Lincoln National: Despite Progress On Capital, Patience Is Required (Rating Upgrade)

Core Viewpoint - Lincoln National's stock has experienced volatility, with a 10% decline since Q2 earnings report, as management indicated that increased capital returns are several years away [1][6] Financial Performance - In Q2, Lincoln National reported earnings of $1.84, exceeding consensus by $0.07, but alternatives underperformed, costing $41 million with returns just over 4% annualized [2][4] - Group protection operating earnings increased by 19% to $130 million, aided by a $23 million refund, but adjusted income was flat at $107 million [2][4] - Annuities segment earned $297 million, up 10% year-over-year, with sales rising 48% to $3.8 billion due to strong demand [2][3] Investment Strategy - Lincoln National invested in less-liquid asset classes, achieving new money yields at 6.9%, 240 basis points above its portfolio yield [3][6] - The investment portfolio maintains a conservative average A rating, with 14% in structured products and 15% in commercial mortgages [3][4] Capital Management - The company sold its wealth management business for $650 million, increasing its risk-based capital (RBC) ratio to 420% and reducing debt to capital by 1.2% to 28.9% [4][5] - Management aims for a free cash flow conversion of 45-55% by 2026, currently at 35% [5][6] Future Outlook - The company is focused on improving operating efficiency and investing for long-term growth, with a dividend yield of 6.2% costing about $310 million [5][6] - Despite recent progress, Lincoln National is viewed as a turnaround story requiring patience, with better investment opportunities available in the insurance sector [6]