Lincoln National Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. LNC is an insurance and retirement-services holding company operating Annuities, Retirement Plan Services, Life Insurance and Group Protection segments.
Financial results and condition
- Second-quarter revenue was $5.104 billion, up 5% from $4.851 billion a year earlier. Net income was $238 million, or $1.34 per diluted share, down from $642 million, or $3.34 per diluted share.
- For the first six months, revenue was $9.791 billion versus $9.386 billion; net income was $341 million versus $867 million.
- Second-quarter net income included $522 million of realized gains, compared with a $2 million loss a year earlier. However, benefit-ratio unlocking reduced earnings by $527 million after tax in Q2 and $696 million in the first half. The company’s non-GAAP segment operating income was $391 million for Q2, versus $608 million a year earlier.
- Six-month operating cash flow was $2.708 billion, compared with cash used of $231 million in the 2021 period. The reported 2022 inflow included a $3.083 billion favorable change in insurance liabilities and reinsurance-related balances.
- At June 30, total assets were $335.8 billion, down from $387.3 billion at year-end 2021. Stockholders’ equity was $9.2 billion, down from $20.3 billion, with accumulated other comprehensive loss of $4.3 billion versus $6.4 billion of AOCI income at year-end. Separate-account assets and liabilities declined to $145.8 billion from $182.6 billion.
- Cash and invested cash was $1.567 billion. Long-term debt was $6.498 billion; LNC issued $300 million of 3.40% senior notes due 2032 and repaid $300 million of notes due 2022. The company paid $157 million in common dividends and repurchased $500 million of stock during the first half.
- Net investment income for the first half declined to $2.781 billion from $3.094 billion. The investment yield on invested assets was 4.07%, versus 4.63%, reflecting notably lower alternative-investment income.
Material changes and segment performance
- Q2 operating income declined in Annuities ($256 million vs. $323 million), Retirement Plan Services ($54 million vs. $62 million) and Life Insurance ($114 million vs. $255 million); Group Protection rose to $59 million from $46 million. Lower investment income, reduced account values and higher benefit costs weighed on results. Life Insurance was also affected by a 2021 reinsurance transaction.
- First-half total deposits increased to $14.5 billion from $13.9 billion, and net flows rose to $2.9 billion from $1.5 billion. Account values fell to $279.1 billion from $323.9 billion, reflecting market declines.
- Rising interest rates and widening spreads drove fixed-maturity AFS gross unrealized losses to $8.552 billion at June 30, from $451 million at year-end. Management attributed the losses primarily to market-rate and credit-spread movements, stated it did not intend or expect to be forced to sell before recovery, and recorded no material earnings impairment for this unrealized loss position.
Outlook, risks and unusual items
- The filing provides no specific earnings guidance. Management described Federal Reserve rate increases and expected further increases in 2022, and said it would manage spread effects through portfolio and crediting-rate actions. Those expectations depend on net flows and other conditions.
- LNC expected COVID-19-related elevated mortality in Life Insurance and Group Protection and disability morbidity headwinds in the third quarter of 2022. Management said pandemic impacts remained uncertain.
- Variable-annuity exposure increased materially: 54% of in-force contracts with guaranteed living benefits were “in the money,” versus 6% a year earlier; estimated exposure after reinsurance was $3.6 billion versus $411 million. The company cautioned that hedges may not fully offset market, interest-rate, volatility or policyholder-behavior changes.
- LNC plans to adopt the long-duration insurance accounting standard (ASU 2018-12) on January 1, 2023. Management was still assessing the impact and said adoption could materially affect the financial statements, including retained earnings and AOCI.
- Management estimated aggregate reasonably possible litigation and regulatory losses of up to approximately $120 million after tax; this is not an expected-loss estimate or a maximum exposure. A previously disclosed COI class action settlement received final approval in June 2022; its terms include $92.5 million pre-tax cash and a five-year rate freeze. Other COI litigation remains pending.
- Other risks include interest-rate and equity-market volatility, investment credit losses, reinsurance disputes and collectability, legal and regulatory outcomes, subsidiary dividend capacity, ratings downgrades and execution of the Spark initiative. Spark expense was $75 million for the first half, versus $35 million a year earlier.
Key facts for investors to verify
- How much of reported earnings and cash flow reflects market-sensitive gains, benefit-ratio unlocking and reserve/reinsurance movements, rather than recurring operations?
- Whether fixed-income unrealized losses remain recoverable without forced sales, and how changing rates affect capital, liquidity and policyholder behavior.
- Developments in variable-annuity guarantees, hedge effectiveness and the $3.6 billion reported in-the-money exposure.
- The eventual financial and capital effects of ASU 2018-12 adoption in 2023.
- Updates on COI litigation, the $120 million reasonably possible loss estimate, COVID-related claims and the company’s ability to sustain subsidiary dividends and shareholder returns.