LNC Q1 2025 Reports $756M Net Loss Amid Market Volatility
- Favorable mortality results in the Life business: The executives noted that mortality was more favorable than expected in the Life segment, with nearly breakeven underlying results when adjusting for alternative investment underperformance, which supports the company’s resilience in its retail life business.
- Robust capital metrics: The company maintained an RBC ratio well above 420% (ranging around $425‑$435 million), indicating a strong capital buffer designed to withstand adverse market conditions and provide stability amid market volatility.
- Effective cost control and strategic initiatives: Ongoing expense reduction and efficiency measures, particularly in the Life business, are beginning to show tangible benefits, supporting margin expansion and reinforcing competitive differentiation, even in a competitive annuities market.
- Substantial Net Loss: The company reported a net loss of $756 million or -$4.41 per share in Q1 2025, primarily driven by negative market risk benefits amid lower interest rates and softer equity markets, which raises concerns about its near-term profitability under adverse market conditions.
- Market Volatility Impact on Fee Income: The sensitivity of annuity earnings to market fluctuations is evident as the company expects about a $15 million impact to annualized earnings for every 1% change in annuity AUM, highlighting potential earnings instability if market volatility continues.
- Underperformance in Alternative Investment Returns: The alternatives portfolio delivered a 1.9% return against a 2.5% target, which, in the current volatile market, could contribute to future earnings drag and uncertainty regarding the portfolio’s ability to meet long-term expectations.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Group Business Margin | FY 2025 | Expected to remain relatively flat compared to FY 2024 | no guidance provided | no current guidance |
Group Business Margin | FY 2026 | Anticipated to exceed 8% | no guidance provided | no current guidance |
Free Cash Flow Conversion | FY 2026 | Updated to a range of 45% to 60% (previous upper bound was 55%) | no guidance provided | no current guidance |
Leverage | FY 2026 | Expected leverage improved to 25% to 26.5% (prior range: 25% to 28%) | no guidance provided | no current guidance |
Retirement Plan Services Base Spread | FY 2025 | Expected to stabilize at current levels in H1 with modest expansion in H2 | no guidance provided | no current guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Annuity Sales Performance and Sustainability | Consistently discussed across Q2–Q4 2024 with emphasis on diversified product mix, growth in fixed annuities, variable annuities, and RILA products, and strategic actions to sustain growth | Q1 2025 highlighted a strong 33% increase in total annuity sales, an even more diversified product mix including spread‐based products, and strategic partnerships to support sustainable, profitable growth | Improved performance with enhanced strategic focus and strong product diversification. |
Capital Metrics and Free Cash Flow Generation and Conversion | Q2–Q4 2024 detailed robust RBC ratios (above 420–430%), improved free cash flow conversion targets (moving from 35% toward a 45–55% range), and strategic actions for long‐term capital flexibility | Q1 2025 noted stable capital metrics (RBC in the $425–$435 million range) with continued emphasis on free cash flow benefits influencing capital – though driven by similar operational factors as before | Consistent focus with gradual improvements in free cash flow conversion and capital stability. |
Group Protection Business Performance and Competitive Landscape | Across Q2–Q4 2024, group protection demonstrated record earnings, significant margin expansion (margins moving from around 4.1% to above 8%), growth in diversified segments, and strategic positioning in national, regional, and local markets | Q1 2025 continued the strong trend with a 26% year-over-year earnings increase and margin expansion (up 120 basis points), with ongoing investments in digital capabilities and diversification in supplemental health products | Robust, consistently positive performance with expanding margins and strategic market positioning. |
Life Business Mortality and Policyholder Assumptions | Q2 2024 showed mixed mortality signals (slightly elevated in Universal Life offset by favorable term life) and Q3 2024 indicated stable assumptions, whereas Q4 2024 noted elevated mortality due to large claims and seasonality effects | Q1 2025 reported improved mortality outcomes with normalized severity and positive policyholder remeasurement gains, enhancing statutory results compared to the prior quarter | Shift from challenging mortality in Q4 to improved, more normalized results in Q1, reflecting a recovery in assumptions. |
Leverage Reduction and Capital Return Strategies | Q2–Q4 2024 discussions focused on reducing leverage through organic equity growth, debt repayment (with targets around 25%), and considerations for share repurchases, with sequential improvements noted | Q1 2025 reported a leverage ratio of 27.5% (a sequential improvement of 30 basis points and over 250 basis points improvement year-over-year) along with plans to return capital once targets are met | Progressive deleveraging with a clear pathway toward future capital returns. |
