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__________________________________________________________________________________________________________

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

 

FORM 10-Q

_________________

 

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2020

 OR

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from ______ to ______

 

Commission File Number: 1-6028

_________________

 

LINCOLN NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

_________________

 

Indiana

35-1140070

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

150 N. Radnor-Chester Road, Suite A305, Radnor, Pennsylvania

19087

(Address of principal executive offices)

(Zip Code)

 

(484) 583-1400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

__________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock

LNC

New York Stock Exchange

__________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x

As of August 3, 2020, there were 193,248,120 shares of the registrant’s common stock outstanding.

_________________________________________________________________________________________________________


Lincoln National Corporation

 

Table of Contents

Item

Page

PART I

 

1.

Financial Statements

1

2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

54

 

 

Forward-Looking Statements – Cautionary Language

54

 

 

Introduction

55

 

 

    Executive Summary

55

    Critical Accounting Policies and Estimates

57

Acquisitions and Dispositions

59

 

 

Results of Consolidated Operations

60

 

 

Results of Annuities

61

Results of Retirement Plan Services

66

 

 

Results of Life Insurance

70

 

 

Results of Group Protection

74

Results of Other Operations

77

Realized Gain (Loss) and Benefit Ratio Unlocking

79

Consolidated Investments

81

 

 

Review of Consolidated Financial Condition

93

 

 

Liquidity and Capital Resources

93

3.

Quantitative and Qualitative Disclosures About Market Risk

97

4.

Controls and Procedures

97

PART II

 

1.

Legal Proceedings

98

1A.

Risk Factors

98

2.

Unregistered Sales of Equity Securities and Use of Proceeds

98

6.

Exhibits

98

Exhibit Index for the Report on Form 10-Q

99

 

Signatures

100

 


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

LINCOLN NATIONAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

As of

As of

June 30,

December 31,

2020

2019

(Unaudited)

ASSETS

Investments:

Fixed maturity available-for-sale securities, at fair value

(amortized cost: 2020 – $98,817; 2019 – $94,295; allowance for credit losses: 2020 – $22; 2019 – $0)

$

113,519

$

105,200

Trading securities

4,651

4,673

Equity securities

87

103

Mortgage loans on real estate, net of allowance for credit losses

(portion at fair value: 2020 – $777; 2019 – $0)

16,578

16,339

Policy loans

2,551

2,477

Derivative investments

2,957

1,911

Other investments

4,574

2,994

Total investments

144,917

133,697

Cash and invested cash

4,201

2,563

Deferred acquisition costs and value of business acquired

7,012

7,694

Premiums and fees receivable

490

465

Accrued investment income

1,168

1,148

Reinsurance recoverables, net of allowance for credit losses

16,866

17,144

Funds withheld reinsurance assets

535

536

Goodwill

1,778

1,778

Other assets

15,905

16,170

Separate account assets

146,787

153,566

Total assets

$

339,659

$

334,761

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Future contract benefits

$

38,604

$

36,420

Other contract holder funds

100,537

98,018

Short-term debt

-

300

Long-term debt

6,736

6,067

Reinsurance related embedded derivatives

245

327

Funds withheld reinsurance liabilities

1,867

1,810

Payables for collateral on investments

7,031

5,082

Other liabilities

17,121

13,482

Separate account liabilities

146,787

153,566

Total liabilities

318,928

315,072

Contingencies and Commitments (See Note 11)

 

 

Stockholders’ Equity

Preferred stock – 10,000,000 shares authorized

-

-

Common stock – 800,000,000 shares authorized; 193,247,103 and 196,668,532 shares

issued and outstanding as of June 30, 2020, and December 31, 2019, respectively

5,081

5,162

Retained earnings

8,327

8,854

Accumulated other comprehensive income (loss)

7,323

5,673

Total stockholders’ equity

20,731

19,689

Total liabilities and stockholders’ equity

$

339,659

$

334,761


See accompanying Notes to Consolidated Financial Statements

1


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in millions, except per share data)

