Business Context and Reporting Period
Company: Lincoln National Corporation (LNC)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2024
Business Overview: LNC is a holding company operating four primary business segments: Annuities, Life Insurance, Group Protection, and Retirement Plan Services. The company provides wealth accumulation, protection, and retirement income solutions. In 2024, LNC executed strategic priorities including strengthening its balance sheet, improving operational efficiency, and completing the sale of its wealth management business (Lincoln Financial Network) to Osaic Holdings, Inc. on May 6, 2024, for $723 million in cash.
Key Financial Metrics
| Metric | 2024 | 2023 | Change |
|---|---|---|---|
| Net Income (Loss) | $3,275 million | $(752) million | Turnaround to Profit |
| Income from Operations | $1,315 million | $990 million | +$325 million |
| Total Revenues | $18,442 million | $11,645 million | +$6,797 million |
| Total Assets | $390,831 million | $372,413 million | +$18,418 million |
| Total Liabilities | $382,562 million | $365,520 million | +$17,042 million |
| Stockholders' Equity | $8,269 million | $6,893 million | +$1,376 million |
| Dividends to Common Stockholders | $306 million | $305 million | +$1 million |
Note: The significant increase in 2024 Net Income compared to 2023 is largely driven by non-operating items, including a $582 million pre-tax gain on the sale of the wealth management business and favorable changes in net annuity product features ($2.5 billion pre-tax gain).
Material Changes vs. Prior Period
- Net Income Volatility: The company reported a net income of $3.3 billion in 2024, a stark contrast to the $752 million net loss in 2023. This swing is primarily attributable to:
- Net Annuity Product Features: A $2.5 billion pre-tax gain in 2024 compared to a $68 million gain in 2023, driven by improvements in the fair value of guaranteed living benefit (GLB) hedge instruments and higher interest rates.
- Reinsurance Transaction Impact: Favorable changes in the fair value of reinsurance-related embedded derivatives in 2024 ($535 million gain) compared to unfavorable changes in 2023 ($802 million loss) related to the Q4 2023 Fortitude Re transaction.
- Asset Sale: Recognition of a $544 million pre-tax gain on the sale of the wealth management business in 2024.
- Segment Performance:
- Annuities: Income from operations increased to $1.16 billion (from $1.07 billion) due to higher fee income from increased separate account balances.
- Life Insurance: Loss from operations narrowed to $63 million (from $159 million) due to lower benefits and policyholder liability remeasurement losses, partially offset by lower fee income.
- Group Protection: Income from operations grew to $425 million (from $299 million) driven by higher premiums and improved loss ratios.
- Investment Portfolio: Total investments increased to $129.3 billion. Gross unrealized losses on fixed maturity available-for-sale (AFS) securities increased by $1.2 billion to $11.0 billion, primarily due to rising interest rates. However, management does not intend to sell these securities before recovery.
Guidance, Outlook, and Risks
Management Outlook:
- Strategic Focus: Management plans to continue growing wholesale distribution, shifting new business to a more capital-efficient mix, and improving the profitability of the Group Protection business through strategic pricing.
- Capital Management: The company aims to maintain Risk-Based Capital (RBC) ratios significantly above regulatory action levels. Proceeds from the wealth management sale were used to increase the RBC ratio of The Lincoln National Life Insurance Company (LNL) above the 400% target.
- Interest Rate Environment: While the Federal Reserve lowered rates in late 2024, the environment remains elevated. The company expects sales of fixed annuities and RILA products to continue benefiting from this environment.
Key Risks and Contingencies:
- Market Risk: Significant exposure to equity market volatility and interest rate changes. A 10% drop in equity markets could negatively impact net income by approximately $850 million (after-tax estimates). High interest rates may lead to increased policy surrenders.
- Regulatory and Litigation:
- Cost of Insurance Litigation: A provisional settlement of $147.5 million (pre-tax) has been reached regarding cost of insurance rate litigation (Glover et al.), subject to final court approval. This amount is accrued.
- Regulatory Changes: Potential impacts from the DOL Fiduciary Advice Rule (currently stayed), SEC climate disclosure rules, and NAIC changes to reserving standards (VM-20, VM-21, VM-22).
- Reinsurance Counterparty Risk: Exposure to reinsurers such as Fortitude Re, Resolution Life, and Athene. The company monitors concentration and financial strength ratings closely.
- Cybersecurity: Ongoing risk of data breaches and cyberattacks, though no material breaches have occurred to date.
Investor Verification Checklist
- Reinsurance Settlement Status: Verify the final court approval status of the $147.5 million cost of insurance litigation settlement and any potential for additional legal accruals.
- Unrealized Investment Losses: Review the $11.0 billion in gross unrealized losses on fixed maturity AFS securities and management's intent to hold to maturity versus potential forced sales in a liquidity stress scenario.
- Net Annuity Product Features: Assess the sustainability of the $2.5 billion pre-tax gain in net annuity product features, which is highly sensitive to equity market performance and interest rate volatility.
- Reinsurance Run-Rate Impact: Monitor the ongoing unfavorable impact of the Q4 2023 Fortitude Re transaction, estimated at $25–$30 million per quarter, on future operating results.
- Dividend Capacity: Confirm the ability of insurance subsidiaries to pay dividends to the holding company, noting the estimated $730 million available for 2025 without prior regulatory approval.