Christopher Neczypor
Executive Vice President and Chief Financial Officer at Lincoln National
Thank you, Ellen, and good morning, everyone.
Our 4th-quarter results reflected another quarter of solid progress across our businesses, concluding a year of strong financial performance and disciplined execution of the strategic objectives we introduced last year. We have built substantial momentum across the enterprise and are well-positioned to continue delivering on our strategic and financial priorities.
I'm going to focus on three areas this morning. First, I'll review our 4th-quarter results, including our segment level financial performance. Second, I'll touch on our investment portfolio. And third, I'll provide an update on capital, free-cash flow and our execution against our multi-year outlook.
So let's start with a review of the quarter.
This morning, we reported 4th-quarter adjusted operating income available to common stockholders of $332 million or $1.91 per share. There were no significant items in the quarter. Our alternative investments portfolio delivered over an 11% annualized return in the quarter or $105 million. On an after-tax basis, this amount was $8 million above our return target or $0.05 per share. Excluding the impacts of our annual assumption review in each year, full-year 2024 adjusted income from operations was over $1.2 billion, a 16% improvement compared to 2023 as earnings growth in our group and annuities businesses more than offset the headwinds in our life business.
Turning to GAAP net income for the quarter, we reported net income available to common stockholders of $1.7 billion or $9.63 per diluted share. The difference between the net income and adjusted operating income was predominantly driven by two factors.
First, there was a favorable impact of $1.2 billion within non-operating income, primarily driven by a net positive movement in-market risk benefits, resulting from higher interest rates in the 4th-quarter. Our hedge program continues to perform in-line with expectations.
And second, there was a $587 million gain, primarily driven by the change in fair-value of the GAAP embedded derivatives related to the Fortitude reinsurance transaction we completed in the 4th-quarter of last year. This change was primarily driven by the impact of higher interest rates on available-for-sale securities in the funds withheld portfolio backing the Fortitude agreement with a corresponding offset flowing through accumulated other comprehensive income or AOCI.
Now turning to our segment results.
Let's start with Group, which had a record 4th-quarter. Group reported operating income of $107 million and a margin of 8.4%, more than doubling from $52 million and a margin of 4.1% in the prior year quarter. The dynamics that drove our results throughout the first 3/4 of 2024 were also drivers in the 4th-quarter, further supporting its year-over-year earnings improvement.
First, strong execution of our strategic priorities, including disciplined pricing actions on new business and renewals, diversification into higher-margin market segments and products and strong operational performance was the primary driver of our earnings growth this quarter and throughout the year.
Second, the favorable macroeconomic conditions, which remain supportive throughout the year, continued to be reflected in our 4th-quarter LTD incidence rate, further supporting the strength of our disability results.
And lastly, while mortality results can vary, this quarter, they were favorable relative to our expectations, leading to our lowest life loss ratio in over two years.
Now turning to group product-line results for the quarter.
The disability loss ratio was 75%, improving by over 8 percentage points year-over-year. The loss ratio remained favorable relative to our expectations as incidence rates remained low and when coupled with strong LTV recoveries enabled positive return to work outcomes for our claimants. The Group life loss ratio was 65%, a 2 percentage point improvement versus the prior year quarter as lower incidents more than offset slightly elevated.
As a reminder, mortality results are seasonally higher in the first-quarter of each year, which we anticipate will drive a sequential increase in the life loss ratio. Now briefly touching on full-year results. Group reported operating income of $426 million and a margin of 8.3% compared to $275 million and a margin of 5.5% in the prior year, excluding the impact of the assumption review in both periods.
Given the strategic emphasis we've placed on growth, diversification and improving the profitability of the group business, I want to provide a few updates on its trajectory heading into 2025.
As I noted in my comments on Group's 4th-quarter results, strong strategic execution was the primary driver of its earnings growth in 2024 and will continue to support earnings next year. However, as I discussed last quarter, the favorable macro tailwinds, which contributed roughly 100 basis-points of the margin expansion Group delivered in 2024 are unlikely to persist indefinitely. And as a result, we anticipate some moderation of the record-low disability incidents we experienced during this period to occur in 2025.
When adjusting for the normalization of macro tailwinds, we expect year-over-year margin expansion, driven by the benefits of our strategic actions and ongoing improvement in mortality. These actions should help us to sustain a similar level of earnings in 2025 compared to 2024.
