Lincoln(LNC) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Lincoln National Corporation, providing comprehensive disclosures on financial position, performance, and cash flows Consolidated Balance Sheets Total assets decreased to $365.9 billion as of March 31, 2022, from $387.3 billion at year-end 2021, primarily due to lower investments and separate account assets Consolidated Balance Sheet Highlights (in millions) | Account | March 31, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $365,929 | $387,301 | | Total Investments | $144,624 | $153,630 | | Separate Account Assets | $168,879 | $182,583 | | Total Liabilities | $351,217 | $367,029 | | Long-term Debt | $6,561 | $6,325 | | Separate Account Liabilities | $168,879 | $182,583 | | Total Stockholders' Equity | $14,712 | $20,272 | | Accumulated Other Comprehensive Income (Loss) | $1,250 | $6,441 | Consolidated Statements of Comprehensive Income (Loss) For Q1 2022, net income decreased to $104 million from $225 million in Q1 2021, driven by higher benefits expenses and a significant other comprehensive loss of $5.19 billion Q1 2022 vs Q1 2021 Performance (in millions, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total Revenues | $4,687 | $4,534 | | Total Expenses | $4,595 | $4,272 | | Net Income (Loss) | $104 | $225 | | Other Comprehensive Income (Loss), net of tax | $(5,191) | $(3,170) | | Comprehensive Income (Loss) | $(5,087) | $(2,945) | | Diluted Net Income (Loss) Per Common Share | $0.58 | $1.16 | | Cash Dividends Declared Per Common Share | $0.45 | $0.42 | Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased to $14.71 billion as of March 31, 2022, from $19.59 billion a year prior, primarily due to a $5.19 billion other comprehensive loss Changes in Stockholders' Equity (in millions) | Component | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Beginning Balance | $20,272 | $19,593 | | Net Income (Loss) | $104 | $225 | | Other Comprehensive Income (Loss) | $(5,191) | $(3,170) | | Retirement of Common Stock/Cancellation | $(400) | $(105) | | Common Stock Dividends Declared | $(79) | $(81) | | Ending Balance | $14,712 | $19,593 | Consolidated Statements of Cash Flows Net cash provided by operating activities significantly improved to $753 million in Q1 2022, while net cash used in investing activities increased to $2.14 billion Cash Flow Summary (in millions) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $753 | $(642) | | Net Cash from Investing Activities | $(2,141) | $(712) | | Net Cash from Financing Activities | $736 | $996 | | Net (Decrease) in Cash | $(652) | $(358) | - The company repurchased $400 million of common stock in Q1 2022, compared to $105 million in Q1 2021[14] Notes to Unaudited Consolidated Financial Statements The notes provide detailed explanations of accounting policies, investment portfolio, derivatives, segment performance, and legal contingencies, including ongoing litigation - The company sells a wide range of wealth protection, accumulation, retirement income, and group protection products, including various types of annuities and life insurance[16] - The company is preparing for the adoption of ASU 2018-12 (Targeted Improvements to the Accounting for Long-Duration Contracts) effective January 1, 2023, which may have a material impact[23] - As of March 31, 2022, the company estimates the aggregate range of reasonably possible losses for certain litigation and regulatory matters to be up to approximately $120 million, after-tax[121] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results, analyzing segment performance, investment outcomes, and liquidity, highlighting a decrease in consolidated net income for Q1 2022 Executive Summary The executive summary outlines the company's business structure, key environmental factors like the COVID-19 pandemic and rising interest rates, and the ongoing 'Spark Initiative' for expense savings - The company operates through four business segments: Annuities, Retirement Plan Services, Life Insurance, and Group Protection[195][197] - The Federal Reserve's interest rate hikes in March and May 2022 are expected to adversely affect business through spread compression, though this is expected to moderate over time[203] - The company is implementing a new expense savings program, the 'Spark Initiative', which integrates remaining efforts from a previous strategic digitization initiative[205] Results of Consolidated Operations Consolidated net income for Q1 2022 decreased to $104 million from $225 million in Q1 2021, primarily due to unfavorable variable annuity derivative results and lower alternative investment income Consolidated Net Income (Loss) (in millions) | Component | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Income (loss) from operations | $294 | $350 | | Excluded realized gain (loss), after-tax | $(20) | $(180) | | Benefit ratio unlocking, after-tax | $(170) | $55 | | Net income (loss) | $104 | $225 | - Key drivers for the decrease in net income include unfavorable variable annuity derivative results, poor disability experience, and lower alternative investment income[216] - Total deposits increased to $7.4 billion in Q1 2022 from $6.7 billion in Q1 2021, while total account values remained relatively stable at approximately $308 billion[216] Results of Annuities The Annuities segment reported a slight increase in income from operations to $302 million in Q1 2022, driven by higher net investment income and a lower tax rate Annuities Segment - Income from Operations (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total operating revenues | $1,232 | $1,204 | | Total operating expenses | $881 | $854 | | Income from operations | $302 | $290 | - The increase in operating income was driven by higher net investment income (from prepayments and higher account values) and a lower effective tax rate[221] - Variable annuity deposits were $1.14 billion, and fixed annuity deposits were $1.57 billion in Q1 2022, with the segment experiencing net outflows of $553 million[216][226][231] Results of Retirement Plan Services The Retirement Plan Services segment's income from operations slightly decreased to $55 million in Q1 2022, primarily due to lower net investment income, despite strong net inflows of $946 million Retirement Plan Services - Income from Operations (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total operating revenues | $318 | $327 | | Total operating expenses | $254 | $257 | | Income from operations | $55 | $57 | - The