Executive Summary / Key Takeaways

• Lincoln National Corporation is undergoing a multi-year strategic transformation focused on strengthening its capital base, optimizing operations, and shifting its business mix towards more stable cash flows and higher risk-adjusted returns.
• Recent performance, including a 14% year-over-year increase in Q1 2025 adjusted operating income (excluding prior year significant items), demonstrates momentum driven by strong execution, particularly in Group Protection and underlying improvements in Life.
• The strategic partnership with Bain Capital, including an $825 million equity investment and asset management collaboration, is expected to accelerate growth in spread-based businesses and enhance asset sourcing capabilities.
• Management is targeting significant improvements by 2026, including a free cash flow conversion range of 45%-60% and a leverage ratio target of 25%-26.5%, supported by strategic initiatives like the Bermuda reinsurance subsidiary (Alpine) and expense discipline.
• While market volatility and potential moderation of favorable macro tailwinds pose risks, the company's capital buffer, hedging programs, and diversified strategy are intended to enhance resilience and position it for sustainable long-term value creation.

Setting the Scene: A Legacy Business in Transformation

Lincoln National Corporation, a company with over a century of history in the U.S. insurance and financial services landscape, is actively engaged in a significant strategic realignment. Traditionally a major player across life insurance, annuities, group benefits, and retirement plans, the company is now focused on transforming its operational model and business mix to enhance stability and improve risk-adjusted returns in a dynamic market environment. This journey, which has gained considerable momentum over the past two years, is built upon fortifying its capital structure, streamlining operations for greater efficiency, and strategically evolving its product offerings.

The competitive landscape for LNC is diverse and intense, encompassing large, diversified financial services companies like MetLife (MET), Prudential Financial (PRU), and AIG (AIG), as well as firms with strong positions in specific segments such as Principal Financial Group (PFG) in retirement and asset management, and The Hartford (HIG) in group benefits. These competitors bring varying strengths, from MET's global scale and digital prowess to PRU's product innovation and distribution network, AIG's underwriting expertise, PFG's retirement focus, and HIG's cost efficiency in group benefits. LNC holds an estimated 5-7% aggregate market share across its primary U.S. markets, positioning it as a significant, though not always the largest, player in its core segments. While LNC's growth trajectory has recently lagged some peers, its strategic repositioning aims to improve its competitive standing.

The Role of Technology and Operational Excellence

Technology is a critical battleground in the insurance and retirement industry, impacting everything from customer acquisition and service to operational efficiency and risk management. LNC is investing strategically in this area, focusing on enhancing digital capabilities, upgrading underwriting technology, and re-engineering its client service model. While specific, quantifiable benefits of its proprietary technology compared to competitors are not extensively detailed, the stated goals are clear: improve operational efficiency, enhance the customer experience, enable scalability, improve reach, and accelerate the shift towards targeted products.

Management commentary highlights the intent for these investments to drive tangible benefits, such as increasing operating leverage in the Life business and supporting growth in Group Protection by meeting customers where they want to be met. In the Retirement Plan Services segment, investments in capabilities are aimed at improving products and services, enhancing the customer experience, and increasing operational efficiency to drive sales and earnings growth. The company's flexible model in RPS is noted as a benefit derived from these technological and operational enhancements. These efforts are crucial for LNC to keep pace with or surpass competitors who are also heavily investing in digital transformation and AI-driven efficiencies.

Recent Performance Reflecting Strategic Momentum

Lincoln National Corporation delivered a solid start to 2025, with adjusted operating income available to common stockholders reaching $280 million, or $1.60 per diluted share, in the first quarter. This represents a 14% increase compared to the prior year quarter, excluding the impact of significant items in Q1 2024. The GAAP net loss available to common stockholders was $(756)$ million, or $(4.41)$ per diluted share, primarily driven by negative movements in market risk benefits (MRBs) amid lower interest rates and equity markets, and unfavorable changes in the fair value of reinsurance-related embedded derivatives.

