Executive Summary / Key Takeaways

• Strategic Repositioning as a Capital-Efficient Spread Engine: Lincoln National is executing a multi-year transformation from a traditional life insurer into a capital-light, spread-based earnings machine, leveraging its Bermuda reinsurance subsidiary (Alpine) and the Bain Capital partnership to accelerate free cash flow conversion from 35% toward a 45-60% target, fundamentally altering the company's risk-return profile.

• Margin Inflection Across Core Segments: Group Protection has delivered nearly 300 basis points of margin expansion, reaching mid-8% levels, while Annuities is shifting toward spread-based products (63% of new business) and Life Insurance is pivoting to risk-sharing products, creating a diversified earnings base that reduces equity market sensitivity and supports sustainable profitability growth.

• Bain Capital Partnership as a Force Multiplier: The $825 million investment for a 9.9% stake provides more than capital—it unlocks differentiated private asset origination capabilities, enabling Lincoln to launch innovative funds (Total Credit Fund, Royalty Fund) and enhance product competitiveness through unique sourcing advantages that peers cannot easily replicate.

• Valuation Discount Reflects Execution Risk, Not Fundamentals: Trading at 0.84x book value and 3.6x earnings—material discounts to peers like Prudential (PRU) (1.19x, 15x) and MetLife (MET) (1.77x, 14.6x)—the market prices in transformation execution risk. Successful delivery on management's 2026 margin and cash flow targets could drive significant re-rating.

• Key Risks Center on Legal Overhang and Interest Rate Sensitivity: With up to $150 million in potential litigation losses and material sensitivity to rate movements (±25bps impacts net income by $375-400 million), investors must monitor execution on the Bermuda reinsurance integration and the sustainability of Group Protection's margin gains amid potential disability incidence normalization.

Setting the Scene: A 120-Year-Old Insurer Rewires Its DNA

Founded in 1905 and headquartered in Radnor, Pennsylvania, Lincoln National Corporation spent over a century building a traditional life insurance and annuities franchise. For most of its history, the company operated as a capital-intensive, market-sensitive insurer, vulnerable to equity volatility and interest rate swings. That model began cracking in the low-rate environment of the 2010s, pressuring margins and exposing the inherent cyclicality of variable annuity-heavy earnings.

The strategic inflection arrived in early 2023. Management launched a deliberate, multi-year repositioning focused on three pillars: building a robust capital foundation, optimizing the operating model, and delivering profitable growth with stable cash flows. This wasn't a cosmetic restructuring—it was a fundamental rewiring of how Lincoln creates value. The company sold its wealth management business in Q2 2024, eliminating a capital drag. It launched its Bermuda-based reinsurance subsidiary (Alpine) to retain more spread-based earnings and increase free cash flow conversion. It began shifting product mix across all four segments—Annuities, Life Insurance, Group Protection, and Retirement Plan Services—toward capital-efficient, risk-sharing solutions.

This transformation occurs against a backdrop of intensifying competition. Prudential (PRU) and MetLife (MET) dominate with scale advantages and global diversification. Principal Financial (PFG) leads in retirement plan recordkeeping. Equitable Holdings (EQH) competes aggressively in indexed annuities. Meanwhile, fintech platforms nibble at the edges, offering robo-advisory services and digital life insurance that threaten traditional distribution. Lincoln's response isn't to outspend these giants on marketing or acquisitions—it's to engineer a structurally different business model that competitors cannot easily replicate.

Technology, Products, and Strategic Differentiation: Building Moats Through Structure

Lincoln's competitive advantage doesn't stem from a single breakthrough technology but from structural innovations that alter the economics of insurance manufacturing. The Bermuda reinsurance subsidiary represents the most significant moat. By receiving approval for its first internal flow agreement for fixed annuities in Q4 2024 and transitioning to fully retaining fixed annuity flows by Q3 2025, Lincoln captures spread income that previously leaked to external reinsurers. This isn't merely a accounting shift—it directly increases free cash flow per dollar of premium, enhancing return on equity and reducing reliance on volatile equity markets.

The Bain Capital partnership, closed June 5, 2025, accelerates this structural advantage. Bain's $825 million investment for a 9.9% stake brings more than capital. The 10-year investment management agreement commits Lincoln to grow assets under management to at least $20 billion by year six, but the real value lies in differentiated access to private asset origination. Bain's cross-platform sourcing capabilities enable Lincoln to launch innovative products like the Lincoln Bain Capital Total Credit Fund and the Lincoln Partners Group Royalty Fund—evergreen funds offering private credit and cross-sector royalties to individual investors. These products create "walled garden" distribution opportunities where Lincoln competes with a smaller set of rivals, avoiding pure price competition.

