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Retirement Plan Services | - | - | - | - | 1,310 | 322 | 677 | 335 | ||||||||||||||||||||||||||||||||||||||||||||||
Other Operations | - | - | - | - | -755 | 27 | 39 | 52 | ||||||||||||||||||||||||||||||||||||||||||||||
- Insurance Premiums | - | - | - | - | - | 1 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
- Net Investment Income | - | - | - | - | - | 27 | 27 | 34 | ||||||||||||||||||||||||||||||||||||||||||||||
- Other Revenues | - | - | - | - | - | 9 | 9 | 17 | ||||||||||||||||||||||||||||||||||||||||||||||
Insurance Premiums | - | - | - | - | 3,672 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Fee Income | - | - | - | - | 5,467 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Net Investment Income | - | - | - | - | 5,879 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Realized Gain (Loss) | - | - | - | - | -4,311 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Other Revenues | - | - | - | - | 900 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | - | - | - | - | 11,645 | 4,116 | 5,153 | 4,111 | ||||||||||||||||||||||||||||||||||||||||||||||
KPIs - Metric | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
Death Claims per In-force | - | - | - | 2.49 | - | 2.44 | 2.37 | 2.36 | ||||||||||||||||||||||||||||||||||||||||||||||
Net Amount at Risk for Guaranteed Minimum Benefits | - | - | - | 3,143 | - | 2,056 | 2,135 | 1,544 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average Duration of Additional Liabilities | - | - | - | 17 | - | 17 | 16 | 16 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average Age of Policyholders | - | - | - | 72 | - | 72 | 72 | 72 | ||||||||||||||||||||||||||||||||||||||||||||||
Commercial Mortgage Loan Prepayment and Bond Make-whole Premiums | - | - | - | - | - | 2 | 2 | 5 | ||||||||||||||||||||||||||||||||||||||||||||||
Loan-to-Value Ratios for Commercial Mortgage Loans | - | - | - | 17,310 | - | 17,431 | 17,572 | 17,419 | ||||||||||||||||||||||||||||||||||||||||||||||
Debt-Service Coverage Ratios for Commercial Mortgage Loans | - | - | - | 1.90 | - | 2.64 | 2.72 | 2.35 | ||||||||||||||||||||||||||||||||||||||||||||||
Outflows as a Percentage of Average Gross Account Balances | - | - | - | 9% | - | 11% | 11% | 11% | ||||||||||||||||||||||||||||||||||||||||||||||
Variable Annuity Net Flows | - | - | - | (7,196) | - | (2,304) | (2,375) | (233) | ||||||||||||||||||||||||||||||||||||||||||||||
Fixed Annuity Net Flows | - | - | - | 5,169 | - | (413) | 1,421 | 872 | ||||||||||||||||||||||||||||||||||||||||||||||
Average Daily Variable Annuity Account Balances | - | - | - | 29,141 | - | 118,176 | 116,770 | 34,344 | ||||||||||||||||||||||||||||||||||||||||||||||
Average Fixed Account Balances | - | - | - | 24,502 | - | 23,655 | 23,550 | 23,604 | ||||||||||||||||||||||||||||||||||||||||||||||
Fair Value of Separate Account Assets | - | - | - | 158,257 | - | 166,225 | 165,199 | 171,483 | ||||||||||||||||||||||||||||||||||||||||||||||
Securities Pledged under Securities Lending Agreements | - | - | - | 205 | - | 283 | 202 | 185 |
Executive Team
Questions to Ask Management
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Given the minimal impact of your annual assumption review on the Life business this quarter, can you explain why you are confident in your current mortality and policyholder behavior assumptions, especially considering recent industry studies suggesting potential changes?
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Despite strong free cash flow generation exceeding expectations and taking a dividend from LNBar, you have not resumed share buybacks; can you provide an updated timeline on when investors might expect a return to capital distributions and elaborate on your capital deployment priorities?
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Annuity sales remained robust in the third quarter even with a pullback in interest rates; do you anticipate any slowdown in sales due to potential future rate declines, and can you clarify whether recent sales growth is driven by new customer inflows or exchanges from existing customers?
