Lincoln National Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Lincoln National operates Annuities, Retirement Plan Services, Life Insurance and Group Protection businesses, plus Other Operations.
Financial results and position
| Metric | Q3 2022 | Nine months 2022 | Comparable 2021 |
|---|---|---|---|
| Total revenue | $4.798 billion | $14.589 billion | Q3: $5.241 billion; nine months: $14.627 billion |
| Net income (loss) | $(2.574) billion | $(2.233) billion | Q3: $318 million; nine months: $1.185 billion |
| Diluted EPS | $(15.17) | $(13.06) | Q3: $1.68; nine months: $6.19 |
| Net investment income | $1.326 billion | $4.108 billion | Q3: $1.576 billion; nine months: $4.670 billion |
| Operating cash flow | Not provided for the quarter | $3.394 billion | Nine months 2021: $108 million |
Q3 revenue fell about 8% year over year; nine-month revenue was nearly flat. Q3 and nine-month losses reflected, among other items, substantial Life Insurance reserve assumption changes, a $634 million goodwill impairment, and market-related and hedging results. Net income included $771 million of realized gains for the nine months, versus a $97 million realized loss in 2021; this did not offset the period’s major adverse items.
Segment operating income (loss), nine months: Annuities $1.007 billion (2021: $951 million); Retirement Plan Services $161 million ($178 million); Life Insurance $(1.988) billion ($455 million); Group Protection $55 million ($(12) million); Other Operations $(285) million ($(307) million). These are management-defined operating measures, not GAAP net income.
Balance sheet at September 30: Total assets were $324.7 billion, down from $387.3 billion at year-end 2021; stockholders’ equity was $2.2 billion, down from $20.3 billion. AOCI shifted from $6.4 billion of income to $(8.6) billion, primarily reflecting the sharp decline in investment fair values. Fixed maturity AFS securities were $97.6 billion, against $111.1 billion amortized cost; gross unrealized losses were $14.4 billion, up from $451 million at year-end. Management attributed most unrealized losses to higher rates and wider credit spreads and said it did not expect to need to sell securities before recovery.
Cash and invested cash was $1.5 billion, versus $2.6 billion at year-end. Short- and long-term debt totaled $6.459 billion ($500 million and $5.959 billion, respectively). The company issued $300 million of 3.40% senior notes due 2032 and repaid $300 million of 2022 notes. The nine-month cash-flow statement showed $9.867 billion of investing outflows and $5.333 billion of financing inflows. Cash dividends declared were $1.35 per share for the nine months.
Material changes and management commentary
- The Q3 annual assumption review produced an approximately $2.2 billion after-tax adverse Life Insurance operating impact, principally from updated policyholder behavior assumptions for universal-life products with secondary guarantees. Management expects this review to reduce Life Insurance operating income by about $45 million per quarter in future periods.
- Life Insurance recorded a $634 million impairment, eliminating all goodwill assigned to that reporting unit. The company planned its annual impairment test for other reporting units in Q4.
- After-tax benefit-ratio unlocking reduced net income by $339 million in Q3 and $1.036 billion for the nine months. The filing also reports unfavorable variable-annuity hedge results amid volatile markets.
- Alternative-investment returns were $(60) million in Q3 2022, compared with $188 million in Q3 2021; nine-month returns were $53 million versus $574 million. Lower average variable-account values also weighed on fee income.
- Group Protection returned to operating profit, with Q3 operating income of $37 million versus a $32 million loss, supported by premium growth and lower COVID-19-related life claims; disability reserve experience remained a pressure.
- Management expected a $550 million statutory capital impact in Q4 from the assumption review and said it believed capital was adequate while it replenished statutory capital toward targeted levels. Common-share repurchases were paused beginning in Q4 2022.
- The company’s 2023 adoption of the long-duration insurance accounting standard (LDTI) was expected, at the January 2021 transition date, to reduce previously reported equity by approximately $1.2–$2.2 billion after tax. Management said the expected impact as of September 2022 was less significant than the initial estimate; the ultimate effect remains subject to market and actuarial assumptions.
Liquidity, risks and contingencies
Management said it expected to meet holding-company cash needs. LNL had $6.1 billion of estimated FHLB borrowing availability based on qualifying assets and $3.1 billion outstanding; LNC was in a net collateral-payable position of $3.2 billion on derivatives. Additional collateral facilities could provide up to $1.25 billion, subject to conditions. Management cautioned that market volatility, policy surrenders, subsidiary dividend capacity and rating downgrades could pressure liquidity or capital.
The filing estimates aggregate reasonably possible litigation and regulatory losses of up to approximately $190 million after tax; this is not an expected-loss estimate or maximum exposure. Several cost-of-insurance lawsuits remain pending. Courts denied class-certification motions in two matters, but plaintiffs indicated plans to seek certification again; a separate case had a certified class. Reinsurer rate disputes also continued, with management saying a material impact was unlikely.
Other cited risks include persistently changing interest rates, equity-market declines, COVID-19 impacts, credit and reinsurance exposure, hedging effectiveness, regulation, litigation, and execution of the Spark initiative. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the Life Insurance assumption changes, particularly policyholder behavior and secondary guarantees, affect future earnings and statutory capital.
- Whether the $14.4 billion of AFS unrealized losses remain primarily market-related, and whether liquidity or policyholder withdrawals could force securities sales.
- Future variable-annuity hedge performance, guaranteed-benefit exposure and the effect of equity and interest-rate movements.
- The company’s statutory capital and RBC position after the expected $550 million Q4 impact, and its capacity to replenish capital and pay holding-company dividends.
- Developments in cost-of-insurance litigation, reinsurance disputes and the estimated litigation-loss range.
- The eventual LDTI transition impact and any changes to management’s Q4 outlook or repurchase pause.