For the Three

For the Six

Months Ended

Months Ended

June 30,

June 30,

2020

2019

2020

2019

Revenues

Insurance premiums

$

1,342

$

1,398

$

2,715

$

2,845

Fee income

1,458

1,517

2,997

2,991

Net investment income

1,172

1,355

2,547

2,606

Realized gain (loss):

Total other-than-temporary impairment losses on securities

-

(4

)

-

(27

)

Portion of loss recognized in other comprehensive income

-

-

-

15

Net other-than-temporary impairment losses on securities

recognized in earnings

-

(4

)

-

(12

)

Realized gain (loss), excluding other-than-temporary

impairment losses on securities

(647

)

(113

)

(671

)

(468

)

Total realized gain (loss)

(647

)

(117

)

(671

)

(480

)

Amortization of deferred gain on business sold through reinsurance

11

8

22

15

Other revenues

181

149

332

298

Total revenues

3,517

4,310

7,942

8,275

Expenses

Interest credited

732

680

1,457

1,358

Benefits

1,725

1,852

4,227

3,610

Commissions and other expenses

1,123

1,272

2,207

2,446

Interest and debt expense

84

70

152

141

Strategic digitization expense

14

15

26

31

Total expenses

3,678

3,889

8,069

7,586

Income (loss) before taxes

(161

)

421

(127

)

689

Federal income tax expense (benefit)

(67

)

58

(85

)

73

Net income (loss)

(94

)

363

(42

)

616

Other comprehensive income (loss), net of tax

4,319

1,883

1,650

3,929

Comprehensive income (loss)

$

4,225

$

2,246

$

1,608

$

4,545

Net Income (Loss) Per Common Share

Basic

$

(0.49

)

$

1.80

$

(0.22

)

$

3.03

Diluted

(0.49

)

1.79

(0.27

)

3.01

Cash Dividends Declared Per Common Share

$

0.40

$

0.37

$

0.80

$

0.74


See accompanying Notes to Consolidated Financial Statements

2


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in millions, except per share data)

For the Three

For the Six

Months Ended

Months Ended

June 30,

June 30,

2020

2019

2020

2019

Common Stock

Balance as of beginning-of-period

$

5,071

$

5,285

$

5,162

$

5,392

Stock compensation/issued for benefit plans

10

16

19

11

Retirement of common stock/cancellation of shares

-

(60

)

(100

)

(162

)

Balance as of end-of-period

5,081

5,241

5,081

5,241

Retained Earnings

Balance as of beginning-of-period

8,500

8,679

8,854

8,551

Cumulative effect from adoption of new accounting standards

-

-

(203

)

-

Net income (loss)

(94

)

363

(42

)

616

Retirement of common stock

-

(90

)

(125

)

(138

)

Common stock dividends declared

(79

)

(74

)

(157

)

(151

)

Balance as of end-of-period

8,327

8,878

8,327

8,878

Accumulated Other Comprehensive Income (Loss)

Balance as of beginning-of-period

3,004

2,453

5,673

407

Other comprehensive income (loss), net of tax

4,319

1,883

1,650

3,929

Balance as of end-of-period

7,323

4,336

7,323

4,336

Total stockholders’ equity as of end-of-period

$

20,731

$

18,455

$

20,731

$

18,455


See accompanying Notes to Consolidated Financial Statements

3


LINCOLN NATIONAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

For the Six

Months Ended

June 30,

2020

2019

Cash Flows from Operating Activities

Net income (loss)

$

(42

)

$

616

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Realized (gain) loss

671

480

Trading securities purchases, sales and maturities, net

(33

)

(2,115

)

Amortization of deferred gain on business sold through reinsurance

(22

)

(15

)

Change in:

Deferred acquisition costs, value of business acquired, deferred sales inducements

and deferred front-end loads deferrals and interest, net of amortization

(177

)

(109

)

Premiums and fees receivable

(25

)

17

Accrued investment income

(20

)

(27

)

Future contract benefits and other contract holder funds

770

(864

)

Reinsurance related assets and liabilities

(50

)

(457

)

Accrued expenses

(296