Lincoln National Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Lincoln National is an insurance and retirement-services holding company operating Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior year-end |
|---|---|---|
| Total revenue | $4.534 billion | $4.425 billion |
| Income before taxes | $262 million | $34 million |
| Net income | $225 million; diluted EPS $1.16 | $52 million; diluted EPS $0.15 |
| Net investment income | $1.510 billion | $1.375 billion |
| Realized investment and derivative loss | $(181) million | $(24) million |
| Other comprehensive loss, net of tax | $(3.170) billion | $(2.669) billion |
| Operating cash flow | $(642) million | $455 million |
| Investing cash flow | $(712) million | $742 million |
| Financing cash flow | $996 million | $2.442 billion |
| Total assets | $366.760 billion | $365.948 billion |
| Stockholders’ equity | $19.593 billion | $22.699 billion |
| Debt | $300 million short-term; $6.294 billion long-term | No short-term debt; $6.682 billion long-term |
| Cash and invested cash | $1.350 billion | $1.708 billion |
| Common dividend declared per share | $0.42 | $0.40 |
Material changes and segment results
- Net income improved year over year, reflecting less unfavorable variable-annuity derivative results, lower credit-loss expense, higher alternative-investment income and business growth. These benefits were partly offset by pandemic-related claims, deferred-compensation costs and spread compression.
- Operating income by segment was: Annuities $290 million versus $261 million; Retirement Plan Services $57 million versus $40 million; Life Insurance $107 million versus $171 million; and Group Protection a loss of $26 million versus income of $40 million. Other Operations had a loss of $78 million versus $47 million.
- Life Insurance benefits increased to $1.173 billion from $954 million, including higher net death benefits ($796 million versus $620 million); management attributed the increase primarily to COVID-19-related mortality and growth in business in force.
- Group Protection benefits and credited interest rose to $971 million from $864 million. Its total loss ratio increased to 86.8% from 78.5%, primarily due to unfavorable life mortality.
- Total deposits declined to $6.673 billion from $7.926 billion; total net flows fell to $364 million from $2.162 billion. Annuities had negative net flows of $776 million, compared with positive flows of $528 million a year earlier.
- Equity-market and interest-rate movements reduced accumulated other comprehensive income to $5.761 billion from $8.931 billion, contributing to the decline in equity. Management said the unrealized fixed-income losses did not require earnings impairment, citing its intent and ability to hold securities until recovery.
Liquidity, outlook and risks
- Operating cash use was attributed mainly to increased claim payments, driven by the COVID-19 pandemic, and the timing of cash receipts and payments. Holding-company available liquidity was $758 million at quarter-end; this includes amounts related to pre-funding $300 million of senior notes due 2022. Management said it expects to meet ongoing holding-company cash needs.
- Management expects low interest rates to continue pressuring business interest margins. It is using investment, product-design, crediting-rate and asset-liability actions to mitigate the effects; spread compression remains a risk.
- The company expected annuity negative net flows to continue in Q2 2021 and elevated mortality in Life Insurance and Group Protection to persist in Q2. It also cited possible disability morbidity headwinds from economic conditions and delayed Social Security approvals.
- COVID-19’s duration and effects remain uncertain. Other disclosed risks include market volatility, credit deterioration, policyholder surrenders, hedging effectiveness, reinsurance disputes and regulatory or legal outcomes.
- Management estimated aggregate reasonably possible litigation losses of up to approximately $120 million after tax; this is not an estimate of expected loss or maximum exposure. Several cost-of-insurance matters had no recorded accrual, and some possible losses could not be estimated.
- Insurance subsidiaries had $4.2 billion of FHLB borrowings outstanding, reported in payables for collateral on investments. Net collateral payable on derivatives was $2.2 billion; the company disclosed up to $1.25 billion of additional liquidity from committed facilities for potential collateral needs, subject to conditions.
- No formal earnings guidance was provided in the filing. Results for the quarter are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether pandemic-related mortality and disability claims, particularly the expected Q2 effects, develop as management anticipated.
- Whether negative annuity flows and low-rate spread pressure persist, and how crediting-rate and product repricing actions affect retention and earnings.
- How investment performance, interest rates and credit spreads affect unrealized losses, statutory capital and the company’s ability to meet policyholder and collateral needs.
- Developments in cost-of-insurance litigation and reinsurance disputes, including any change to the disclosed possible-loss estimate or accruals.
- The adequacy of holding-company liquidity and insurance-subsidiary dividend capacity, given cash outflows, debt maturities and collateral requirements.