Business Overview and History
Lincoln National Corporation (LNC) has a rich history of providing financial solutions to its customers, weathering various market cycles, and adapting to industry changes. As a leading provider of annuities, life insurance, group protection, and retirement plan services, Lincoln National has established itself as a trusted partner for individuals and businesses seeking to secure their financial futures.
Founded in 1905 and headquartered in Radnor, Pennsylvania, Lincoln National has grown to become one of the largest insurance and investment management companies in the United States. The company's origins can be traced back to the Lincoln National Life Insurance Company, which was established in Fort Wayne, Indiana, in 1905. Initially, the company focused on offering affordable life insurance policies to working-class Americans. Over the next several decades, Lincoln National expanded its product offerings to include annuities, group protection, and retirement plan services.
During the 1980s and 1990s, Lincoln National faced significant challenges as interest rates rose, leading to struggles in managing its investment portfolio. This resulted in substantial losses and prompted a re-evaluation of the company's business model. Under new leadership, Lincoln National refocused its efforts on its core insurance and retirement planning businesses, divesting non-core operations.
In the early 2000s, Lincoln National successfully navigated the dot-com bust and the financial crisis of 2008-2009, leveraging its diversified product portfolio and conservative investment practices to emerge stronger. The company continued to grow through strategic acquisitions, expanding its annuity and group protection businesses.
More recently, in 2023, Lincoln National faced another challenge when it took a significant charge related to its universal life insurance products with secondary guarantees. In response, the company conducted an extensive review of its actuarial assumptions and made changes to its product portfolio, refocusing on more capital-efficient and less interest rate-sensitive offerings. This strategic shift included the sale of its wealth management business, which provided a capital benefit to the organization.
Today, Lincoln National operates through four core business segments: Annuities, Life Insurance, Group Protection, and Retirement Plan Services. The Annuities segment offers a wide range of variable annuities, fixed annuities, and indexed annuities, providing customers with accumulation and income solutions. The Life Insurance segment provides term life, universal life, and variable universal life products, catering to both individual and corporate clients. The Group Protection segment offers group life, disability, and dental insurance products to employer-sponsored groups, while the Retirement Plan Services segment provides recordkeeping and administrative services for employer-sponsored retirement plans.
Financial Performance and Ratios
As of September 30, 2024, Lincoln National reported total assets of $396.84 billion, up from $372.41 billion as of December 31, 2023. The company's net income for the nine months ended September 30, 2024, was $1.59 billion, compared to $483 million for the same period in 2023. This improvement was driven by strong performance across the company's business segments, with the Group Protection and Retirement Plan Services segments leading the way.
For the most recent fiscal year (2023), Lincoln National reported revenue of $11.71 billion and a net loss of $752 million. The company's operating cash flow and free cash flow for 2023 were both negative $2.07 billion. In the most recent quarter (Q3 2024), Lincoln National reported revenue of $4.11 billion and a net loss of $562 million. The operating cash flow and free cash flow for Q3 2024 were both negative $27 million.
Lincoln National's financial ratios reflect its position in the industry. As of September 30, 2024, the company's debt-to-equity ratio stood at 0.89, indicating a moderate level of leverage. The company's current ratio and quick ratio were both 20.04, demonstrating strong short-term liquidity. The return on equity (ROE) for the nine months ended September 30, 2024, was 59.3%, demonstrating its ability to generate strong returns for shareholders.
Solvency and Liquidity
Lincoln National's capital position remains robust, with the company's estimated Risk-Based Capital (RBC) ratio exceeding 420% as of September 30, 2024. This well-capitalized position provides the company with the flexibility to navigate market volatility and pursue strategic initiatives. Additionally, the company's liquidity position is strong, with $6.01 billion in cash and invested cash as of the same date. Lincoln National also has access to $2.75 billion in committed repurchase facilities, of which only $25 million was utilized as of September 30, 2024, providing additional financial flexibility.
Recent Developments and Outlook
In 2024, Lincoln National made significant progress in its strategic realignment efforts, which focused on strengthening its capital foundation, optimizing its operating model, and delivering profitable growth. The company's annuity sales grew by 25% year-over-year in the third quarter of 2024, driven by the expansion of its spread-based product offerings and the successful launch of its second-generation registered index-linked annuity (RILA) product.
