LNC Q3 2025: Spread-Based Annuities Jump to 29% of Balances, Signaling Durable Earnings Shift

October 30, 2025 | By EarningsIQ Research

Lincoln Financial’s Q3 results spotlight a decisive pivot toward higher-margin, capital-efficient products, with spread-based annuities now comprising 29% of total account balances—up significantly as the company exits external reinsurance and fully retains fixed flows. The quarter’s broad-based segment growth, disciplined expense management, and robust capital position reinforce a business model evolving for resilience and sustainable profitability. Management’s outlook signals ongoing investment in growth levers, but also flags normalization in group protection margins and near-term expense headwinds as key watchpoints into 2026.

Summary

• Spread-Based Product Shift: Lincoln’s strategic mix now tilts toward spread-based annuities and fixed products for more stable, predictable earnings.
• Expense Discipline and Margin Expansion: Operational efficiency gains and targeted investments underpin margin improvement across core businesses.
• Capital Deployment Watch: Excess capital deployment, including Bain proceeds, and reinsurance optimization remain pivotal for 2026 returns.

Performance Analysis

Lincoln Financial’s Q3 results mark the fifth consecutive quarter of year-over-year adjusted operating income growth, driven by broad-based strength across annuities, life insurance, group protection, and retirement plan services. The company’s annuities business delivered robust earnings growth, underpinned by higher average account balances and a deliberate shift toward spread-based products—fixed annuities and RILA (Registered Index-Linked Annuities) now account for a growing share of new business and total balances. Notably, fixed annuity sales surged 36% year over year, and RILA sales rose 21%, both contributing to a more balanced, capital-efficient product mix.

Life insurance earnings rebounded sharply, with operational improvements and stable mortality experience supporting a significant year-over-year increase. Group protection held steady at prior-year record levels, though margin compression emerged as disability loss ratios normalized and LTD (long-term disability) recoveries moderated. Retirement plan services posted higher earnings on increased account balances and positive net flows, though stable value outflows and seasonality present ongoing headwinds. Expense management was a standout, with companywide G&A expenses declining and investments targeted at technology and digital capabilities to support future growth.

• Spread-Based Annuities Now 29% of Balances: This structural shift supports more resilient, predictable earnings and aligns with management’s risk-return focus.
• Life Insurance Earnings Power Normalizes: Stable mortality and expense discipline drive improved run-rate, with Q3 representing a clean baseline for future quarters.
• Group Protection Margins Off Peak: Disability loss ratio volatility and lower LTD recoveries signal a reversion to more normalized, though still elevated, margins.

Overall, Lincoln’s results reflect disciplined execution of a multi-year transformation, but also highlight the importance of ongoing margin management and capital deployment to sustain momentum into 2026.

Executive Commentary

Strategic Positioning

1. Spread-Based Earnings and Product Diversification

Lincoln’s transition from a variable annuity-dominated model to a more diversified, spread-based product mix is accelerating. With fixed annuity and RILA sales comprising a majority of new business and now 29% of total annuity account balances, the company is building a more resilient earnings base. The move to fully retain fixed annuity flows and exit external reinsurance arrangements is expected to drive higher spread income over time, though with a near-term uptick in acquisition expenses.

2. Margin Management and Expense Discipline

Expense control remains a core lever, with G&A expenses down 4% year over year in the life business and operational efficiency gains evident across segments. Strategic investments in digital tools, customer service, and claims management underpin both cost savings and competitive differentiation. However, management notes that Q4 will bring a seasonal rise in expenses due to variable compensation and growth-related investments, reflecting the need to balance ongoing efficiency with future growth initiatives.

3. Group Protection Margin Normalization

Group protection margins, which have expanded from 1-3% to over 8% in recent years, are now facing normalization as disability loss ratios and LTD recoveries revert toward historical averages. While premium growth remains robust, especially in supplemental health (+33% YoY), the business will need to offset margin pressure with continued pricing discipline, product expansion, and persistency improvements driven by digital investments and broker relationships.