Segment performance in Q1 2025 underscored the strategic momentum. Group Protection delivered excellent results, with operating income of $101 million, a 26% increase year-over-year, and margin expansion of 120 basis points to 7.4%. This was driven by robust premium growth (up 7%), strong persistency, disciplined pricing, favorable disability results (70% loss ratio, down over 400 bps), and a strategic shift towards higher-margin business like supplemental health. Annuities operating income was $290 million, consistent with the prior year quarter (excluding significant items), supported by strong total sales of $3.8 billion (up 33% year-over-year) and growth in spread-based products (60% of new sales mix). Life Insurance reported an operating loss of $16 million, an improvement from the $35 million loss in the prior year quarter, reflecting improved mortality and lower net G&A expenses (down 8%). Retirement Plan Services operating income was $34 million, slightly down from $36 million due to a one-time loss, but underlying results were stable, with total deposits up 8% year-over-year.

Capital, Liquidity, and Strategic Initiatives Driving the Future

A core pillar of LNC's strategy is building a strong capital foundation. The company ended Q1 2025 with an estimated RBC ratio well above its 400% target and its 420% buffer goal, a position strengthened by initiatives like the sale of its wealth management business in 2024. Delevering is also a strategic priority, with the leverage ratio improving sequentially to 27.5% in Q1 2025, a significant improvement from the prior year and moving towards a long-term target closer to 25%.

Liquidity is supported by a mix of sources, including subsidiary dividends, debt facilities, access to FHLB borrowings ($2.5 billion outstanding vs. $4.9 billion available capacity at LNL as of March 31, 2025), and collateral arrangements on derivatives ($5.5 billion net payable as of March 31, 2025). The company is balancing capital deployment between investing in the business for growth and delevering.

Key strategic initiatives are expected to drive future value. The Fortitude Re reinsurance transaction in late 2023 aimed to reduce statutory reserve strain. The establishment of Alpine, the Bermuda reinsurance subsidiary, is intended to enhance capital efficiency for new business, particularly spread products, and accelerate free cash flow generation by optimizing reinsurance mix. The FABN program, launched in 2024, is expected to scale and contribute to spread-based earnings. Most notably, the recently closed partnership with Bain Capital involves an $825 million equity investment and a 10-year strategic investment management relationship focused on private assets, aimed at accelerating growth in spread-based earnings and enhancing asset sourcing capabilities.

Outlook and Key Risks

Management expresses confidence in the company's trajectory and has provided specific targets for 2026, including a free cash flow conversion range of 45%-60% and a leverage ratio target of 25%-26.5%. They anticipate continued momentum in 2025, driven by investments, profitable growth initiatives, and optimization of legacy blocks. Segment-specific expectations include sustained strong margins in Group Protection (at or above 8% by 2026), continued success in Annuities supported by momentum and mix shift, modest earnings growth in RPS driven by moderating spread compression and expense discipline, and achieving positive earnings in Life Insurance over time through normalized mortality and expense actions.

However, the outlook is subject to risks. Market volatility in equity markets and interest rates can impact fee income, hedge costs, alternative investment returns, and MRB valuations. While hedging programs are in place, they may not perfectly offset market movements. Changes in macroeconomic conditions, particularly unemployment, could affect disability claims. Deviations in policyholder behavior, mortality, and morbidity from assumptions can impact reserves and profitability. Litigation and regulatory proceedings, including cost of insurance cases with estimated possible losses up to $150 million after-tax, pose potential financial and reputational risks. Reinsurance counterparty risk and the ability to execute strategic initiatives as planned are also factors to monitor.

Conclusion

Lincoln National Corporation is actively executing a strategic transformation to build a more resilient and profitable business. The recent performance in Q1 2025, particularly the strength in Group Protection and underlying improvements in Life, signals positive momentum. The partnership with Bain Capital represents a significant step to accelerate growth in key areas and enhance asset management capabilities. While challenges from market volatility and potential shifts in macro conditions persist, the company's focus on strengthening its capital base, optimizing operations, diversifying its business mix, and leveraging technology positions it to navigate these headwinds. The clear targets set for 2026 for free cash flow conversion and leverage underscore management's commitment to enhancing shareholder value, making LNC a company to watch as its strategic realignment continues to unfold.