Lincoln National Corporation — Q2 2023 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2023, compared with the same periods in 2022; balance-sheet comparisons are against December 31, 2022. Lincoln operates Life Insurance, Annuities, Group Protection and Retirement Plan Services, with other activities reported in Other Operations. The company adopted ASU 2018-12 on January 1, 2023, changing accounting for long-duration insurance contracts and MRBs; 2022 figures shown here reflect the new accounting, so older filings may not be directly comparable.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $2.929 billion | $5.577 billion | $6.743 billion | $10.297 billion |
| Net income (loss) | $511 million | $840 million | $(370) million | $2.321 billion |
| Diluted EPS | $2.94 | $4.83 | $(2.41) | $13.25 |
| Operating income from operations, company-defined measure | $354 million | $374 million | $642 million | $647 million |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $(252) million | $2.365 billion |
Revenue, margins and earnings. Q2 revenue fell primarily because realized results shifted to a $1.784 billion loss from a $1.101 billion gain in Q2 2022. Six-month realized losses were $2.612 billion, versus gains of $1.282 billion a year earlier. Net investment income increased to $1.508 billion for Q2 and $2.974 billion for six months; the six-month portfolio yield was 4.25%, compared with 4.12%. The filing does not provide a single consolidated operating margin. The company’s operating income measure excludes specified market, investment, reinsurance and other items and should not be treated as GAAP net income.
Balance sheet, debt and liquidity. At June 30, total assets were $348.6 billion, including $134.5 billion of investments and $3.8 billion of cash and invested cash. Total liabilities were $342.8 billion and stockholders’ equity was $5.8 billion, up from $5.1 billion at year-end; accumulated other comprehensive loss was $5.1 billion. Short-term and long-term debt totaled $6.454 billion, including $500 million of notes due September 1, 2023. Six-month interest and debt expense was $166 million. Operating activities used $252 million of cash; investing activities used $1.182 billion and financing activities provided $1.859 billion, producing a $425 million increase in cash, invested cash and restricted cash. The company reported $2.2 billion of FHLB borrowings and a $4.3 billion net collateral-payable position on derivatives.
Material changes versus prior comparable period
- Q2 GAAP net income declined to $511 million from $840 million; six-month results moved from $2.321 billion of income to a $370 million loss. Volatile hedge and indexed-product derivative results, alongside the Fortitude Re-related investment impairment, were major drivers.
- MRB-related impacts were favorable in 2023, reflecting equity-market movements, partly offset by interest-rate effects. The company-defined six-month operating income measure was broadly stable at $642 million versus $647 million.
- Group Protection operating income improved to $180 million for six months from $3 million, supported by premium growth and more favorable claims experience and liability remeasurement.
- Annuities operating income fell to $545 million from $612 million for six months, with lower fee income and higher expenses among the drivers. Management said surrender-related outflows increased as interest rates rose.
- Gross unrealized losses on fixed-maturity AFS securities were $11.640 billion at June 30, versus $13.018 billion at year-end. The portfolio’s average credit quality was A-; 96.9% of fair value was investment grade.
Outlook, commentary, risks and unusual items
- Fortitude Re transaction: Announced May 2, 2023, the agreement would cede approximately $28 billion of statutory reserves for UL with secondary guarantees, MoneyGuard and fixed annuity business. It remains subject to customary closing conditions, including regulatory approvals. Management expects reduced balance-sheet risk, stronger capital and improved free cash flow. Upon closing, it expects quarterly operating income reductions of approximately $30–$35 million in Life Insurance and $5 million in Annuities.
- Transaction-related impairment: The company recorded a $624 million pre-tax ($493 million after-tax) impairment on securities it intends to sell as part of the Fortitude Re transaction. It expects to recognize gains on certain securities in unrealized gain positions when the transaction closes; these were approximately $473 million pre-tax ($374 million after-tax) at June 30.
- Rates and markets: Management cited higher-rate-driven annuity surrenders and sensitivity of earnings, liabilities and collateral needs to interest rates and equity markets. Illustrative instantaneous sensitivities estimated after-tax net-income effects of $(750) million for a 10% equity-market decline and $575 million for a 10% rise; a 25-basis-point rate decrease or increase was estimated to affect income by $(525) million or $475 million, respectively. These are scenarios, not forecasts, and exclude important behavioral and market interactions.
- Legal contingencies: A provisional settlement of two cost-of-insurance cases provides for $117.75 million pre-tax cash in aggregate and a five-year rate freeze, subject to final court approval; a hearing was scheduled for October 4, 2023. The company estimated reasonably possible aggregate litigation losses of up to approximately $190 million after tax, while noting that some matters cannot be estimated and outcomes may differ.
- Controls: Disclosure controls and procedures were ineffective at quarter-end because of a previously reported material weakness in management review controls over significant reinsurance transactions. Remediation steps were underway; management said it was targeting completion before year-end 2023, but the weakness was not yet considered remediated.
- Capital returns: The company declared $0.45 per common share for Q2 and made no share repurchases during the quarter. Common dividends paid were $152 million for the first half.
Most important facts for investors to verify
- Whether and when the Fortitude Re transaction closes, its final terms and capital/free-cash-flow effects, including realization of the expected securities gains.
- How much of the reported earnings volatility reflects market-driven MRB and hedge movements versus underlying segment performance, and how the company-defined operating measure reconciles to GAAP results.
- Liquidity and capital capacity after the September 2023 $500 million note maturity, including insurance-subsidiary dividend capacity, collateral demands and rating-agency considerations.
- Developments in the cost-of-insurance settlement, other litigation and the estimated exposure beyond recorded accruals.
- Evidence that reinsurance-transaction review controls operate effectively and that management completes its planned remediation testing.