The Group Protection segment delivered impressive results, with earnings more than doubling year-over-year in the third quarter. This performance was attributed to the segment's strategic focus on margin expansion, disciplined pricing, and favorable mortality trends. Additionally, the Retirement Plan Services segment sustained its momentum, reporting sequential earnings growth and a more than tripling of first-year sales compared to the prior-year period.
Lincoln National reported strong third quarter results for 2024, with adjusted operating income available to common stockholders of $358 million or $2.06 per share. This included an $8 million or $0.05 per share benefit from the annual assumption review. The company's alternative investment portfolio delivered an 11% annualized return in the quarter, which was $7 million or $0.04 per share above their return target.
Looking ahead, Lincoln National expects seasonally higher expenses and elevated reinsurance financing charges in the fourth quarter of 2024, which will outweigh the tailwinds experienced so far in the year. The company anticipates its fourth quarter retirement plan services spread to stabilize around 100 basis points. Positive net flows for retirement plan services in the fourth quarter are expected to be impacted by the timing of known plan terminations. In the life insurance business, Lincoln National expects elevated mortality in the fourth quarter driven by a small number of large claims.
While fourth quarter annuity sales are expected to be lower than the record 2023 fourth quarter, the company anticipates sales growth for the full year. Lincoln National remains well on target to hit its 2026 free cash flow outlook, with free cash flow generation tracking above expectations so far this year.
Segment Performance
Annuities Segment The Annuities segment provides a variety of annuity products, including variable annuities, fixed annuities, and indexed annuities. These products offer tax-deferred growth, retirement income, and a variety of guaranteed benefit riders. For the three months ended September 30, 2024, the Annuities segment had operating revenues of $1.20 billion and income from operations of $301 million. The segment saw higher fee income driven by higher average daily variable account balances, partially offset by lower net investment income and higher commissions and other expenses.
Life Insurance Segment The Life Insurance segment offers a range of life insurance products, including universal life (UL), variable universal life (VUL), indexed universal life (IUL), term life, and linked-benefit UL and VUL. For the three months ended September 30, 2024, the Life Insurance segment had operating revenues of $1.59 billion and income from operations of $22 million. The segment saw lower benefits and policyholder liability remeasurement, partially offset by lower net investment income and fee income due to the impact of the fourth quarter 2023 reinsurance transaction.
Group Protection Segment The Group Protection segment offers group life, disability, and dental insurance products to employers. For the three months ended September 30, 2024, the Group Protection segment had operating revenues of $1.43 billion and income from operations of $109 million. The segment saw higher insurance premiums due to growth in business in force and lower benefits, partially offset by higher commissions and other expenses.
Retirement Plan Services Segment The Retirement Plan Services segment provides employer-sponsored retirement plans and services, including defined contribution plans, defined benefit plans, and rollover individual retirement accounts. For the three months ended September 30, 2024, the Retirement Plan Services segment had operating revenues of $335 million and income from operations of $44 million. The segment saw higher fee income driven by higher average daily variable account balances, partially offset by lower net investment income and higher commissions and other expenses.
Risks and Challenges
While Lincoln National has demonstrated its ability to navigate market cycles, the company faces several risks and challenges that warrant consideration. These include interest rate fluctuations, which can impact the profitability of its annuity and life insurance products, as well as regulatory changes that may affect the company's operations and product offerings.
Additionally, the competitive landscape in the insurance and investment management industry remains intense, requiring Lincoln National to continuously innovate and differentiate its products and services to maintain its market share. The company's ability to effectively integrate and manage any future acquisitions will also be crucial to its long-term success.
Conclusion
Lincoln National Corporation's long history, diverse product portfolio, and strategic execution have positioned the company as a leading player in the insurance and investment management industry. Despite facing market volatility and industry challenges, the company has demonstrated its resilience and adaptability, leveraging its strong capital position and liquidity to drive growth and create value for its shareholders. As Lincoln National continues to navigate the evolving landscape, its focus on profitable growth, operational efficiency, and disciplined risk management will be instrumental in ensuring its long-term success. The company's performance across its four main business segments - Annuities, Life Insurance, Group Protection, and Retirement Plan Services - provides a solid foundation for future growth, supported by ongoing product innovation and effective risk management strategies.