Product innovation reinforces this positioning. In annuities, Lincoln's Registered Index-Linked Annuities (RILA) sales increased 21% year-over-year in Q3 2025, marking six consecutive quarters of sequential growth. The enhanced fixed indexed annuities with Cap Lock Strategy and exclusive Nasdaq Priva™ Index provide unique crediting strategies that differentiate beyond rate competition. In variable annuities, the exclusive LVIP American Funds Vanguard Active Passive Growth Fund, available only within Lincoln's products, creates proprietary value. These aren't incremental features—they're deliberate moves to shift the value proposition from commodity pricing to unique solution design.

The Life Insurance segment's pivot to accumulation and protection products with more risk-sharing features follows the same logic. By emphasizing executive benefits and products that share mortality risk, Lincoln reduces capital intensity while maintaining premium growth. Executive benefits sales tripled year-over-year in Q2 2025, representing two-thirds of Life Insurance sales volume. This mix shift improves the stability of earnings and aligns with the broader transformation toward capital efficiency.

Financial Performance & Segment Dynamics: Evidence of Execution

The financial results validate the strategic thesis. Consolidated operating revenues reached $4.78 billion in Q3 2025, up 3.9% year-over-year, but the headline number masks profound mix shifts that matter more for long-term earnings power.

Group Protection delivered the clearest margin inflection, with operating margins reaching 8.1% in Q3 2025 (excluding assumption review impact), up from 5.5% in the prior year. This 280-basis-point improvement reflects disciplined pricing, diversification into higher-margin supplemental health (sales up 33% year-over-year), and favorable disability incidence trends. Management expects full-year 2025 margins in the mid-to-upper 8% range, with 2026 margins at or above 8%—a sustainable level that peers struggle to match.

Annuities demonstrates the spread-based transformation in action. While variable annuity net outflows continued, spread-based products (fixed annuities and RILA) constituted 63% of new business in Q3 2025, up from approximately 60% in Q1. Fixed annuity sales increased 36% year-over-year, and the transition to fully retaining these flows through Alpine will enhance spread-based earnings growth over time. Operating income from Annuities rose to $310 million in Q3 2025, driven by higher average account balances and continued growth in spread income. The rule-of-thumb guidance—$15 million impact to annualized earnings for every 1% change in annuity AUM due to markets—shows management's confidence in the earnings model's predictability.

Life Insurance, long a drag on profitability, shows nascent improvement. Q3 2025 operating earnings of $54 million (excluding assumption review impact) marked a significant year-over-year improvement, driven by stabilization of mortality experience, increased investment income, and expense discipline. While the segment remains small, the strategic pivot toward risk-sharing products and executive benefits positions it for sustained profitability rather than chronic losses. The nine-month operating income of $40 million, while down from $48 million in 2024, reflects the transition costs of repositioning the business model.

Retirement Plan Services delivered modest but steady growth, with Q3 2025 operating income of $46 million (up 5% year-over-year) and first-year sales of $2.4 billion (up nearly 50% year-over-year in Q2). The base spread expanded to 107 basis points, up from both prior quarter and prior year, demonstrating pricing discipline and asset-liability management. Net flows turned positive in Q3, a critical inflection after periods of outflow pressure. Management expects modest earnings growth in 2025, supported by moderating spread compression and higher account balances.

The Other Operations segment, which includes run-off reinsurance agreements, generated $99 million in operating income in Q3 2025, up from $84 million in 2024. While not core to the transformation story, this segment provides stable cash flow that supports the overall capital position.

Outlook, Management Guidance, and Execution Risk

Management's guidance frames the transformation's trajectory. For 2025, full-year expenses are expected to be relatively flat compared to 2024 despite higher sales volumes, reflecting disciplined cost management. Group Protection margins should finish in the mid-to-upper 8% range, representing roughly 50 basis points of year-over-year improvement. The Annuities segment will see slightly higher retained acquisition expenses from the fixed annuity retention strategy, but this investment is expected to accelerate spread-based earnings growth in 2026 and beyond.

The 2026 outlook reveals management's confidence. Free cash flow conversion guidance was widened from 45-55% to 45-60%, while expected leverage improved from 25-28% to 25-26.5%. These aren't marginal tweaks—they signal that the capital efficiency engine is working. The Group Protection margin target of "at or above 8%" for 2026, building on 2025's gains, suggests the business has structurally repriced its risk and expense base.

Key execution variables will determine whether this guidance proves conservative or aspirational. The Bermuda reinsurance subsidiary must successfully retain and manage the fixed annuity block, maintaining credit quality and asset-liability matching. The Bain partnership needs to deliver differentiated private assets that support product innovation and improve investment spreads. Group Protection must sustain its margin expansion even as disability incidence rates normalize from historically low levels—management acknowledges that favorable macro tailwinds contributed roughly 100 basis points to 2024's margin expansion and are unlikely to persist indefinitely.

