Lincoln National Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in millions except per-share data. Lincoln National sells annuities, life insurance, retirement-plan services, and group life, disability, and dental products.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $3,381 | $3,282 | $6,685 | $6,457 |
| Net income | $344 | $398 | $644 | $727 |
| Diluted EPS | $1.35 | $1.48 | $2.50 | $2.69 |
| Operating cash flow | Not provided for quarter | $582 | $371 |
- Q2 revenue grew 3%, while net income fell 14%; first-half revenue grew 4%, while net income fell 11%. Benefits increased to $1,220 in Q2 from $1,079, contributing to lower earnings.
- First-half segment operating income: Annuities $494 (+12%); Retirement Plan Services $65 (-17%); Life Insurance $215 (-20%); Group Protection $13 (-38%); Other Operations loss $63 (versus $51 loss). These are management-defined non-GAAP measures and do not sum to GAAP net income.
- Net investment income was $1,187 in Q2 (-2%) and $2,374 for the first half (-2%). Total realized gains were $10 in Q2 versus $35; first-half realized losses were $38 versus gains of $16.
- Key spread pressure: average new-money rates trailed portfolio yields. Annuities’ interest-rate spread was 1.63% in Q2 versus 1.85%; Life Insurance’s interest-sensitive spread was 1.57% versus 1.76%.
Financial position, liquidity, and capital
- At June 30, total assets were $255,214, liabilities $240,515, and stockholders’ equity $14,699, compared with year-end 2014 equity of $15,740. Accumulated other comprehensive income fell to $1,944 from $3,096, largely reflecting investment-market valuation changes; Q2 other comprehensive loss was $1,709.
- Total investments were $102,009; cash and invested cash were $2,327, down from $3,919 at year-end. First-half operating cash flow was $582, investing cash outflow $2,134, and financing cash outflow $40.
- Long-term debt was $5,529, up from $5,270; short-term debt was zero. The company issued $300 of 3.35% senior notes due 2025 and repaid $250 of maturing notes. Holding-company available liquidity was $545 at quarter-end.
- Returned $602 to common stockholders in the first half: $102 in dividends and $500 in repurchases. The quarterly dividend was $0.20 per share. The board increased aggregate repurchase authorization to $1.0 billion; $968 remained at June 30.
- Fixed-maturity AFS securities were 95.4% investment grade by fair value. Gross unrealized losses on AFS securities increased $536 during the first half; management said it did not expect to need to sell temporarily impaired securities before recovery.
Changes, outlook, and risks
- Earnings declined primarily due to higher Life Insurance claim severity, weaker realized investment results, less favorable alternative-investment income, lower prepayment and make-whole premiums, and spread compression. Growth in account values and insurance in force partly offset these pressures.
- Life Insurance Q2 claims were about 14% worse than expected in dollar terms, driven by claim severity rather than frequency; claim count was modestly better than expected. Management said long-term claims experience was expected to remain consistent with historical averages.
- Management provided no consolidated earnings guidance in the supplied filing text. Group Protection expected its non-medical loss ratio to be within or near the high end of its 71%–74% long-term expectation for the rest of 2015, with higher DAC amortization expected from lapses and repricing. Retirement Plan Services expected continued strategic investment and higher expenses.
- Management estimated that a 50-basis-point reduction in its long-term new-money yield assumption could reduce operating income by approximately $125, primarily through DAC and VOBA unlocking, with the largest effect in Life Insurance. A hypothetical June 30 RTM reset would have produced favorable pretax unlocking of about $260 for Annuities and $25 for Retirement Plan Services and Life Insurance.
- Variable-annuity guarantees, equity-market volatility, interest rates, hedging effectiveness, credit losses, reinsurance recoverability, and regulatory changes are material risks. About 68% of individual variable-annuity account values had GLB features; 4% of GLB contracts were “in the money,” with $287 exposure after reinsurance.
- Legal proceedings include the Bezich putative class action involving cost-of-insurance charges. Appellate rulings allowed certification of legal issues across the claims, but damages remain for individual case-by-case trials; the company said it was defending the case and sought further appeal.
- After quarter-end, on July 16, the company completed the sale of Lincoln Financial Media for $105, subject to purchase-price adjustments, in cash and Entercom convertible preferred stock.
Most important facts for investors to verify
- Whether elevated Life Insurance claim severity persists and how it affects segment earnings.
- Whether investment yields and crediting rates continue to compress spreads, and the sensitivity of DAC/VOBA to revised yield assumptions.
- Whether equity-market movements, volatility, and hedging results materially change variable-annuity guarantee exposures and realized results.
- Whether subsidiary dividend capacity, statutory capital, and the $545 holding-company liquidity position remain adequate alongside debt service and planned repurchases.
- Developments in the Bezich litigation, the NYDFS reserve discussions, and regulatory requirements for captive reinsurance and XXX/AG38 reserves.