Lincoln National Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. Lincoln operates four insurance and retirement businesses: Annuities, Retirement Plan Services, Life Insurance and Group Protection, plus Other Operations.
Financial performance and position
| Metric | FY2021 / year-end | FY2020 / prior year-end |
|---|---|---|
| Total revenue | $19.23 billion | $17.44 billion |
| Net income | $1.405 billion; diluted EPS $7.43 | $499 million; diluted EPS $2.56 |
| Income from operations by segment and Other Operations | Annuities $1.283 billion; Retirement Plan Services $235 million; Life Insurance $535 million; Group Protection loss $127 million; Other Operations loss $375 million | Annuities $983 million; Retirement Plan Services $168 million; Life Insurance loss $34 million; Group Protection $43 million; Other Operations loss $295 million |
| Operating cash flow | $151 million | $534 million |
| Total assets / stockholders’ equity | $387.3 billion / $20.3 billion | $365.9 billion / $22.7 billion |
| Investments / cash and invested cash | $153.6 billion / $2.6 billion | $154.0 billion / $1.7 billion |
| Short- and long-term debt | $6.625 billion | $6.682 billion |
Revenue rose about 10% and net income increased substantially year over year. Net income benefited from higher alternative-investment income, lower realized losses and the effect of assumption unlocking. Group Protection’s operating result weakened sharply amid elevated COVID-19-related mortality and disability claims. Consolidated comprehensive income was a loss of $1.085 billion, largely reflecting a $2.535 billion after-tax decline in unrealized investment gains; this reduced equity despite reported net income.
Operating cash flow was $151 million, down from $534 million. Investing activities used $3.567 billion and financing activities provided $4.320 billion. These cash flows reflect the company’s insurance and investment operations and should be read with the balance sheet and cash-flow notes.
Changes, capital and liquidity
- Annuities operating income rose to $1.283 billion, helped by higher fee income and investment income, while net flows were negative $2.569 billion. Management expected negative annuity net flows to persist.
- Retirement Plan Services operating income increased to $235 million; net flows were positive $464 million.
- Life Insurance returned to operating profit of $535 million from a $34 million loss. The company entered a reinsurance agreement effective October 1, 2021, covering an in-force block of executive benefit and universal life policies; it received $1.2 billion of proceeds and expects an ongoing reduction in segment operating income.
- Group Protection reported a $127 million operating loss versus $43 million of income. Its total loss ratio increased to 87.5% from 81.8%, including a 98.6% life loss ratio.
- Shareholders received $1.424 billion through dividends and repurchases in 2021, including $1.105 billion of share repurchases. The quarterly dividend increased from $0.42 to $0.45 per share. The company expected a further $400 million of incremental repurchases by the end of Q1 2022.
- Management reported statutory capital and surplus of $8.773 billion for its U.S. insurance entities and stated that the consolidated RBC ratio was more than four times the company-action-level threshold. Direct domestic insurance subsidiaries could pay about $865 million in dividends to the holding company in 2022 without prior regulatory approval.
- Insurance subsidiary financial-strength ratings were A+ from A.M. Best, A+ from Fitch, A1 from Moody’s and AA- from S&P for LNL and LLANY. S&P outlooks were negative; other disclosed rating outlooks were stable.
Outlook, risks and unusual items
- Management’s 2022 priorities include profitable new business, pricing discipline, products with fewer long-term guarantees, expense control, capital and liquidity monitoring, and continued investment in distribution and digital capabilities. The filing does not provide a clear numerical earnings or revenue forecast.
- The Spark expense initiative is expected to generate annual net benefits of $260 million to $300 million, pre-DAC and pre-tax, by the end of 2024. Investments were expected to exceed benefits by $25 million to $65 million in 2022; 2021 benefits were about $9 million net of investments.
- Management expected COVID-19-related elevated mortality in Life Insurance and mortality and morbidity pressure in Group Protection to continue into Q1 2022. The pandemic, changing consumer behavior, market volatility and operational disruption remain risks.
- Low interest rates may compress investment spreads and increase guarantee costs; rapidly rising rates could prompt policy surrenders and asset sales. At year-end, guaranteed-rate business was at minimum crediting rates for 39% of annuity, 85% of Retirement Plan Services and 88% of Life Insurance balances with guaranteed minimums.
- Variable-annuity guarantees, hedging effectiveness, reserve assumptions, credit losses, reinsurance recoverability, regulatory capital rules and rating changes are significant exposures. Reinsurance recoverables were $20.3 billion; $10.7 billion related to Protective and $4.7 billion to Resolution Life. The company stated that 86% of total reinsurance recoverables were secured by collateral.
- The company expects to adopt the long-duration insurance accounting standard (ASU 2018-12) on January 1, 2023. It cautioned that the effect on equity and earnings may be material, but the magnitude was not yet clear.
- Pending litigation includes cost-of-insurance matters. A proposed settlement in one case was $92.5 million pre-tax, subject to final court approval. Separately, the company estimated aggregate reasonably possible litigation losses of up to approximately $120 million after tax; this is not an estimate of expected or maximum loss.
Investor facts to verify
- Whether the $1.2 billion reinsurance transaction and subsequent capital returns produce the expected earnings, capital and liquidity effects.
- Progress in arresting annuity net outflows and sustaining fee income as market values and account balances change.
- COVID-19 claim trends, especially Life Insurance mortality and Group Protection disability and life loss ratios.
- Actual Spark investment costs, timing and realization of the projected $260 million to $300 million annual net benefits.
- Statutory capital, dividend capacity, rating outlooks and sensitivity to interest-rate, equity-market and reserve changes.
- Final court approval and terms of the proposed cost-of-insurance settlement, and developments in other litigation and reinsurance disputes.