Lincoln National Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Lincoln National operates insurance and retirement businesses through Annuities, Retirement Plan Services, Life Insurance and Group Protection, plus Other Operations.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $4.851 billion | $3.517 billion | $9.386 billion | $7.942 billion |
| Income (loss) before taxes | $772 million | $(161) million | $1.034 billion | $(127) million |
| Net income (loss) | $642 million | $(94) million | $867 million | $(42) million |
| Diluted EPS | $3.34 | $(0.49) | $4.51 | $(0.27) |
| Net cash from operating activities | Not separately stated for the quarter | $(231) million | $971 million |
Second-quarter revenue included $1.584 billion of net investment income and a $2 million realized loss, versus $1.172 billion and a $647 million realized loss, respectively, in Q2 2020. For the first half, net investment income was $3.094 billion and the realized loss was $182 million, compared with $2.547 billion and $671 million in 2020. Alternative investment income was $386 million for the first half, versus a $78 million loss in the prior-year period.
Segment income from operations (after tax): Annuities $323 million for Q2 and $613 million year to date (prior year: $237 million and $498 million); Retirement Plan Services $62 million and $118 million (prior: $30 million and $69 million); Life Insurance $255 million and $362 million (prior: $(37) million and $134 million); Group Protection $46 million and $20 million (prior: $39 million and $79 million); Other Operations $(78) million and $(154) million (prior: $(82) million and $(128) million). These are management’s non-GAAP segment measures, not consolidated net income.
Balance sheet at June 30, 2021: Total assets were $380.1 billion, including $155.1 billion of investments and $2.4 billion of cash and invested cash. Total liabilities were $358.4 billion and stockholders’ equity was $21.7 billion. Long-term debt was $6.334 billion and short-term debt was $300 million. Fixed maturity AFS securities had fair value of $122.2 billion; 96.5% of their fair value was investment grade.
Cash, liquidity and capital returns: Operating activities used $231 million in the first half, which management attributed primarily to higher claim payments related to COVID-19 and timing of receipts and payments. Investing activities used $1.518 billion, while financing activities provided $2.430 billion. Holding-company available liquidity was $762 million. The amended unsecured credit facility permits up to $2.5 billion of borrowing and letters of credit, with a June 2026 termination date; the company reported compliance with its covenants. It paid $161 million of common dividends and repurchased $255 million of stock in the first half. The declared quarterly dividend was $0.42 per share.
Material changes versus prior comparable periods
- GAAP net income improved from losses in both comparative 2020 periods, reflecting substantially smaller realized losses, stronger investment income—including a swing in alternative investment results—and higher fee income and account values.
- Q2 Life Insurance results turned profitable, helped by lower COVID-19-related mortality than in Q2 2020. First-half Life Insurance and Group Protection benefits nevertheless reflected unfavorable pandemic-related mortality; Group Protection’s first-half operating income fell to $20 million from $79 million.
- Net cash from operations declined to a use of $231 million from $971 million provided in the first half of 2020.
- Invested assets and account values increased from year-end/prior-year levels. Stockholders’ equity declined from $22.7 billion at December 31, 2020, to $21.7 billion, with accumulated other comprehensive income falling by $1.452 billion during the first half.
Outlook, risks and unusual items
- The filing gives no specific full-year earnings or revenue guidance. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Management expects sustained low interest rates to pressure interest margins. Annuities’ repricing actions continued to weigh on deposits and negative net flows; the company expected negative Annuities net flows to persist into Q3 2021. It planned to manage spreads through portfolio management and, to a lesser extent, crediting-rate actions.
- Management anticipated potentially greater COVID-19-related mortality or morbidity pressure in Group Protection, given lower vaccination rates in that insured population. Pandemic effects, interest rates, equity markets, credit conditions, policyholder behavior and hedge effectiveness remain material uncertainties.
- A hypothetical June 30 unlocking of the company’s reversion-to-the-mean assumption would have produced approximately $440 million of favorable pretax unlocking, primarily in Annuities; this was not reported as an actual result. The annual comprehensive assumption review was scheduled for Q3.
- The company estimated aggregate reasonably possible litigation losses, including amounts above accruals, at up to approximately $120 million after tax. It said certain cost-of-insurance cases had no estimated range of potential liability and could have a material impact, though management did not believe such cases were likely to do so based on information then known. A separate policy-premium refund case was dismissed with prejudice in July 2021, and the plaintiff appealed.
- After quarter-end, the company commenced exchange offers for its 7.00% capital securities due 2066 and 6.05% capital securities due 2067 for subordinated notes with the same maturities.
Most important facts for investors to verify
- Whether investment income, especially alternative investment returns and prepayment premiums, is repeatable and how underlying operating earnings trend excluding market-sensitive realized results.
- COVID-19 mortality and morbidity experience, particularly in Life Insurance and Group Protection, and any resulting claims, reserve or liquidity effects.
- Interest-rate and spread trends, annuity deposit and net-flow performance, and management’s ability to retain policyholders while maintaining margins.
- Operating cash generation, holding-company liquidity, subsidiary dividend capacity and the level and availability of collateral-related funding.
- Developments in cost-of-insurance and other litigation, including potential exposure beyond recorded accruals, and the outcome of the capital-securities exchange offers.