LINCOLN NATIONAL CORP annual report, FY2022

Lincoln National Corporation — FY 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. Lincoln is an insurance and retirement-services holding company with Life Insurance, Annuities, Group Protection and Retirement Plan Services segments, plus Other Operations.

Financial performance

Metric	FY 2022	FY 2021
Total GAAP revenue	$18.784 billion	$19.230 billion
Net income (loss)	$(2.227) billion	$1.405 billion
Diluted earnings (loss) per share	$(13.10)	$7.43
Cash from operating activities	$4.033 billion	$151 million
Net investment income	$5.511 billion	$6.115 billion
Total investments	$131.796 billion	$153.630 billion
Total assets	$335.437 billion	$387.301 billion
Stockholders’ equity	$4.101 billion	$20.272 billion
Short- and long-term debt	$6.455 billion	$6.625 billion

GAAP revenue declined about 2%. The company reported a net loss, reflecting major assumption-review charges, a Life Insurance goodwill impairment, market-related losses and lower fee income.
Segment income from operations was: Life Insurance $(1.941) billion; Annuities $1.245 billion; Group Protection $102 million; Retirement Plan Services $209 million; and Other Operations $(495) million. These are the company’s segment performance measures, not GAAP net income.
The annual assumption review reduced net income by $2.059 billion after tax. The principal driver was an unfavorable update to policyholder lapse assumptions for universal-life products with secondary guarantees, reported at $1.8 billion after tax. Management expects this review to reduce Life Insurance operating income by about $45 million per quarter going forward.
Lincoln recorded a $634 million goodwill impairment, writing off all goodwill in the Life Insurance reporting unit.
Net investment income fell 10%, chiefly because alternative-investment income declined to $66 million from $679 million. The investment portfolio also recorded $14.030 billion of after-tax unrealized investment losses in other comprehensive income, contributing to the sharp decline in equity.
Operating cash flow rose to $4.033 billion from $151 million; the filing attributes much of the year’s cash-flow movement to changes in insurance liabilities and reinsurance balances. Cash and invested cash were $3.343 billion at year-end.
Group Protection improved to $102 million of operating income from a $127 million loss. Its total loss ratio improved to 80.7% from 87.5%.
Deposits rose to $29.5 billion from $28.3 billion, while total net flows increased to $6.488 billion from $1.877 billion. Annuities still had negative net flows of $415 million; Retirement Plan Services net flows improved to $2.905 billion.

Capital, liquidity and debt

Lincoln raised approximately $1 billion through two preferred-stock offerings in November 2022; $780 million was contributed to its principal insurance subsidiary, LNL, to strengthen statutory capital. The preferred shares carry 9.25% and 9.00% stated rates, respectively, if dividends are declared.
The company reported that its insurance subsidiaries’ consolidated RBC ratio exceeded three times the company-action-level threshold. Management’s target is 400%, but the filing does not provide a clear actual year-end RBC ratio.
Lincoln paused common-stock repurchases in Q4 and expected the pause to continue through the end of 2023. It repurchased $550 million of shares during 2022, paid $310 million in common dividends, and had $714 million remaining under its repurchase authorization at year-end.
Debt was $6.455 billion, including $500 million of notes due in September 2023. The company issued $300 million of 3.40% senior notes due 2032 and reported approximately $1 billion of new preferred-stock proceeds, part of which was intended to help fund repayment of the 2023 notes.
LNL had $3.1 billion of Federal Home Loan Bank borrowings. Lincoln also reported a $3.1 billion net collateral-payable position on derivatives at year-end, down from $4.9 billion a year earlier. The filing describes additional committed liquidity facilities, subject to conditions.
Direct domestic insurance subsidiaries were expected to be able to pay about $1.7 billion in dividends to the holding company in 2023 without prior regulatory approval; actual payment capacity remains subject to capital needs and regulatory limits.

Material changes, outlook and risks

Life Insurance operating income fell from $535 million to a $1.941 billion loss, primarily due to the assumption review, lower investment income and lower fee income. Annuities operating income decreased modestly to $1.245 billion from $1.283 billion; Retirement Plan Services fell to $209 million from $235 million.
Management’s 2023 priorities include rebuilding statutory capital and improving capital generation, optimizing capital for new business, pursuing reinsurance and other options for in-force business, improving Group Protection profitability, controlling expenses and executing the Spark Initiative.
Spark produced $22 million of benefits in 2022, net of investment and before DAC and tax. Management expected approximately $60–$100 million of benefits in 2023 and annual benefits of approximately $260–$300 million by the end of 2024, on the same stated basis. These are targets, not guarantees.
A revised variable-annuity hedge program took effect January 1, 2023, emphasizing distributable earnings and explicit capital protection. Hedge results may not fully offset guarantee-related changes, and market movements can create earnings and capital volatility.
Insurance subsidiary rating outlooks were negative for most reported ratings as of February 2023; certain AM Best and S&P ratings for LNL and LLANY were stable. Management disclosed rating actions following concerns about statutory capital. Downgrades could affect sales, surrenders, financing costs and liquidity.
Key exposures include interest-rate and equity-market volatility, policyholder surrenders, guarantee and reserve estimates, investment credit and valuation risk, reinsurance collectability, regulatory capital changes, litigation, and cyber and privacy risks. Rising rates contributed to substantial unrealized fixed-income losses; management said it did not expect to need to sell impaired securities to meet cash needs.
The company adopted the long-duration insurance accounting standard on January 1, 2023. Before adoption, it estimated a transition decrease in equity of $1.4–$1.9 billion after tax as of the January 1, 2021 transition date; the ultimate reported effect is subject to market and assumption changes.
Several cost-of-insurance lawsuits remain pending. Two consolidated matters reached provisional class settlements in January 2023, subject to documentation and court approval; terms were confidential. Lincoln estimated aggregate reasonably possible litigation losses of up to approximately $190 million after tax, while noting some exposures could not be estimated.

Investor verification priorities

Review the assumptions, sensitivity and ongoing earnings effects behind the universal-life secondary-guarantee reserve and DAC charge, including the expected approximately $45 million quarterly impact.
Confirm actual statutory RBC ratios, capital-generation progress, subsidiary dividend capacity and the effect of rating outlooks and subsequent rating actions.
Track liquidity and collateral needs, the 2023 debt maturity and the company’s ability to meet obligations without asset sales or additional financing.
Assess performance of the revised variable-annuity hedge program and sensitivity of guarantee liabilities to equity markets, interest rates, volatility and policyholder behavior.
Monitor the terms and court approval of the provisional cost-of-insurance settlements, other litigation exposures, and realized credit losses or recoveries on investments and reinsurance.
Compare Spark’s realized savings and investment costs with management’s 2023 and 2024 targets, and evaluate whether Group Protection profitability and business flows improve as planned.