Lincoln National Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Ellen Cooper stated that the second quarter performance was strong with adjusted operating income increasing 32% year-over-year, marking the fourth consecutive quarter of year-over-year adjusted operating income growth. The Group Protection business delivered a record quarter with earnings growth of 33% year-over-year and margin improvement of 250 basis points.
• For Annuities, spread income continues to grow, and spread-based products are diversifying the portfolio. RILA account balances are on the rise, contributing to the strategic diversification.
• Life Insurance is undergoing a strategic repositioning towards accumulation and protection products, with sales growth supported by distribution evolution to be closer to financial professionals.
• Retirement Plan Services saw significant first year sales growth driven by stable value sales, and has a promising pipeline for the second half of the year.

Segment Performance

• Group Protection: Record quarter with operating earnings of $173 million, up 33% year-over-year. Margin was 12.5%, an increase of 250 basis points from the prior year. Driven by improved life results, favorable disability results, and strategic shift to higher-margin business.
• Annuities: Second quarter operating income was $287 million, down from $297 million in the prior year quarter. Driven by traditional variable annuity outflows, but spread income continued to grow. Spread-based products represent 28% of total annuity account balances net of reinsurance, a 2 percentage point increase from a year ago. RILA account balances increased 15% over the prior year quarter and now represent 22% of total balances.
• Retirement Plan Services (RPS): Second quarter operating earnings were $37 million, down from $40 million in the prior year quarter but up sequentially. First year sales increased nearly 50% year-over-year, driven by stable value sales, and there is a strong pipeline of known wins for the second half of the year.
• Life Insurance: Second quarter operating earnings were $32 million, a substantial improvement from an operating loss of $35 million in the prior year quarter. Driven by higher alternative investment returns, improved mortality, and effective expense management. Sales increased 15% year-over-year and 25% sequentially.

Guidance

• Anticipates Group business margin for the second half of 2025 to be broadly in line with the margin achieved during the second half of 2024.
• For RILA product, emphasizes profitable growth over top line sales growth, focusing on capital efficiency and maintaining profitability targets.
• Plans to deploy excess capital into areas such as growing Group benefits, diversifying the annuity mix, and optimizing the legacy life portfolio, with deployment expected over the next few years.

Risks

• Market volatility and changes in economic backdrop could lead to actual results differing materially from current expectations.
• In Group business, mortality outcomes may fluctuate quarter-to-quarter, and disability incidence rates could revert to historical levels, potentially impacting margins.
• RPS business is affected by stable value outflows, which can impact earnings, although actions are in place to address this.

Q: Ryan Krueger with KBW asked about the shift into smaller local markets and supplemental health products in Group, and if margin expansion would continue.

A: Ellen Cooper mentioned the focus on local markets and supplemental health as high-margin and fast-growing areas. Chris Neczypor added that they expect margin improvement to continue, with factors like favorable disability incidence trends and life loss ratio improvement contributing.

Q: Suneet Kamath with Jefferies asked about RILA product market competition and flows.

A: Ellen Cooper said RILA sales were up 32% year-over-year due to the second-generation product and distribution expansion. Chris Neczypor noted that as RILA products age, outflows may increase but sales growth aims to offset this.

Q: Alex Scott with Barclays asked about distribution drivers in Group and external reinsurance potential.

A: Ellen Cooper discussed distribution efforts including dedicated teams, digital tools, and partnership deepening. Chris Neczypor mentioned studying external reinsurance solutions for the legacy life portfolio but no concrete details were available yet.

Q: Wesley Carmichael with Autonomous Research asked about RPS pipeline and external reinsurance.

A: Ellen Cooper said RPS has a strong pipeline of known wins for the second half, and Chris Neczypor explained the remeasurement gain in GAAP profitability is a by-product of reserve assumptions and favorable trends.