Key Highlights

● Net income surged on items outside adjusted results

● Adjusted Operating Income fell

● Group Protection disappointed on disability claims

● Buybacks resumed and the Talcott transaction closed in October

Lincoln National Corporation (NYSE:LNC), which operates as Lincoln Financial and pays a regular common Dividend alongside other income-oriented financial stocks, reported third-quarter results that pulled in opposite directions. Net Income available to common stockholders more than tripled from the prior-year quarter, while adjusted operating income available to common stockholders fell. The Radnor, Pennsylvania, insurer also disclosed the resumption of common share repurchases, the retirement of a substantial amount of preferred stock and further progress in reducing a legacy block of business.

The contrast rests largely on items that adjusted results exclude. The company's investor supplement and Earnings release showed that the increase in net income came mostly from net Annuity product features, primarily changes in Market Risk benefits, along with Investment gains. These were partly offset by other items, including costs related to a Reinsurance recapture. A large net income figure driven by such movements can reverse when markets change, and it does not by itself describe the earnings power of the insurance operations.

Adjusted operating income, the measure management emphasizes for the underlying business, was also shaped by a non-routine item: the annual assumption review, which was a net unfavorable item for both net income and adjusted operating income. Revenues increased from the prior-year quarter. For the year to date, adjusted income from operations was level with a year earlier in the statistical supplement, while the per-share figure declined. The identical year-to-date totals were checked against both the release and the supplement, which agree.

Chief Executive's Scorecard

Ellen Cooper, the chairman, president and chief executive, offered a segment-by-segment judgment in the release. Life insurance and Retirement Plan Services, she said, “were highlights of the quarter,” while Group Protection fell short of expectations. In Annuities, she pointed to a second consecutive quarter of improving return on average account balances. Her assessment aligns with the numbers, although the improvement in annuity returns is a sequential one and those returns remained below the level of a year earlier.

Market data, summarizing the same report, described Life Insurance and Retirement Plan Services as having delivered year-over-year earnings growth, sequential gains in Annuities operating income and an increase in annuity sales, and a decline in Group Protection. The Group Protection disappointment is notable because the segment had been a meaningful contributor in the prior-year period. Taken together, the businesses show that the company's diversified structure helped limit, but did not eliminate, the effect of one segment's setback.

Disability Claims Hit Group Protection

Group Protection recorded the steepest decline among the operating segments. Operating income fell sharply from the prior-year quarter, both as reported and after removing the assumption review. The Operating Margin narrowed considerably as well. The release pointed to a normalization of disability incidence and higher claim severity, and the investor supplement said the disability loss ratio rose meaningfully from a year earlier, reflecting Volatility in severity and a continued moderation from unusually favorable incidence levels.

Favorable life experience in the segment provided a partial offset. Premiums grew by a low-single-digit rate, led by local markets and a strong percentage increase in supplemental health, but sales declined steeply from the year-earlier period. For a group insurer, premiums tend to respond slowly to Underwriting decisions, while claims can move more quickly. The current results therefore show earnings responding faster than Revenue to a change in claims experience, and they place disability severity among the more important variables in the near term.

The word “normalization” suggests that part of the prior profitability rested on unusually favorable conditions, which the supplement also implies through its reference to moderation from favorable incidence levels. Severity, by contrast, was described in terms of volatility. The distinction matters because a return toward typical incidence would be a lasting shift, whereas volatile severity could vary from one quarter to the next. The available documents do not provide a precise forecast for the segment's margin.

Life Insurance and Retirement Plan Services Move Ahead

Life Insurance reported a large improvement in operating income from the prior-year quarter, even after the assumption review. Management attributed the gain to alternative investment income, improved mortality and the consolidation of a captive. Alternative investment income is an important qualifier here, since it ran well above the company's long-term return target during the quarter, and such returns can be uneven. The investor supplement said underlying earnings, after excluding alternatives above or below target, still grew by a strong rate from the prior year.

Life sales told a less straightforward story. Total sales fell by a majority from a year earlier, which the supplement attributed to large executive benefits cases in the prior-year quarter. Core life sales, however, rose by a low-single-digit rate, led by a strong increase in indexed universal life. Average account balances in the segment grew by a low double-digit rate. The core sales comparison gives a more representative reading of the current trend than the headline total, which was distorted by the prior period's large cases.

Retirement Plan Services recorded higher operating income, helped by spread income, favorable Equity markets and a small one-time item. The business's flows were weaker, however. Net outflows replaced the net inflows seen a year earlier, deposits declined substantially and first-year sales fell, mainly in the mid-to-large market. Account balances still rose, reflecting market gains. Earnings and client flows therefore pointed in different directions, a contrast that could become more important if equity markets stop providing support.

Annuities: Sales Recover, Outflows Continue

Annuities remain the largest profit contributor among the segments, with operating income slightly below the prior-year level. Excluding the assumption review, the decline was attributed to a reallocation of net investment income and to Variable Annuity outflows. Return on average account balances moved lower from a year earlier, though the supplement shows it improving for a second straight quarter when the assumption review is removed. Average account balances grew by a mid-single-digit rate.

