Lincoln National Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet figures are as of March 31, 2024, compared with December 31, 2023. LNC is an insurance and retirement-services holding company with Annuities, Life Insurance, Group Protection and Retirement Plan Services segments, plus Other Operations. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $4,116 | $3,814 |
| Income (loss) before taxes | $1,528 | $(1,170) |
| Net income (loss) | $1,222 | $(881) |
| Net income (loss) available to common stockholders | $1,191 | $(909) |
| Diluted earnings (loss) per common share | $6.93 | $(5.37) |
| Net cash used in operating activities | $(1,343) | $(774) |
| Net cash provided by (used in) investing activities | $1,639 | $(325) |
| Net cash provided by financing activities | $461 | $1,522 |
- Revenue rose about 8% year over year. Net investment income declined to $1,346 from $1,466; realized losses improved to $434 from $828.
- Reported net income was dominated by a $1,907 market-risk-benefit gain, compared with a $619 loss in Q1 2023. Management attributes the year-over-year earnings improvement primarily to capital-market-driven MRB effects and more favorable fair-value changes in reinsurance-related embedded derivatives. These fair-value movements are volatile and excluded from segment operating income.
- Segment income (loss) from operations: Annuities $259 (prior year $274); Life Insurance $(35) ($(13)); Group Protection $80 ($71); Retirement Plan Services $36 ($43); Other Operations $(235) ($(87)).
- Operating cash use increased year over year. Cash, invested cash and restricted cash ended the quarter at $4,122, up $757 from year-end. The filing attributes significant investing cash inflows in part to changes in collateral on investments and derivatives.
- Net investment income yield on invested assets was 4.26%, versus 4.19% a year earlier. No consolidated operating margin is provided as a headline metric.
Balance sheet, debt and liquidity
- Total assets were $383.4 billion, up from $372.4 billion at year-end; total stockholders’ equity was $7.5 billion, up from $6.9 billion. Accumulated other comprehensive loss widened to $4.0 billion from $3.5 billion.
- Total investments were $125.7 billion, including $87.8 billion of fixed-maturity available-for-sale securities and $19.3 billion of mortgage loans. Separate account assets and matching liabilities were each $166.2 billion.
- Fixed-maturity AFS securities had $10.6 billion of gross unrealized losses at quarter-end, up $814 million during the quarter. Management said it did not intend, and was not more likely than not required, to sell the affected securities before recovery; it attributed losses primarily to interest rates and credit spreads and recorded no material earnings impairment from these unrealized losses.
- Short- and long-term debt totaled $6.2 billion, compared with $5.9 billion at year-end. LNC issued $350 million of 5.852% senior notes due 2034 and repaid $47 million of a variable-rate term loan. It expects to use remaining proceeds toward repayment of its 3.35% notes due 2025 and potentially other debt repurchases.
- Derivative-related collateral payables were $6.9 billion; LNC reported a net collateral payable position of $6.8 billion, versus $5.0 billion at year-end. The company reports available contingent liquidity sources, but collateral needs can rise with adverse market movements.
- Common dividends declared were $0.45 per share, unchanged year over year; no common shares were repurchased during the quarter.
Material changes and management commentary
- Fortitude Re transaction: Effective October 1, 2023, LNC reinsured certain universal-life secondary-guarantee, MoneyGuard and fixed-annuity blocks. Management expects an ongoing unfavorable impact to operating results of approximately $25–$30 million per quarter, while stating the transaction improved capital and is expected to increase ongoing free cash flow.
- Wealth management sale: LNC agreed to sell its wealth management subsidiaries to Osaic; closing was expected in the first half of 2024, subject to customary conditions. At March 31, $155 million of assets and $81 million of liabilities were classified as held for sale. The filing does not report a completed closing in this quarter.
- Segment trends: Annuities operating income fell amid higher expenses and lower net investment income net of interest credited, partly offset by higher fee income. Variable annuity net flows were negative $2.3 billion, and outflows as a percentage of average gross account balances increased to 11% from 9%. Life Insurance results reflected reduced fee and investment income following reinsurance, with lower benefits partly offsetting the pressure. Group Protection income improved with premium growth, while disability claim experience was less favorable. Retirement Plan Services income declined, and management noted continued outflows in older, higher-margin annuity blocks.
- Legal matters: LNC recorded a $147.5 million pre-tax accrual for a provisional cost-of-insurance class settlement covering Glover and related cases; court approval remained pending. Separately, the company estimated aggregate reasonably possible litigation and regulatory losses of up to approximately $150 million after tax, including potential exposure beyond amounts accrued. A new securities class action was filed April 23, 2024; LNC said it would vigorously defend the matter.
Outlook, risks and unusual items
- The filing provides no broad consolidated earnings or revenue guidance. Management’s quantified forward-looking item is the expected quarterly $25–$30 million unfavorable operating impact from the Fortitude Re transaction.
- Key sensitivities include interest rates, equity markets, credit spreads, policyholder withdrawals and behavior, mortality and morbidity, investment performance, reinsurer collectability, regulatory capital and ratings. LNC cautions that actual results may differ materially from forward-looking statements.
- Illustrative after-tax MRB hedge sensitivities at March 31 indicated a hypothetical net-income effect of $(775) million for a 10% equity-market decline and $675 million for a 10% increase; a 25-basis-point rate decline corresponded to $(425) million and a 25-basis-point increase to $400 million. These are instantaneous estimates, exclude hedge-program operating costs and are not forecasts.
- Management reported favorable claim terminations in Group Protection, but unfavorable actual mortality experience in UL and Other. The quarter also included the cost-of-insurance settlement accrual and workforce-reduction severance costs.
Important facts for investors to verify
- Whether the $147.5 million provisional settlement receives preliminary and final court approval, and whether related litigation creates further costs.
- Whether the wealth management sale closes as expected and what proceeds, costs or ongoing effects result.
- How much of reported earnings is attributable to volatile MRB and other fair-value movements versus recurring segment operating results.
- Whether negative operating cash flow and elevated collateral requirements persist, and how available liquidity facilities and subsidiary dividend capacity support the holding company.
- Whether unrealized investment losses, mortgage-loan delinquencies and the approximately $5 billion deferred tax asset associated with AFS unrealized losses remain recoverable under management’s assumptions.
- How the Fortitude Re transaction affects future segment earnings, capital and free cash flow relative to management’s stated expectations.