As we look toward 2026, we expect continued premium growth alongside underlying earnings improvement to be supportive of a margin at or above 8%. Group's 2024 results reflect strong progress in our strategy to expand this business into a larger and more profitable part of the enterprise.
Now turning to annuities.
Annuities reported 4th-quarter operating income of $303 million compared to $279 million in the prior year quarter, which included the favorable impact of $14 million from a model refinement. Excluding this item, annuities earnings increased 14% year-over-year. The year-over-year growth was driven by higher account balances and increased spread income, partially offset by higher expenses.
Turning to account balances.
Average account balances were up 12% versus the prior year quarter and 2% sequentially as market growth offset net outflows in variable annuities. Touching briefly on expenses, as I noted in my 3rd-quarter remarks this year, we anticipated elevated expenses in the 4th-quarter. This increase was driven by a reduced benefit from external reinsurance expense reimbursements, a result of this year's 4th-quarter sales moderating compared to last 4th-quarter record levels.
Turning to spreads.
The increase in spread income continued to be driven by the growth of our RILA account balances, which now represent 21% of total account balances and are up 25% compared to the prior year quarter. As we work towards shifting our business mix to increase the proportion of spread-based products as a percentage of our overall account balances, we are pleased to announce that we received approval for our first internal flow agreement with our Bermuda-based affiliated reinsurer Alpine focused on fixed annuities.
With an internal flow agreement now in-place with Alpine, optimizing our internal and external reinsurance mix is a key focus for 2025 with the net benefit being the growth of spread-based account balances and earnings over-time, all while maintaining our required product returns.
Annuities delivered strong results in 2024, reinforcing its importance as a key driver of earnings and free-cash flow for the company. While ending account balances were down $2 billion sequentially, which when combined with two fewer fee days will result in lower earnings in the first-quarter relative to the 4th-quarter, we believe the momentum in our annuities business will support continued success in 2025.
Now turning to Retirement Plan Services, which reported 4th-quarter operating income of $43 million compared to $38 million in the prior year quarter, a 13% increase.
Similar to the 3rd-quarter, the improvement was driven by lower net G&A expenses and higher equity markets, partially offset by elevated participant-driven stable value outflows over the last 12 months, resulting from the higher interest-rate environment.
Our base spread for the quarter was 101 basis-points -- 8 basis-points lower year-over-year. We expect the base spread to stabilize at current levels throughout the first-half of 2025, followed by modest expansion in the second-half of the year. Net outflows for the quarter were $732 million and as I noted in my 3rd-quarter remarks, this was driven by the impact from several known plan terminations, partially offset by continued sales strength.
Net flows for the year were favorable, representing RPS's 10th consecutive year of positive net flows. However, as we look-ahead, we expect flows in 2025 to be pressured from a known large plan termination in the first-quarter.
Now turning to account balances.
Average account balances for the quarter increased 18% year-over-year and end-of-period account balances were nearly $113 billion, up 11% versus the prior year quarter. Overall, RPS had a solid year despite pressure from stable value outflows and spread compression. As we look towards 2025, moderating spread compression, higher account balances and continued expense discipline will support modest earnings growth in this business.
Lastly, turning to life insurance.
Life reported a 4th-quarter operating loss of $15 million compared to an operating loss of $6 million in the prior year quarter. Elevated severity and the run-rate impacts of the Fortitude retransaction were partially offset by above target alternative investment income and lower net G&A expenses. As a reminder, year-over-year comparisons will no longer be impacted by the Fortitude retransaction starting in 2025.
Turning to mortality.
This quarter, we experienced elevated mortality driven by large claims, leading to an outsized impact from severity. While volatility like this can occur from time-to-time, this was an unusual quarter and we would not expect this level of severity on a go-forward basis. Net G&A expenses were down $14 million or 10% versus the prior year quarter, reflecting the effect of the targeted actions we took throughout 2024.
We expect this trend to continue into 2025 and be a key contributor to year-over-year earnings growth. While Life's operating income remained pressured in 2024, the actions we took throughout the year to rightsize the expense base and target growth in products with more risk-sharing have strengthened the underlying fundamentals of the business. When coupled with normalized mortality trends and continued spread expansion, these actions reinforce our confidence in achieving and sustaining positive earnings for this business that will grow over-time.
