Q4 2024 Earnings Summary
- Significant margin expansion in the Group Protection business, with margins increasing from 1% in 2022 to 8.3% in 2024 due to strong execution and strategic initiatives. The company expects to sustain or surpass 8% margin by 2026, indicating ongoing profitability improvements.
- Reduction in leverage ratio is progressing faster than expected, aided by stronger equity growth. Lincoln National is considering returning to share repurchases as free cash flow grows, demonstrating financial strength and a commitment to shareholder returns.
- Raised the upper end of free cash flow outlook for 2026 from 55% to 60%, attributed to successful strategic shifts, including moving towards higher free cash flow segments like Group Protection, optimizing capital efficiency of new sales, and improving legacy blocks. This showcases confidence in future performance and growth potential.
- Premium growth in the Group Protection segment was subdued, with quarterly premium growth at only 2% and full-year growth at 3%, which is lower than previous periods. Additionally, lower persistency levels due to business not renewing as price increases are implemented may impact future revenue growth.
- Management expects earnings in the Group Protection segment to be relatively flat in 2025 compared to 2024, as the favorable macroeconomic conditions that contributed to margin expansion in 2024 may not persist, potentially limiting future earnings growth.
- The company faces constraints on returning capital to shareholders, such as share repurchases, due to the need to grow free cash flow to sustainable levels and reduce leverage to the 25% level, which may not be achieved until 2026, potentially limiting near-term shareholder returns.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | Highest quarterly revenue at $5,063 million in Q4 2024 | Total revenue reached a record high in Q4 2024, suggesting a rebound in client demand and a stronger sales mix compared to previous quarters that had been dampened by operational headwinds. This improvement is indicative of a positive market response and strategic recovery from prior periods. |
Operating Income (EBIT) | $2,100 million in Q4 2024 | Operating income experienced strong performance, reflecting effective cost control and improved operational efficiency relative to earlier quarters. This turnaround contrasts with periods when lower revenue and higher expenses had limited EBIT. |
Net Income | Turnaround from a $528 million loss in Q3 2024 to $1,686 million in Q4 2024 | Net income rebounded drastically as the company turned a prior quarter loss into robust profitability. The rebound is a result of the higher revenue and operating improvements in Q4 as well as effective mitigation of previous losses. |
Earnings Per Share (EPS) | Basic EPS of $9.81 and Diluted EPS of $9.63 in Q4 2024 | EPS improved dramatically in alignment with the net income turnaround. The enhanced EPS reflects the direct impact of the net income recovery and improved profitability relative to the loss in the prior period. |
SG&A Expenses | $650 million in Q4 2024 | Stable SG&A expenses maintained the cost base while revenue increased, supporting stronger profit margins. This consistency in spending contrasts with previous periods where cost inflation may have eroded margins. |
Depreciation & Amortization | $302 million in Q4 2024 | Depreciation & Amortization levels remained supportive of a healthy operating margin. These consistent expense figures help underline that operational improvements were driven by revenue growth rather than cost-cutting measures. |
Cash and Cash Equivalents | Declined modestly to $5,801 million in Q4 2024 | The modest decrease in cash likely reflects strategic reallocation of liquidity, possibly due to investment activities or financing adjustments. This change is set against prior periods where cash inflows from financing and reinsurance transactions had bolstered balances. |
Shareholders’ Equity | Declined to $8,269 million (approx. 8.3% QoQ drop) in Q4 2024 | Despite strong operating results, shareholders’ equity fell, likely due to market revaluation effects and adjustments from items such as changes in Accumulated Other Comprehensive Income. This decline contrasts with the previous period’s build-up in equity from retained earnings, indicating that other capital adjustments offset earnings gains. |
Retained Earnings | Soared to $7,645 million in Q4 2024 (up about 26.6% QoQ) | Retained earnings experienced significant growth driven by the turnaround in net income from a loss in Q3 2024 to robust profitability in Q4 2024. The strong net income in Q4, in contrast to the previous quarter’s net loss, directly boosted retained profit accumulation. |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Debt Repayment | FY 2024 | $100 million of debt repaid in 2024 | Repaid approximately $73 million (total debt from $6,229 million in Q1 2024 to $6,156 million in Q4 2024) | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Ongoing focus on capital structure improvements and deleveraging | Mentioned consistently from Q1 through Q3, targeting leverage ratio reduction to 25% by 2026 and emphasizing preferred debt repayment. RBC levels above 420% were highlighted as a key milestone. | Reiterated goal of a 25% leverage ratio, citing higher RBC above 430% and improved confidence in 2026 outlook. | Continued emphasis on deleveraging and capital strength. |
