LINCOLN NATIONAL CORP Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Capital Foundation: Ended 2024 with an estimated RBC ratio of over 430%, a 20-point buffer over the target. Sold the wealth management business in Q2 and increased capital position.
• Operating Model Optimization: Took targeted actions to reduce expenses, invested in operations, technology, and talent. Launched Bermuda-based reinsurance subsidiary to support financial objectives.
• Profitable Growth: Group business grew profitably with diversified products and market segments. Annuities diversified product mix with a higher proportion of spread-based products. Life business repositioned product portfolio and distribution model. RPS expanded product solutions and enhanced service offerings.

Segment Performance

• Group Protection: Record fourth quarter with earnings more than doubling year over year and a margin of 8.4%. Full-year operating income was $426 million with a margin of 8.3%, up from $275 million and 5.5% in 2023 (excluding assumption review impact). Premium growth for the full year was 3%.
• Annuities: Fourth-quarter operating income was $303 million compared to $279 million in the prior year quarter. Average account balances were up 12% year over year. RILA account balances were up 25% year over year. Full-year sales reached the highest level since 2019, with approximately two-thirds of sales attributable to spread-based products.
• Retirement Plan Services (RPS): Fourth-quarter operating income was $43 million, a 13% increase from the prior year quarter. First-year sales grew 46% quarter over quarter, and full-year first-year sales were up nearly 70% with total deposits up 25%.
• Life Insurance: Fourth-quarter operating loss was $15 million. The business is refocused on accumulation and protection products with more risk sharing, and underlying fundamentals are strengthening.

Guidance

• 2025: Expect moderation in group margin due to normalization of macro tailwinds, but strategic actions to sustain earnings. Annuities to focus on optimizing internal and external reinsurance mix. RPS to see modest earnings growth with moderating spread compression and higher account balances.
• 2026: Group margin expected at or above 8%. Free cash flow conversion range widened to 45%-60% from prior 45%-55%. Leverage ratio improved, with confidence in achieving positive earnings for life business over time.

Risks

• Macroeconomic Uncertainty: Impact on mortality and disability results, with seasonality affecting life loss ratios.
• Competitive Pressures: In annuities and group protection, with industry dynamics potentially affecting sales and margins.
• Hedging and Reserve Risks: Changes in fair value of derivatives and reserve patterns could impact financial results.

Question and Answer

• Q: About raising the free cash flow outlook for 2026, A: Discussed ongoing mix shift towards higher free cash flow conversion segments (e.g., group protection), optimization of capital efficiency with Bermuda reinsurance, and legacy block improvements to accelerate free cash flow conversion.
• Q: Leverage ratio and capital uses, A: Leverage ratio improvement due to higher equity growth, potential delevering through various options, and consideration of share repurchase as free cash flow grows sustainably.
• Q: Alpine and flow agreements, A: Focus on capital efficiency by optimizing internal and external reinsurance mix, with the fixed annuity flow agreement with Alpine supporting spread-based account balance growth.
• Q: Group premium growth, A: Full-year premium growth around 3%, with focus on profitable growth over top-line, leveraging strategic investments in operations and products.
• Q: Variable annuity sales, A: Continued focus on holistic product solutions, with variable annuities remaining part of the suite while emphasizing spread-based products. Industry dynamics affect fixed annuity sales, but Lincoln's diversified approach supports growth.
• Q: Group margin guide, A: Group margin in 2024 included 100 basis points from favorable macro backdrop. Expect moderation in 2025, but strategic execution to sustain earnings, with margin expected at or above 8% by 2026.