Lincoln National Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Lincoln National operates Life Insurance, Annuities, Group Protection and Retirement Plan Services, plus Other Operations. Figures are unaudited and in U.S. dollars.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / prior year-end |
|---|---|---|
| Total revenue | $3.814 billion | $4.720 billion |
| Net income (loss) | $(881) million; diluted loss per share $(5.37) | $1.482 billion; diluted EPS $8.39 |
| Operating cash flow | $(774) million | $476 million |
| Cash and invested cash | $3.766 billion | $3.343 billion |
| Total investments | $134.223 billion | $131.654 billion |
| Total assets | $343.142 billion | $334.217 billion |
| Total stockholders’ equity | $6.732 billion | $5.102 billion |
| Debt | $6.474 billion, including $500 million short-term debt | $6.455 billion total |
Revenue declined 19% year over year. The company reported a $1.170 billion pretax loss, partly offset by a $289 million income tax benefit. Net investment income was $1.466 billion, up from $1.411 billion; the reported investment yield on invested assets was 4.19%, compared with 4.16%. The filing does not present a single consolidated operating margin.
Large fair-value movements drove reported results: realized loss was $828 million versus a $181 million gain a year earlier, and market risk benefit (MRB) expense was $619 million versus a $1.359 billion gain. Other comprehensive income was $2.598 billion, substantially reducing accumulated other comprehensive loss to $3.754 billion from $6.352 billion. Cash used in investing was $325 million; financing activities provided $1.522 billion.
Fixed maturity available-for-sale securities had a fair value of $101.936 billion and amortized cost of $111.528 billion. Gross unrealized losses were $11.091 billion, down $1.9 billion from year-end. Management attributed most unrealized losses to interest rates and credit spreads, and said it did not intend, and was not more likely than not required, to sell the securities before recovery of amortized cost. The allowance for credit losses on these securities was $39 million. Approximately 96.7% of the portfolio was investment grade.
Segment performance and changes
- Life Insurance: Operating loss of $13 million versus $23 million income. Higher benefits and expenses more than offset growth in premiums and fee income.
- Annuities: Operating income of $274 million, down from $317 million, mainly due to lower fee income and lower net investment income relative to interest credited.
- Group Protection: Operating income of $71 million versus a $46 million loss. Improved disability and life claim experience, alongside business growth, supported the turnaround.
- Retirement Plan Services: Operating income of $43 million versus $58 million, reflecting lower fee income and higher expenses.
- Other Operations: Operating loss of $87 million versus $78 million, including higher interest and debt expense and unfavorable run-off disability and institutional pension experience.
These segment operating results are management-defined measures and exclude specified items, including MRB changes and certain investment and derivative results. They should not be treated as GAAP net income.
Outlook, risks and unusual items
- No consolidated earnings or revenue guidance is provided in the supplied filing text. Management said the Fortitude Re transaction is expected to reduce quarterly operating income by approximately $30–35 million in Life Insurance and $5 million in Annuities.
- On May 2, 2023, after quarter-end, LNC agreed to cede approximately $28 billion of statutory reserves for universal life with secondary guarantees, MoneyGuard and fixed annuity business to Fortitude Re. Closing was expected in Q2 2023, subject to customary conditions and regulatory approvals. LNC expects to retain policy administration and claims management.
- Interest rates, equity markets, policyholder withdrawals and behavior, mortality, credit losses, reinsurance availability and the effectiveness of hedging are significant risks. For variable-annuity guarantees, management estimated that instantaneous market shocks could affect after-tax net income by approximately $(650) million / $550 million for a 10% equity-market decline / increase, and $(575) million / $525 million for a 25-basis-point rate decline / increase. These are scenario estimates, not forecasts.
- Cost-of-insurance class-action cases had a provisional settlement of $117.75 million pre-tax in aggregate, plus a five-year rate freeze and other terms; it remained subject to court approval. The company estimated aggregate reasonably possible litigation losses of up to approximately $190 million after tax, while noting that this is not an expected-loss estimate or maximum exposure.
- Disclosure controls were ineffective as of March 31, 2023, due to a previously reported material weakness involving management review controls over significant reinsurance transactions. Management said remediation work was underway and targeted completion before year-end 2023, subject to testing.
- LNC adopted the long-duration insurance accounting standard ASU 2018-12 on January 1, 2023, with retrospective transition effects. The filing’s adjusted Q1 2022 comparative net income is $1.482 billion; comparisons to previously reported, pre-adoption figures may differ.
Important facts for investors to verify
- Whether the Fortitude Re transaction receives approvals and closes on the expected timetable, and its realized capital, earnings and liquidity effects.
- Whether the provisional cost-of-insurance settlement receives final court approval, and how the settlement and related rate freeze affect reserves and future earnings.
- Progress and independent testing of remediation for the material weakness in reinsurance transaction controls.
- Insurer statutory capital, RBC ratios, dividend capacity and rating-agency assessments; the filing text does not provide a clear current RBC ratio.
- Liquidity under stress, including collateral needs, FHLB borrowing and the potential effect of policy surrenders or investment sales.
- How much of the reported loss reflects market-sensitive MRB and derivative movements versus underlying operating performance, and whether those exposures remain adequately hedged.