Risks and Asymmetries: What Could Break the Thesis

Three material risks threaten the transformation narrative. First, legal and regulatory overhang creates quantifiable but manageable downside. The Glover class action settlement ($147.5 million pre-tax) received final approval in June 2025, though related case appeals remain pending. The Meade securities class action dismissal is under appeal, and derivative actions are stayed pending resolution. The aggregate range of reasonably possible losses is estimated at up to $150 million after-tax—material but not catastrophic for a company with $7.96 billion market cap and strong liquidity. The tax assessment appeal with Radnor Township adds uncertainty but represents a local, not systemic, risk.

Second, interest rate sensitivity poses a structural earnings risk. Lincoln's hypothetical analysis shows a 25 basis point rate increase would generate a $375 million gain, while a 25 basis point decrease would cause a $400 million loss. This asymmetry reflects the duration mismatch in spread-based products. While the company maintains hedging programs and the Alpine reinsurance structure provides some insulation, sustained rate volatility could overwhelm these protections, particularly if the Federal Reserve's easing cycle accelerates beyond expectations.

Third, execution risk on the strategic transformation remains high. The shift to fully retaining fixed annuity flows requires investment in systems, risk management, and capital allocation that could strain near-term earnings. If the Bermuda reinsurance subsidiary fails to achieve expected efficiencies, or if the Bain partnership's asset sourcing doesn't deliver competitive advantages, the anticipated improvement in free cash flow conversion may not materialize. Competitors like Prudential and MetLife, with larger scale and more established reinsurance operations, could respond aggressively to Lincoln's moves, compressing margins in spread-based products.

Valuation Context: Pricing the Transformation

At $41.92 per share, Lincoln trades at a significant discount to intrinsic asset value and peer multiples. The price-to-book ratio of 0.84x compares to Prudential's 1.19x, MetLife's 1.77x, and Principal's 1.62x. This discount reflects market skepticism about the transformation's execution risk and the legacy life insurance block's drag on returns. However, it also creates asymmetry—successful delivery on management's 2026 targets could drive multiple expansion toward peer levels, implying 40-110% upside on book value re-rating alone.

The price-to-earnings ratio of 3.64x appears artificially low due to one-time items and the market's reluctance to price in sustainable earnings from the new business mix. On a cash flow basis, the picture is more nuanced. Operating cash flow was negative $2.01 billion TTM, reflecting the working capital demands of the transformation and capital contributions to subsidiaries ($967 million in nine months 2025, including $800 million to LNL from Bain proceeds). However, free cash flow conversion improved from 35% in 2023 to 39% in 2024, with management targeting 45-60% by 2026. If achieved, this would place Lincoln in line with more capital-efficient peers.

The dividend yield of 4.29% provides income while investors wait for the transformation to mature, with a conservative payout ratio of 15.61% indicating room for growth. Debt-to-equity of 0.74x is manageable, though higher than Principal's 0.34x, reflecting the capital demands of the repositioning. The enterprise value of negative $30.07 billion (due to insurance accounting conventions) renders traditional EV/EBITDA metrics meaningless, making book value and cash flow conversion more relevant valuation anchors.

Relative to peers, Lincoln's valuation appears to price in a 30-50% probability of transformation failure. Prudential trades at 15x earnings despite slower growth, reflecting confidence in its diversified model. MetLife's 14.6x multiple incorporates its scale and international diversification. Lincoln's 3.6x multiple suggests the market views its earnings as unsustainable—precisely the mispricing that successful execution could correct.

Conclusion: The Margin Renaissance Thesis

Lincoln National's transformation represents a deliberate engineering of margin structure and capital efficiency that few insurers have attempted at this scale. The combination of Bermuda reinsurance, Bain Capital's asset sourcing capabilities, and product mix shifts toward spread-based earnings creates a pathway to 45-60% free cash flow conversion and sustainable mid-8% margins in Group Protection. These aren't incremental improvements—they're structural reconfigurations that reduce equity market sensitivity and improve return on capital.

The investment case hinges on execution velocity and competitive response. If Lincoln can successfully retain and manage the fixed annuity block, scale its institutional funding agreement program ($1.9 billion issued year-to-date), and deliver on Bain's promised differentiation, the valuation discount to peers should close. The legal overhang, while material at up to $150 million, is quantifiable and manageable. Interest rate risk remains the wild card, requiring vigilant asset-liability management.

For investors, the key variables are free cash flow conversion trajectory and Group Protection margin sustainability. Q3 2025's 39% conversion and 8.1% Group margin provide early validation, but 2026 targets of 45-60% and "at or above 8%" represent the true test. Success means Lincoln evolves from a cyclical insurer trading at a discount to a capital-efficient financial services franchise worthy of a premium multiple. Failure means the market's skepticism was justified, and the stock remains range-bound. The asymmetry favors patient investors who believe that 120 years of insurance expertise, properly restructured, can generate 21st-century returns.