Sales decreased modestly from a year earlier yet rebounded by about a fifth from the second quarter. Spread-based products, which management has identified as a priority, made up most of sales, and fixed annuity sales more than doubled sequentially. The share of spread-based products in ending account balances increased from a year earlier. This mix shift reflects a deliberate move toward products whose earnings depend on investment spreads rather than on fees tied to equity markets.

Net outflows widened from the prior-year quarter, which limits the benefit of sales gains. Annuity net flows combine new sales with withdrawals and surrenders from older contracts, so sales growth alone does not produce an expanding book. The segment's ability to replace outflows from older variable contracts with newer spread-based Business is one of the metrics the release allows readers to track from quarter to quarter.

Talcott and the Legacy Block

The largest strategic development came just after quarter-end. Lincoln closed its reinsurance transaction with Talcott Financial Group effective at the start of October. A market data release described a Talcott Subsidiary reinsuring a large block of in-force Statutory Reserves in the legacy universal life book that Lincoln labels GUL, representing more than a third of its remaining in-force business of that type. Together with an earlier deal with Fortitude Re, the transaction means that well over half of the company's total GUL block is now reinsured, while Lincoln continues to administer the policies.

The company described the deal as further reducing exposure to a legacy, capital-intensive block. Cooper said in the results release that closing the deal marked one of the final milestones in its Balance Sheet work. The transaction does carry an earnings cost: the investor supplement estimates small negative effects on Life Insurance and Other Operations in the fourth quarter and next year. A refinement to the definition of adjusted operating income, also effective at the start of October, is expected to add to reported segment results, and the reinsurance and definition effects are worth separating in later periods.

Comparisons will therefore become less straightforward. Beginning with the fourth quarter, reported Life Insurance operating income will reflect both the reinsurance and the definition change. The company has provided estimates to help with that bridge, but anyone comparing later quarters with this one will need to adjust for those changes rather than treat the headline movement as a simple measure of operating performance.

Alternatives, Legal Costs and Other Moving Parts

Several smaller items shaped the quarter's reported figures. Alternative investment income, on an after-tax basis, rose well above both the prior-year quarter and the second quarter, with the Life Insurance segment receiving the bulk of it. That portfolio returned well above the company's stated long-term target on an annualized basis. Prepayment income, by contrast, declined from a year earlier. Because alternative returns can swing from quarter to quarter, the difference between actual and target returns provides a useful adjustment when comparing Life Insurance earnings across periods.

Other Operations reported a larger loss than a year earlier, but after removing the assumption review, the result was in line with the prior-year period. Legal accruals were an additional drag, particularly for the year to date, and Transaction Costs tied mainly to a reinsurance recapture were recorded in the quarter. Those transaction costs sit outside adjusted results but reduced net income, meaning the reported surge came despite them. Year-to-date net income was also far above the same period of last year, when reported results had been much lower.

The assumption review itself touched most of the business. After tax, Annuities, Life Insurance, Group Protection and Other Operations all recorded unfavorable effects, with Group Protection and Other Operations taking the largest amounts. Removing the review produces the operating figures that management cites when describing trends. The review is an annual exercise, so comparisons with the year-earlier quarter need to account for its effect, and for that reason the release presents segment results both with and without it.

Scale of the Franchise

Lincoln's size provides context for these movements. The company has described itself as serving a very large customer base across annuities, life insurance, group protection and retirement plan services, according to its corporate descriptions and market data. End-of-period account balances, net of reinsurance, stood at a very large sum at the end of September, slightly below the level reported at the end of June. Lincoln Financial is the Marketing name for Lincoln National Corporation and its affiliates.

In early October, results would be followed by a morning conference call and the release of the supplements through the Investor relations website. The published materials therefore give a detailed account of segment performance and capital, while leaving the near-term direction of disability claims, annuity outflows and retirement flows to be measured in the quarters ahead.

Capital, Preferred Stock and the Common Dividend

Capital actions gave the quarter much of its significance. The company resumed common share repurchases on a modest scale and retired a substantial portion of its preferred stock through tender offers, paying a premium on the repurchase. The investor supplement's estimates indicate lower preferred dividends over the coming periods, based on the reduced balance. The investor supplement also said the Leverage Ratio stood at the long-term target. Holding Company available liquidity, net of prefunding, rose from the end of last year and from the end of June.

The estimated risk-based Capital ratio was reported at a high level, and Cooper said significantly improved financial flexibility had allowed the resumption of repurchases. Book Value per share including accumulated other comprehensive income fell from both the prior year and the end of June, as a higher Treasury rate environment widened unrealized losses on available-for-sale securities. Book value excluding that component and adjusted book value both rose. Each measure emphasizes a different aspect of the balance sheet, and the release reports all of them.

Income investors will notice that the common dividend appears as a stable line rather than a headline. The statistical supplement shows common dividends declared per share for the year to date equal to the prior-year period. An article from Market commentary noted the board's quarterly declaration earlier this year. The results release itself announced no change, so the buyback resumption and the preferred retirement are the visible new uses of capital, and no increase in the common payout was disclosed.