4. Capital Deployment and Reinsurance Optimization

Lincoln’s capital position remains well above target, with management signaling plans to deploy excess capital—including Bain proceeds—across organic growth, product retention, and potential reinsurance optimization of legacy life blocks. The company continues to scale its institutional funding agreement program, and further updates on legacy block optimization are expected in Q4, with implications for free cash flow and earnings power in 2026 and beyond.

5. Investment Portfolio and Private Credit Strategy

Lincoln’s portfolio maintains high credit quality (97% investment grade), with private credit and structured securities allocations managed conservatively. The Bain partnership is enhancing sourcing and execution capabilities, but management remains cautious, emphasizing portfolio discipline and risk management as private credit exposure grows in tandem with spread-based product expansion.

Key Considerations

Lincoln’s Q3 demonstrates the tangible benefits of its transformation, but also surfaces key areas for investor scrutiny as the company enters a critical phase of capital deployment and margin management.

Key Considerations:

• Spread-Based Growth Trajectory: The move to retain all fixed annuity flows and grow RILA balances will further shift earnings composition, but near-term acquisition cost drag must be monitored.
• Expense and Margin Sustainability: Expense reductions have supported earnings, but Q4 will test the company’s ability to absorb rising compensation and investment costs while maintaining margin discipline.
• Group Protection Volatility: Disability and LTD trends are normalizing, and while premium growth remains strong, future margin expansion will depend on pricing actions and persistency gains.
• Capital Deployment Execution: How and when Lincoln deploys its excess capital—particularly Bain proceeds and legacy block optimization—will shape free cash flow and ROE over the next 12-24 months.
• Investment Portfolio Quality: Private credit expansion is being managed prudently, but sector-wide risks and asset quality must be watched as allocations rise.

Risks

Key risks include the potential for higher-than-expected disability or mortality claims, slower-than-anticipated normalization of group protection margins, and execution risk around capital deployment and legacy block optimization. Macroeconomic volatility, competitive pricing pressure, and sector-wide credit events could also impact investment returns and spread income, especially as private credit exposure increases.

Forward Outlook

For Q4 2025, Lincoln guided to:

• Seasonal expense increase, primarily from variable compensation and growth investments.
• Group protection margin in the mid to upper 8% range, with continued normalization in disability loss ratios.

For full-year 2025, management maintained guidance:

• Flat expenses year over year, despite higher sales volumes.
• Continued above-target capital position, with deployment plans to be detailed in Q4.

Management highlighted several factors that will influence results:

• Full retention of fixed annuity flows and scaling of institutional funding programs will support spread-based earnings growth.
• Ongoing investments in digital tools and service capabilities are expected to drive operational leverage and persistency improvements.

Takeaways

Lincoln’s Q3 confirms the durability of its transformation, but the next phase will hinge on margin sustainability and effective capital deployment.

• Spread-Based Earnings Base Expands: The company’s product mix shift is now visible in financials, with implications for earnings predictability and risk profile.
• Margin and Expense Management Remain Key: Operational discipline supports current results, but Q4 and 2026 will test the company’s ability to balance growth investments with ongoing efficiency.
• Capital Actions Will Define Next Leg: Investors should watch for specific updates on Bain proceeds deployment and legacy block optimization, as these will shape free cash flow and ROE trajectory.

Conclusion

Lincoln Financial’s Q3 2025 results validate its strategy of product diversification, margin discipline, and capital efficiency, with spread-based annuities now a cornerstone of earnings stability. The company is well-positioned for the next phase of growth, but must execute on capital deployment and manage normalization in group protection margins to sustain momentum into 2026.

Industry Read-Through

Lincoln’s accelerated pivot to spread-based annuities and disciplined expense management reflect broader industry shifts toward capital-efficient, predictable earnings models in life and retirement. The normalization in group protection margins and disability trends signals that sector-wide margin expansion may be peaking, with future growth increasingly dependent on product innovation, digital investments, and persistency gains. Lincoln’s experience with private credit allocation and reinsurance optimization offers a template for peers navigating similar transitions, but also underscores the need for prudent risk management as the industry absorbs macroeconomic and credit cycle volatility.

LNC Financials Insurance Annuities Spread income Capital deployment Group protection Expense management