Q3 2024 Earnings Summary
- 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.
- 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.
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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.
Research analysts covering LINCOLN NATIONAL.