Moving to investments.
Overall performance remained solid in the 4th-quarter, a reflection of our high-quality and well-diversified portfolio and our ongoing emphasis on optimizing our investment strategy. Throughout 2024, we focused on capturing opportunities in less liquid and structured asset classes. We also improved the overall quality of portfolio assets year-over-year through our high-quality purchase strategy and solid credit performance with upgrades outpacing downgrades throughout the year. The portfolio remained at 97% investment-grade, demonstrating our ability to balance yield, diversification and quality.
Our general account optimization efforts where we are leveraging our multi-manager platform to deliver increased value to the organization continued to drive additional incremental yield through a targeted shift in our asset mix toward investment-grade private assets and high-quality structured products.
New money in 2024 was invested at a 6.4% yield, approximately 140 basis-points above the yield on comparably rated public bonds, 50 basis-points higher than our yield pickup last year. The prevailing interest-rate environment will continue to influence our new money yield, but as we look-ahead, we see incremental opportunity to take advantage of higher-yielding assets within our overall risk appetite.
Touching briefly on our commercial mortgage loan portfolio, the portfolio remains high-quality, is well-diversified and continues to deliver stable results within our expectations. We recognize office is still in a longer-term transition and we continue to monitor our portfolio closely.
However, we feel-good about our high-quality mortgage loan portfolio and the positioning of the office portfolio. Additional information can be found in our quarterly earnings supplements. Lastly, our alternative investments generated another strong quarterly return of 2.8% in the 4th-quarter, above our expectation of 2.5%. For the full-year, our annualized return was 8.9%.
Overall, the performance of our alternative investments in the quarter and throughout 2024 benefited from our diversified investment approach with positive contributions from all underlying asset categories. Lastly, I'd like to provide an update on our financial outlook, focusing on capital, free-cash flow conversion and expected growth.
I'll address this across three key timeframes.
First, the progress we made in 2024. Second, how we are positioned heading into 2025; and lastly, an update on our expectations for 2026 and beyond.
As we look-back on 2024, we made significant progress toward the strategic priorities we outlined a year-ago. At the heart of our efforts to restore long-term value was a commitment to building a strong capital foundation, optimizing our operating model and a strategic shift towards products and market segments that will deliver profitable growth and improve our free-cash flow.
Throughout the course of 2024, we invested in our group business and executed on our growth strategy, resulting in nearly 300 basis-points of margin expansion on a full-year basis when excluding the impacts of the assumption reviews. We took action on expenses, both from a total company perspective as well as targeted actions in our life business, increasing our operational efficiency.
We also executed on large strategic initiatives such as the sale of our wealth management business and the launch of our Bermuda reinsurance affiliate. The net result of these actions allowed us to-end the year with RBC above 430%, grow adjusted operating earnings to its highest-level in three years despite a loss of $100 million in-life earnings from the Fortitude transaction and increase our free-cash flow conversion from 35% in 2023 to 39% in 2024.
As we look to 2025, we expect another year of investment, helping to drive continued momentum in the business. This year will continue to be a combination of growing our franchise, increasing the profitability of our businesses and optimizing legacy blocks to grow earnings and free-cash flow.
Some examples include launching and beginning to scale our FABN program, recalibrating the optimal mix of internal and external flow reinsurance, continued targeted expense actions, optimizing certain hedge programs and continuing our efforts to optimize our general account new money strategies. Some of these initiatives are continuation or acceleration of the progress we made last year, some are new initiatives and some will be a multiyear effort.
As we look out to 2026, we have increased confidence in the outlook laid out this time last year. As you can see on Slide 4 in our investor deck, we made two changes to our 2026 outlook.
The first being a widening of the upper bound of expectations for free-cash flow conversion from 45% to 55% in last year's outlook, 45% to 60% and the second being an improvement in expected leverage, down from a range of 25% to 28% in last year's outlook to 25% to 26.5% in this year's outlook. There are risks to our outlook as always given the assumption for a relatively constructive economic backdrop as well as a reliance on our ability to continue to execute on our strategic initiatives, particularly within Group protection and retail life. But given the success we've been able to demonstrate over the last two years and the continued underlying momentum we see today, we feel confident in achieving our goals.
We thank everyone for listening. And with that, I'll turn it back to Tina.