decrease in operating income was driven by lower net investment income from alternative investments and spread compression[238] - Net flows were strong at $946 million, up from $347 million year-over-year, driven by the mid-large market segment[216][244] Results of Life Insurance The Life Insurance segment's income from operations decreased significantly to $58 million in Q1 2022, primarily due to lower net investment income and higher commission expenses, partially offset by lower COVID-19 mortality claims Life Insurance - Income from Operations (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total operating revenues | $1,825 | $1,939 | | Total operating expenses | $1,760 | $1,809 | | Income from operations | $58 | $107 | - The decrease in operating income was driven by lower net investment income and higher commission and other expenses[255] - A key offsetting factor was lower benefits due to reduced mortality claims from the COVID-19 pandemic[255] - Total sales increased to $155 million from $114 million year-over-year, and total in-force face amount grew to $996.6 billion[260][261] Results of Group Protection The Group Protection segment reported an increased loss from operations of $41 million in Q1 2022, primarily due to unfavorable disability experience and higher claims management expenses, worsening the total loss ratio to 88.0% Group Protection - Income (Loss) from Operations (in millions) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total operating revenues | $1,303 | $1,254 | | Total operating expenses | $1,355 | $1,287 | | Income (loss) from operations | $(41) | $(26) | - The increased loss was driven by unfavorable disability experience and higher operating expenses[274] Loss Ratios by Product Line | Product Line | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Life | 91.0% | 101.0% | | Disability | 87.2% | 78.8% | | Dental | 71.1% | 76.8% | | Total | 88.0% | 86.8% | Results of Other Operations Other Operations reported an increased loss of $80 million in Q1 2022, primarily due to higher Spark Initiative expenses and lower revenues tied to market fluctuations - The loss from operations increased to $80 million from $78 million year-over-year[285] - A key driver of the increased loss was higher Spark program expense, which rose to $31 million from $13 million in Q1 2021[285][286] - The loss was partially offset by lower other expenses, mainly due to the impact of a declining stock price on deferred compensation plan liabilities[286][291] Consolidated Investments Total investments decreased to $144.6 billion as of March 31, 2022, with the portfolio remaining high-quality and heavily weighted towards fixed maturity AFS securities, despite increased unrealized losses Investment Portfolio Composition (in millions) | Investment Type | March 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Fixed maturity AFS securities | $110,695 | $118,746 | | Mortgage loans on real estate | $17,892 | $17,991 | | Alternative investments | $2,805 | $2,666 | | Total investments | $144,624 | $153,630 | - The fixed maturity AFS portfolio's credit quality remained high, with 96.6% of securities rated investment grade as of March 31, 2022[315] - Gross unrealized losses on fixed maturity AFS securities increased by $2.5 billion in Q1 2022, primarily attributed to widening credit spreads and rising interest rates[32][317] Liquidity and Capital Resources The company maintains a strong liquidity and capital position, supported by insurance premiums, investment income, and capital market access, with $480 million returned to common stockholders in Q1 2022 - The holding company received $126 million in dividends from its subsidiaries in Q1 2022, down from $255 million in Q1 2021[352] Return of Capital to Common Stockholders (in millions) | Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Dividends paid | $80 | $81 | | Repurchase of common stock | $400 | $105 | | Total cash returned | $480 | $186 | - The company has access to FHLB facilities with an estimated maximum borrowing capacity of $7.75 billion ($7.0 billion at LNL, $750 million at LLANY), of which $3.9 billion was outstanding as of March 31, 2022[365] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks, including interest rate, equity market, credit, and foreign currency exchange risk, through an integrated asset-liability management process - The company is exposed to several market risks, primarily interest rate risk, equity market risk, and credit risk, which are managed via an integrated asset-liability process[371] Controls and Procedures The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures are effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[372] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[373] PART II - OTHER INFORMATION Legal Proceedings This section provides an update on legal proceedings, noting a class certification granted in the 'Vida Longevity Fund, LP v. Lincoln Life & Annuity Company of New York' case related to cost of insurance charges - In the case of Vida Longevity Fund, LP v. Lincoln Life & Annuity Company of New York, the court granted class certification on March 31, 2022, for owners of six universal life products assessed a cost of insurance charge since June 27, 2013[376] Risk Factors This section states that there are no material changes from the risk factors previously disclosed in the company's Form 10-K for the year ended December 31, 2021 - The report refers to the risk factors detailed in the company's 2021 Form 10-K, indicating no material changes during the quarter[378] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2022, the company repurchased 5.82 million shares of common stock for approximately $400 million, with $864 million remaining available for future repurchases under authorization Share Repurchase Activity - Q1 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2022 | - | - | | Feb 2022 | 4,757,657 | $67.26 | | Mar 2022 | 1,059,739 | $75.49 | | Total Q1 | 5,817,396 | N/A | - As of March 31, 2022, the company had $864 million remaining under its security repurchase authorization, which has no expiration date[379] Exhibits This section references the Exhibit Index, which lists all exhibits filed with the Form 10-Q report, including new debt securities, compensation agreements, and required certifications - The Exhibit Index lists all documents filed with the report, including debt agreements, compensation plans, and Sarbanes-Oxley certifications[380][383]