Lincoln National Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. LNC operates Annuities, Retirement Plan Services, Life Insurance and Group Protection, plus Other Operations. Figures below are consolidated unless noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $5.241 billion | $5.361 billion | $14.627 billion | $13.303 billion |
| Income before taxes | $368 million | $460 million | $1.402 billion | $334 million |
| Net income | $318 million | $398 million | $1.185 billion | $356 million |
| Diluted EPS | $1.68 | $2.01 | $6.19 | $1.74 |
| Net investment income | $1.576 billion | $1.458 billion | $4.670 billion | $4.005 billion |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $108 million | $341 million |
Q3 comprehensive loss was $312 million, including $630 million of after-tax other comprehensive loss. For the nine-month period, comprehensive loss was $897 million, including $2.082 billion of after-tax other comprehensive loss.
Balance sheet at September 30: Total assets were $377.1 billion, total liabilities $355.9 billion and stockholders’ equity $21.2 billion. Cash and invested cash was $2.614 billion, versus $1.708 billion at year-end 2020. Debt comprised $300 million short-term and $6.323 billion long-term debt. Investments totaled $155.5 billion, including $122.1 billion of fixed-maturity AFS securities. Separate-account assets and liabilities were each $175.7 billion.
Liquidity and capital: Holding-company available liquidity was $754 million, including funds related to pre-funding $300 million of senior notes due 2022. The company reported compliance with credit-facility covenants. Insurance subsidiaries’ statutory surplus and risk-based capital were above current regulatory requirements; specific capital ratios are not provided in this filing excerpt. Operating cash flow was more than offset by investing outflows, with financing activities providing $3.234 billion in the first nine months.
Investment and claims indicators: The net investment income yield on invested assets was 4.65% for Q3 and 4.64% for the first nine months, including items that management says can vary materially. Approximately 96.5% of fixed-maturity AFS securities were investment grade at quarter-end. The total Group Protection loss ratio was 87.8% in Q3 and 84.7% for nine months, compared with 83.2% and 79.8% in 2020.
Material changes versus comparable periods
- Q3 revenue declined 2% and net income declined 20% year over year. For the first nine months, revenue rose 10% and net income rose to $1.185 billion from $356 million.
- Q3 segment operating income increased in Annuities ($338 million versus $196 million), Retirement Plan Services ($60 million versus $50 million) and Life Insurance ($93 million versus a $311 million loss). Group Protection moved to a $32 million operating loss from $6 million income; Other Operations’ loss widened to $152 million from $74 million.
- For the first nine months, operating income improved in Annuities, Retirement Plan Services and Life Insurance, while Group Protection declined to a $12 million loss from $85 million income and Other Operations’ loss widened to $307 million from $202 million.
- Q3 and year-to-date consolidated earnings comparisons were affected by volatile realized investment and derivative results. Q3 realized gain was $85 million versus $629 million; nine-month realized loss was $97 million versus $43 million.
- Share repurchases totaled $455 million in the first nine months, and common shares outstanding declined to 186.1 million from 192.3 million at year-end 2020. Dividends declared were $1.26 per share for nine months, compared with $1.20.
Outlook, management commentary and risks
- Management expects elevated COVID-19-related mortality in Life Insurance and Group Protection in Q4 2021. It also expects the low-interest-rate environment to continue pressuring interest margins; actions include investment and product strategies, crediting-rate changes, expense management and asset-liability practices.
- Management expected negative Annuities net flows to persist in Q4, following $1.913 billion of negative net flows for the first nine months. It cited product repricing in response to low rates.
- The annual assumption review produced a $25 million net-income reduction in Q3 2021, compared with a $486 million reduction in Q3 2020. Management said a hypothetical reversion-to-the-mean unlocking as of September 30 would have been favorable by approximately $440 million pre-tax; this was not recorded.
- In Q4 2021, LNC announced the Spark expense initiative. Management projected net recurring benefits of $50 million in 2021, $100–$120 million in 2022, $170–$190 million in 2023 and $260–$280 million in 2024, before DAC and tax; projected one-time investments partly offset near-term benefits.
- A reinsurance transaction with a Resolution Life subsidiary became effective October 1, 2021, after quarter-end, generating $1.2 billion in proceeds. LNC expected to use approximately $900 million for incremental repurchases by the end of Q1 2022, with the balance primarily for debt repayment and other corporate purposes.
- On November 2, 2021, the board approved an increase in the quarterly dividend from $0.42 to $0.45 per share.
- Management estimated reasonably possible litigation losses, including amounts above accruals, of up to approximately $120 million after tax. It said some cost-of-insurance matters had no estimable loss range; an adverse outcome could be material. A separate cost-of-insurance case reached a provisional settlement subject to court approval, with terms confidential.
- Other principal risks identified include COVID-19 and mortality or morbidity experience, interest-rate and equity-market movements, credit losses, policyholder behavior, reinsurance availability and disputes, litigation and regulation, ratings downgrades, and operational or cyber incidents.
Important facts for investors to verify
- How much reported earnings reflect recurring segment performance versus realized gains and losses, derivative valuations, and annual assumption unlocking.
- Whether COVID-19 mortality, Group Protection claims and the associated loss ratio improve or worsen after Q3.
- Whether low rates, product repricing and Annuities’ negative net flows continue to pressure spreads, sales and future earnings.
- Execution, realized savings and one-time costs of Spark, and whether the planned reinsurance proceeds and share repurchases occur on the stated schedule.
- Holding-company liquidity, subsidiary dividend capacity, collateral requirements and debt levels, including the effect of market or ratings changes.
- Developments in cost-of-insurance and other litigation, including settlement approval and exposures for which the company cannot estimate a loss range.