Alternative Investment Returns | Q2 2024 saw returns under target (1% vs. 2.5% expectation) driven by lower merger activity and higher rates; Q3 2024 and Q4 2024 noted periods of outperforming expectations and strong quarterly returns | Q1 2025 reported a 7.6% annualized return that was $18 million below target, indicating occasional underperformance even as long-term averages are expected to converge | Mixed and volatile performance with ongoing pressures, yet with confidence in long-term convergence to historical averages. |
Impact of Market Volatility on Earnings and Investments | Discussions in Q2–Q4 2024 addressed both the negative impacts (via fair value changes of derivatives and lower yields in some segments) and mitigating factors such as hedging performance and diversified investment portfolios | Q1 2025 continued to stress a high volatility environment affecting annuity earnings, alternative investment returns, and retirement plan services, while noting proactive hedging programs and capital buffers | Persistent market volatility remains a key challenge, with adaptive hedging and strategic measures to mitigate its impact. |
Operational Efficiency and Strategic Initiatives for Margin Expansion | Q2–Q4 2024 emphasized targeted expense reductions, technology and talent investments, process optimizations, and strategic focus in segments like Group Protection and annuities to drive margin expansion | Q1 2025 reaffirmed efforts in enhancing operational efficiency via cost reductions, organizational improvements, and continued strategic investments (notably in Group Protection and digital capabilities) to support margin expansion | Ongoing and disciplined execution of cost management and strategic investments consistently driving margin expansion. |
Exposure to Universal Life Secondary Guarantee (ULSG) Products | Addressed specifically in Q3 2024 with a detailed discussion on legacy life block options and not impacting current guidance significantly | Not mentioned in Q1 2025 or Q2/Q4 periods | A one-off discussion in Q3 2024; no recent follow-up indicates it is not a current focus. |
Bermuda Reinsurance Subsidiary for Capital Efficiency | Q2 2024 described licensing of Alpine, initial overcapitalized transactions, and strategic objectives for supporting fixed annuities and improving capital efficiency; Q3 and Q4 2024 confirmed its role in optimizing reinsurance strategies | Q1 2025 reiterated the launch and operational integration of the Bermuda-based reinsurance subsidiary as a pillar for enhancing capital efficiency and supporting strategic growth | A continuously emphasized strategic initiative that remains central to improving capital efficiency and reinsurance capacity. |
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Free Cash Flow
Q: Key drivers of 2027 free cash flow boost?
A: Management explained that the free cash flow improvement is driven by deploying capital into spread-based growth and enhancing the legacy life portfolio, not by share repurchases, which underscores a disciplined use of Bain proceeds. -
Capital Deployment
Q: Why issue new equity versus buying on market?
A: The new equity issuance was chosen to create strategic alignment and ensure that additional capital accelerates growth initiatives, particularly in spread-based businesses, rather than merely supplementing balance sheet needs. -
Annuity ROA
Q: What about declining annuity ROA?
A: Management noted that the shift from higher ROA variable annuities to lower ROA spread-based products will lower overall ROA, but risk-adjusted returns are expected to improve over time as the mix evolves. -
Product Expansion
Q: What’s next for new product launches?
A: The team is expanding its suite with new private funds and FABN initiatives, leveraging existing mutual fund expertise and Bain’s strategic partnership to drive growth into adjacent markets. -
Market Seasonality
Q: How favorable was Life mortality and seasonality?
A: Management reported that first quarter mortality outcomes were better than expected despite typical seasonal variations, supporting near breakeven underlying life earnings. -
Competitive Landscape
Q: How are you handling annuity competition?
A: The competitive environment remains intense, but the firm’s focus on profitable growth, differentiated product features, and a strategic emphasis on spread-based offerings maintains its competitive edge. -
Expense Measures
Q: Are expense initiatives showing results?
A: Expense initiatives, particularly on the Life side, are beginning to show benefits through cost savings and reinvestment into growth areas, a trend expected to continue through the year. -
RBC Stability
Q: What’s the outlook for the RBC ratio?
A: Despite minor timing variations, the RBC ratio remains robust, consistently well above 420%, ensuring strong capital stability. -
Disability Performance
Q: How sensitive is disability performance to a downturn?
A: Current margins benefit from a supportive macro environment, but management cautions that in a recession, disability performance could see about a 100bp erosion, although disciplined pricing will help mitigate this risk. -
Life Remeasurement
Q: What drove Life remeasurement improvements?
A: Improved mortality translated into favorable reserve releases, boosting remeasurement gains for both GAAP and statutory results, reflecting better-than-expected performance. -
RPS Run Rate
Q: Impact of the one-time RPS termination?
A: A one-time plan termination, approximately $2M in impact, was noted; excluding that, the run rate is expected to stabilize and improve going forward. -
Disability Drivers
Q: What underpinned group disability margin gains?
A: The gains in group disability reflect both lower claim incidents and stronger recovery rates, though management did not provide a specific breakdown of each factor’s contribution.
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