Lincoln National Corporation (LNC) is a leading provider of insurance and retirement solutions, serving the financial protection and security needs of millions of Americans. With a history stretching back nearly 120 years, the company has weathered numerous market cycles and emerged as a resilient force in the industry.
Company History and Overview
Founded in 1905 in Fort Wayne, Indiana, Lincoln National has grown from a single-state insurance provider to a diversified financial services powerhouse with operations across the United States. The company's journey has been marked by strategic acquisitions, innovative product offerings, and a steadfast commitment to its customers' well-being. A significant milestone in Lincoln's history was the acquisition of Jefferson-Pilot Corporation in 2006, which substantially expanded the company's life insurance and retirement plan businesses, establishing Lincoln as a leading provider in these sectors.
Business Segments
Today, Lincoln National operates through four core business segments: Annuities, Life Insurance, Group Protection, and Retirement Plan Services. The Annuities segment offers a range of variable, fixed, and indexed annuity products, catering to the retirement planning needs of individuals. The Life Insurance segment provides a diverse portfolio of term, universal, and variable universal life insurance solutions. The Group Protection segment offers group life, disability, and dental insurance products to employers, while the Retirement Plan Services segment provides recordkeeping and administrative services for employer-sponsored retirement plans.
Financials
Lincoln National's financial performance has been characterized by resilience and adaptability. As of December 31, 2023, the company reported total assets of $372.41 billion and total stockholders' equity of $6.89 billion. The company's net income for the year ended December 31, 2023, stood at a loss of $752 million, primarily driven by non-operating factors.
For the most recent quarter (Q3 2024), Lincoln National reported revenue of $3,506,000,000 and a net loss of $528,000,000. The company's operating cash flow (OCF) and free cash flow (FCF) for the quarter were both negative $27,000,000.
Throughout its history, Lincoln has faced various challenges, including the global financial crisis of 2008-2009, which put pressure on its investment portfolio and variable annuity business. During this period, the company took decisive actions to strengthen its capital position and enhance its risk management practices. More recently, in 2021, Lincoln took a significant charge related to its universal life insurance products with secondary guarantees, following an industry-wide review of assumptions for these products.
One of the key factors impacting Lincoln National's financials in recent years has been the Fortitude Re reinsurance transaction, which was completed in the fourth quarter of 2023. This transaction, which involved the reinsurance of certain blocks of in-force universal life with secondary guarantees (ULSG) and fixed annuity products, had a significant impact on the company's balance sheet and income statement. The transaction resulted in a deferred loss that is being amortized over time, contributing to the net loss reported for 2023.
Liquidity and Capital Position
Despite the challenges posed by the Fortitude Re transaction, Lincoln National has remained steadfast in its commitment to delivering value to its shareholders. The company's capital position remains strong, with an estimated risk-based capital (RBC) ratio above 420% as of September 30, 2024. This robust capital position has enabled Lincoln National to maintain its financial flexibility and pursue strategic initiatives aimed at strengthening its competitive positioning.
One such initiative was the sale of the company's wealth management business, Lincoln Financial Network (LFN), to Osaic Holdings, Inc. in the second quarter of 2024. This divestiture provided Lincoln National with approximately $650 million in statutory capital benefit, which the company has utilized to bolster its RBC ratio and reduce its leverage.
Strategic Priorities and Future Outlook
Looking ahead, Lincoln National remains focused on executing its strategic priorities, which include building a strong capital foundation, optimizing its operating model, and delivering profitable growth across its business segments. The company has made progress in these areas, as evidenced by the sequential improvement in its RBC ratio and the consistent performance of its Group Protection and Retirement Plan Services segments.
In the Group Protection segment, Lincoln National has been successfully executing on its margin expansion strategy, delivering record third-quarter results in 2024. The segment's earnings more than doubled year-over-year, driven by disciplined pricing actions, improved mortality trends, and a favorable macroeconomic backdrop. Operating revenues for this segment increased to $1.43 billion and $4.30 billion for the three and nine months ended September 30, 2024, respectively, driven by growth in business in force. Income from operations for the segment increased to $109 million and $318 million for the respective periods. Sales, measured by annualized premiums, grew to $84 million and $389 million for the three and nine month periods.
The Retirement Plan Services segment has also sustained its momentum, producing another quarter of sequential earnings growth in the third quarter of 2024. The segment's strong sales performance, driven by the company's differentiated service model and product innovation, has been a key contributor to its success. Operating revenues for this segment were $335 million and $984 million for the three and nine months ended September 30, 2024, respectively. Income from operations was $44 million and $120 million for the respective periods. Net flows, which can significantly impact future profitability, were $651 million and $845 million for the three and nine month periods, with the increase driven by higher deposits.
While the Annuities and Life Insurance segments have faced some headwinds in recent periods, Lincoln National remains committed to optimizing these businesses through strategic initiatives. In the Annuities segment, the company has been focused on growing its spread-based product offerings and leveraging its capital-efficient reinsurance strategies to drive profitability. This segment's operating revenues for the three and nine months ended September 30, 2024 were $1.20 billion and $3.67 billion, respectively. Fee income increased to $601 million and $1.77 billion for the respective periods, driven by higher average daily variable account balances. The segment's income from operations increased to $301 million and $857 million for the three and nine months ended September 30, 2024. New deposits increased to $3.39 billion and $7.05 billion for the respective three and nine month periods.
In the Life Insurance segment, the company is realigning its product portfolio to emphasize accumulation and protection products with more risk-sharing features. This segment's operating revenues decreased to $1.59 billion and $4.64 billion for the three and nine months ended September 30, 2024, respectively, primarily due to the run-rate impact of the fourth quarter 2023 reinsurance transaction. However, the segment's income from operations improved to $22 million and $48 million for the respective periods. Sales of the segment's products totaled $122 million and $319 million for the three and nine month periods.
Looking forward, Lincoln National provided guidance for the fourth quarter of 2024. The company expects annuity sales to be lower than the record 2023 fourth quarter, but anticipates full-year sales growth. In group protection, the company anticipates year-over-year sales growth while maintaining their focus on profitability. For retirement plan services, Lincoln National expects net flows to be impacted by the timing of known plan terminations, challenging positive net flows for the fourth quarter. In the life insurance business, the company currently expects elevated mortality driven by a small number of large claims, which could create quarter-over-quarter pressure on results.
Lincoln National remains on track to achieve their initial phase of the new business flow support through their Bermuda reinsurance affiliate starting in 2025. The company also reiterated their 2026 outlook targets for free cash flow conversion ratio improvement to 45-55%.
Competitive Advantages and ESG Initiatives
Lincoln National's ability to navigate the evolving industry landscape has been further bolstered by its strong brand recognition and leadership in distribution. The company's extensive network of financial advisors and its reputation for providing comprehensive financial solutions have been instrumental in maintaining its competitive edge.
Furthermore, Lincoln National has demonstrated its commitment to environmental, social, and governance (ESG) principles, integrating sustainability considerations into its business practices and engaging with stakeholders to create long-term value. The company's recent brand refresh, which emphasizes its focus on stewardship and its enduring commitment to its customers, is a testament to its dedication to this important area.
Conclusion
In conclusion, Lincoln National Corporation has a rich history of adapting to market changes and delivering value to its stakeholders. Despite the challenges posed by the Fortitude Re transaction and other industry dynamics, the company remains well-positioned to capitalize on the growing demand for financial protection and retirement solutions. With its strong capital position, optimized operating model, and focus on profitable growth across its diversified business segments, Lincoln National is poised to navigate the evolving landscape and continue its legacy of serving the financial needs of millions of Americans.