Lincoln National Corporation (LNC) Earnings & Analysis

Latest quarter

Lincoln National reported Q2 revenue of $4.5 billion, up from $4.0 billion a year earlier. On the consensus measure, revenue was $4.9 billion and came in 1.40% above expectations; both reported revenue and the estimate rounded to $4.9 billion. Adjusted EPS was $2.24, above the $2.00 consensus.

Lincoln reported diluted EPS of $6.72, compared with $3.80 a year earlier. CFO Chris Nezypor said the difference between net income and adjusted operating income was driven primarily by a favorable change in market risk benefits as equity markets and interest rates rose. Lincoln’s filing also attributed higher net income primarily to gains in net annuity product features driven by capital markets.

Nezypor said life insurance and retirement plan services operating income increased, while group protection income fell from the prior-year quarter and annuity income was flat. Lincoln’s operating margin rose to 38.0% from 20.6%, while free cash flow was −$558.0 million, compared with $1.0 billion a year earlier.

Adjusted EPS is the figure the consensus estimates, not the GAAP EPS above.

What management said on the call

CEO Ellen Cooper said annuity sales were $3.5 billion in the quarter, with spread-based products accounting for 63%. She said Lincoln was prioritizing profitability over volume in a competitive market. Asked about annuities, Cooper said the company had expanded distribution for fixed indexed annuities and expected to increase their sales meaningfully in the second half of the year.

CFO Chris Nezypor said annuity operating income was $287 million, flat year over year: higher average balances and spread income were largely offset by a reallocation of investment income to non-operating income. He expected higher starting balances, an additional fee day and spread income growth to support third-quarter earnings growth.

In group protection, Nezypor said operating income fell to $147 million from $173 million a year earlier as disability results normalized. Asked about paid family leave, he said the impact on the disability loss ratio was mainly a first-quarter issue, while long-term disability normalization was continuing. He expected a full-year group margin within the eight to 9% target range.

Nezypor said retirement plan services had approximately $2.4 billion of net outflows, driven by three plan terminations that did not meet profitability thresholds. He said Lincoln was prioritizing “the profitability of the business we retain over volume.” In life insurance, favorable mortality helped operating income rise to $57 million from $32 million, although lower alternative investment returns partly offset the improvement.

Cooper announced an agreement to reinsure approximately $6 billion of legacy life reserves. Nezypor said the transaction was expected to close in the fourth quarter, subject to regulatory approval, and increase ongoing annual free cash flow by approximately $30 to $40 million. Asked about capital, he said the board had reconfirmed an existing repurchase authorization but was not announcing timing.

Guidance

CFO Chris Nezypor said Lincoln expects alternative investment returns to recover to at or above its 10% target in the third quarter, after an approximately 5% annualized return in the second quarter.