Lincoln National Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; it also reports fourth-quarter results. Lincoln is an insurance and retirement-services holding company with Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $17.439 billion | $17.258 billion |
| Net income | $499 million | $886 million |
| Diluted EPS | $2.56 | $4.38 |
| Operating cash flow | $534 million | $(2.686) billion |
| Net investment income | $5.510 billion | $5.223 billion |
| Net investment income yield on invested assets | 4.34% | 4.47% |
| Assets at year-end | $365.948 billion | $334.761 billion |
| Stockholders’ equity at year-end | $22.699 billion | $19.689 billion |
| Long-term debt at year-end | $6.682 billion | $6.067 billion |
Net income margin, calculated as net income divided by revenue, was approximately 2.9% versus 5.1% in 2019. Fourth-quarter 2020 revenue was $4.135 billion and net income was $143 million, or $0.74 diluted EPS.
Year-end cash and invested cash was $1.708 billion. The holding company reported $754 million of available liquidity, including amounts related to pre-funding 2022 debt. Insurance subsidiaries’ statutory capital and surplus was $8.938 billion, up from $8.564 billion; their RBC ratios exceeded four times the company-action level. Management expected approximately $865 million of dividends from direct domestic insurance subsidiaries in 2021 without prior regulatory approval.
Shareholders’ equity included $8.931 billion of accumulated other comprehensive income, compared with $5.673 billion a year earlier, primarily reflecting investment-related unrealized gains. The filing does not provide a single consolidated operating-margin measure; segment operating results are reported separately.
Segments and changes versus 2019
| Segment operating income (loss) | 2020 | 2019 |
|---|---|---|
| Annuities | $983 million | $954 million |
| Retirement Plan Services | $168 million | $172 million |
| Life Insurance | $(34) million | $259 million |
| Group Protection | $43 million | $238 million |
| Other Operations | $(295) million | $(268) million |
- Revenue increased modestly, but net income fell 44%, reflecting COVID-19-related mortality and disability claims, spread compression in a low-rate environment, unfavorable assumption unlocking and lower prepayment and bond make-whole premiums.
- Life Insurance shifted to an operating loss, with higher mortality and unfavorable unlocking among the principal factors. Group Protection income declined sharply as life and disability claims rose.
- Annuities operating income improved, helped by investment income and higher variable-account fees, but deposits declined to $11.260 billion from $14.525 billion and net flows turned negative at $(341) million, from positive $1.851 billion.
- Retirement Plan Services income was broadly stable. Net flows declined to $166 million from $620 million, including continued outflows from mature business.
- Total deposits across Annuities, Retirement Plan Services and Life Insurance fell to $27.167 billion from $31.310 billion; total net flows decreased to $3.962 billion from $7.893 billion.
Outlook, risks and unusual items
- 2021 outlook: Management expects elevated mortality in Life Insurance and Group Protection and continued Group Protection disability-claim pressure related to economic conditions and unemployment. Annuities management expects negative net flows to persist into 2021.
- Management plans continued product repricing, a greater focus on products without long-term guarantees, expense discipline, investment in technology and distribution, and monitoring of capital and liquidity. It did not provide a specific 2021 earnings or EPS forecast in the supplied filing text.
- The digitization initiative generated approximately $50 million of 2020 pretax benefits, net of investment. Management expects about $80 million in 2021 and ultimately $90 million to $150 million annually.
- Annual assumption updates produced unfavorable after-tax unlocking of $486 million in 2020, principally in Life Insurance and Annuities. Management also disclosed that unlocking the reversion-to-the-mean assumption at year-end would have produced an estimated $365 million pretax benefit; it did not record that hypothetical amount.
- Realized investment losses were $513 million pretax. COVID-19-related credit assumptions contributed to a $114 million increase in mortgage-loan credit-loss expense; total mortgage-loan allowance was $204 million at year-end. Management said most fixed-maturity unrealized losses were not considered credit impairment.
- Major risks include persistent low interest rates and spread compression, market volatility and variable-annuity guarantees, COVID-19 claims and economic effects, credit deterioration, reinsurance collectability, regulatory and reserve changes, and cybersecurity or operational disruption. Net collateral payable on derivatives rose to $1.9 billion from $830 million.
- Debt actions included issuing $800 million of senior notes and redeeming 2021 notes; the next stated senior-debt maturity was in 2022. Total long-term debt was $6.682 billion. Common dividends declared were $1.62 per share, up from $1.51; repurchases were $275 million versus $640 million.
- The company estimated reasonably possible litigation losses of up to approximately $90 million, including amounts above accruals; management did not believe currently known matters were likely to materially adversely affect financial condition. It is defending multiple cost-of-insurance litigation matters.
- Adoption of the expected-credit-loss standard reduced retained earnings by $218 million, net of related items and tax, at adoption; a separate fair-value election for certain mortgage loans increased retained earnings by $15 million after tax.
Investor verification points
- Reconcile the $499 million GAAP net income with segment operating results, realized losses, assumption unlocking, taxes and other excluded items.
- Assess the persistence and financial sensitivity of COVID-19 mortality, disability claims and any further deterioration in Group Protection loss experience.
- Review how sustained low rates affect investment spreads, reserve adequacy, statutory capital, product repricing and future unlocking.
- Evaluate the variable-annuity guarantee exposure, hedge effectiveness and collateral/liquidity requirements under stressed market scenarios.
- Check reinsurance concentration and collateral arrangements, particularly the $11.3 billion recoverable from Protective, and monitor reinsurer credit quality.
- Confirm holding-company liquidity, subsidiary dividend capacity, debt maturities and compliance with capital-security and credit-facility covenants.
- Track developments in cost-of-insurance litigation and other contingencies, as well as implementation costs and effects of the long-duration insurance accounting standard scheduled for 2023.
Ernst & Young LLP gave unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2020.