Group Protection remains a recurring topic | Q1 to Q3 calls showed subdued premium growth but highlighted rising margins (from 5.5% in 2023 to near 8% in 2024) and optimistic long-term profitability. | Reported margin at 8.3% for 2024, attributed to disciplined pricing, operational improvements, and favorable macro conditions. Anticipates maintaining ≥8% margin by 2026. | Shift from modest growth to significant margin expansion and optimism. |
Annuity sales | Prominent focus from Q1 to Q3. Highlights included strong fixed annuity sales, RILA growth, and record annuity sales in certain quarters. | Mentioned overall strong FY sales in Q4 but noted a decline vs. record levels in prior quarters. Less emphasis on fixed annuities, with further diversification of product mix. | Downplayed in Q4; possible strategy pivot or response to market conditions. |
Reinsurance initiatives (Bermuda subsidiary, ULSG transactions) | From Q1 to Q3, management repeatedly stressed the Bermuda affiliate for capital efficiency and potential for further ULSG block transactions. | Q4 mentions focus on the Bermuda subsidiary for capital optimization; no specific mention of ULSG transactions. | Shifted away from ULSG deals; Bermuda entity remains part of capital strategy. |
Free cash flow as a central theme | Q2 and Q3 updates detailed improved free cash flow conversion targets (aiming 35% → 45–55% by 2026) and near-term priorities of debt reduction and reinvestment. | Raised upper bound of guidance to 45–60% by 2026; share repurchases mentioned as a future possibility once leverage hits 25%. | More optimistic outlook with a potential return to share buybacks. |
Margin expansion in Group Protection (1% to over 8%) and impact on future trajectory | Q1 to Q3 reports showed progressive increases (e.g., 6.2% in Q1, 10% in Q2 including timing effects, 8.5% in Q3), driven by disciplined pricing and lower disability incidence. | Q4 margin of 8.3% attributed to favorable macro and operational initiatives; company expects ≥8% margins through at least 2026 and views Group Protection as a key growth driver. | Demonstrates sustained progress and positions Group Protection as a major earnings contributor. |
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Free Cash Flow Outlook
Q: Why raise 2026 free cash flow outlook?
A: Management increased the upper end of the 2026 free cash flow conversion range from 55% to 60%. This is driven by ongoing mix shift towards higher free cash flow businesses, optimizing capital efficiency of new sales (with Bermuda helping), and actions on legacy blocks to accelerate free cash flow conversion. -
Leverage Ratio and Capital Allocation
Q: Is lower leverage due to equity growth or debt reduction?
A: The lower leverage ratio is due to anticipated equity growth, bringing the ratio down over time. While debt repurchasing is less attractive due to tighter spreads, it's still considered. They aim to return to share repurchases once free cash flow reaches sustainable levels, expecting this by 2026. -
Group Protection Margin Outlook
Q: What's driving group protection margins above 8%?
A: Margins improved from 1% in 2022 to 8.3% in 2024, with 100 basis points due to favorable economic conditions. They expect 2025 earnings to be flat as the favorable backdrop may not persist. By continuing to execute on priorities, they see margins exceeding 8% by 2026. -
Variable Annuity Sales Outlook
Q: What's behind the increase in VA sales?
A: Total annuity sales reached $13.7 billion, the highest in five years, up 7% year-over-year. Spread-based products (RILA and fixed annuities) represented two-thirds of sales, while VA with guaranteed living benefits were less than 25%. They continue to focus on growth, especially in spread-based products, while maintaining leadership in VAs. -
Bermuda (Alpine) and Capital Efficiency
Q: Will Alpine help with new sales or in-force business?
A: For 2025 and beyond, Alpine (Bermuda) will maximize capital efficiency of new sales, particularly in fixed annuities and potentially retail life. They are not focusing on in-force reinsurance at this time but see Bermuda as key to growing spread-based earnings and improving capital efficiency. -
Fixed Annuity Sales and Reinsurance
Q: Outlook for fixed annuity sales and Bermuda flow agreement?
A: They expect strength in fixed annuity sales over the next 2-3 years. Bermuda allows them to optimize reinsurance between internal and external sources, decreasing reliance on external quota share and retaining more earnings. This supports their objectives for capital efficiency. -
Group Protection Premium Growth
Q: Why is group protection premium growth subdued?
A: While quarterly premium growth was 2%, full-year growth was 3%. They prioritize profitable growth over top-line growth, focusing on business with appropriate margins. Persistency is lower due to price increases causing some business to roll off, but new business is priced appropriately. -
Expense Ratio Outlook
Q: What is the outlook for the expense ratio?
A: Expense reductions from actions taken in 2024 will flow through more in 2025. Savings may be reinvested to grow margins, especially in areas like group protection. Therefore, net G&A expenses may not decrease significantly, but overall margins should improve.
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