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With competitors announcing reinsurance transactions for guaranteed universal life blocks, what are your updated thoughts on pursuing similar deals for your remaining ULSG exposure, and what key considerations are influencing your decision?
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In Retirement Plan Services, you noted that fourth-quarter net flows could be challenged by known plan terminations despite strong sales this quarter; can you provide more details on these terminations and how you plan to mitigate their impact on future earnings?
Past Guidance
1. Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2026
- Guidance:
- Free Cash Flow and Capital Position: Tracking well toward 2026 outlook target.
- Leverage and Debt Repayment: Achieved a 50 basis point reduction in leverage ratio and $100 million in debt repayment for the year.
- Bermuda Subsidiary (Alpine): Plans to fully leverage Alpine for flow agreements in the next year.
- Expense Management: Focus on expense efficiencies as part of operating model optimization.
- Annuities Business: Anticipates seasonally higher expenses and elevated reinsurance financing charges in Q4 2024, but supported by strong fundamentals.
- Retirement Plan Services (RPS): Expects spreads to stabilize at around 100 basis points in Q4 2024, with net flows impacted by plan terminations.
- Group Protection Sales: Anticipates year-over-year sales growth in Q4 2024, focusing on profitability.
- Life Insurance Business: Realigning product portfolio to emphasize accumulation and protection products with more risk sharing.
- Strategic Priorities: Focus on maintaining a strong balance sheet, improving free cash flow, and growing the franchise.
2. Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: FY 2024
- Guidance:
- Group Business Margin Expansion: Expects a 50 to 100 basis point improvement in group business margins for 2024, compared to the 5.5% margin in 2023.
- Retirement Plan Services (RPS) Spreads: Expects spreads to stabilize at around 100 basis points in the second half of 2024.
- Capital and RBC Ratio: Aims to maintain an RBC ratio of 420%, including a 20-point buffer above the 400% target.
- Free Cash Flow Conversion: Goal to improve free cash flow conversion from 35% in 2023 to 45%-55% over the next few years.
3. Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: FY 2024
- Guidance:
- Life Insurance Business: Expects modest earnings for the full year, with seasonality impacting Q1 due to mortality trends.
- Expense Management: Focus on reducing organizational complexity and discretionary spending, with benefits emerging in Q2 2024 and beyond.
- Capital Position: Expects to maintain an RBC ratio of 400%-410%, with a $650 million capital benefit from the wealth management transaction.
- General Account Optimization: Pursuing incremental yield opportunities to support earnings and product competitiveness.
- Annuities Business: Anticipates a strong pipeline to support momentum in 2024, focusing on capital efficiency.
- Retirement Plan Services (RPS): Expects robust sales levels in 2024, supported by a strong pipeline of known wins.
- Alternative Investments: Portfolio expected to deliver solid risk-adjusted long-term returns.
- Mortality Trends: Seasonal improvements in mortality expected to support results in coming quarters.
4. Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: FY 2024
- Guidance:
- Free Cash Flow Conversion: Expected to improve from 35% in 2023 to 45%-55% by 2026.
- RBC Ratio: Ended 2023 with an RBC ratio above 400%, targeting to sustain above 420% going forward.
- Group Protection Margin: Achieved a 5.5% margin in 2023, targeting a 7% sustainable margin over time, with 50-100 basis points of margin expansion in 2024.
- Annuities Business: Expected to remain a key driver of earnings and free cash flow in 2024, with spread improvement and sequential account balance growth.
- Retirement Plan Services (RPS): Account balances surpassed $100 billion, with expected low single-digit growth in operating income.
- Life Insurance: Facing headwinds from the Fortitude Re transaction and higher expenses, but focusing on products with stable cash flows and higher risk-adjusted returns.
- Expense Management: Addressing elevated expenses and optimizing the organizational structure, including a headcount reduction in early 2024.
- Capital Efficiency: Exploring expanded use of affiliated reinsurance to improve free cash flow.
- Investment Portfolio: Continuing to optimize the general account for incremental risk-adjusted yields.
- Market Assumptions: Assumes 6% market appreciation in estimates for 2026 metrics.
This table summarizes the issued and guided periods, along with the exhaustive guidance provided in each earnings call.