Lincoln National Corp. (LNC) - 05-May-2022
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05-May-2022
Lincoln National Corp. (LNC)
Q1 2022 Earnings Call
Total Pages: 17
1-877-FACTSET www.callstreet.com Copyright © 2001-2022 FactSet CallStreet, LLCLincoln National Corp. (LNC) Corrected Transcript
Q1 2022 Earnings Call 05-May-2022
CORPORATE PARTICIPANTS
Albert S. Copersino Ellen Gail Cooper
Vice President & Head-Investor Relations, Lincoln National Corp. Chief Executive Officer-Elect & Executive Vice President, Lincoln
National Corp.
Dennis R. Glass
President, Chief Executive Officer & Director, Lincoln National Corp. Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life,
Lincoln National Corp.
.....................................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Nigel P. Dally Alex Scott
Analyst, Morgan Stanley & Co. LLC Analyst, Goldman Sachs
Thomas Gallagher Suneet Kamath
Analyst, Evercore Group LLC Analyst, Jefferies LLC
Ryan Krueger
Analyst, Keefe, Bruyette & Woods, Inc.
.....................................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Operator: Good morning and thank you for joining Lincoln Financial Group's First Quarter 2022 Earnings
Conference Call. At this time, all lines are in a listen-only mode. Later, we will announce the opportunity for
questions and instructions will be given at that time. [Operator Instructions]
Now, I'd like to turn the conference over to Vice President of Investor Relations, Al Copersino. Please go ahead,
sir.
.....................................................................................................................................................................................................................................................................
Albert S. Copersino
Vice President & Head-Investor Relations, Lincoln National Corp.
Thank you. Good morning and welcome to Lincoln Financial's first quarter earnings call. Before we begin, I have
an important reminder. Any comments made during the call regarding future expectations, including those
regarding deposits, expenses, income from operations, share repurchases, and liquidity and capital resources are
forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties that could cause actual results to differ materially from current
expectations.
These risks and uncertainties include those described in the cautionary statement disclosures in our earnings
release issued yesterday, as well as those detailed in our 2021 Annual Report on Form 10-K, most recent
Quarterly Reports on Form 10-Q, and from time-to-time in our other filings with the SEC. These forward-looking
statements are made only as of today, and we undertake no obligation to update or revise any of them to reflect
events or circumstances that occur after this date.
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Q1 2022 Earnings Call 05-May-2022
We appreciate your participation today and invite you to visit Lincoln's website, www.lincolnfinancial.com, where
you can find our press release and statistical supplement, which include full reconciliations of the non-GAAP
measures used on this call, including adjusted return on equity and adjusted income from operations or adjusted
operating income to the most comparable GAAP measures.
Presenting on today's call are Dennis Glass, President and Chief Executive Officer; Ellen Cooper, CEO-elect; and
Randy Freitag, Chief Financial Officer and Head of Individual Life. After their prepared remarks, we will move to
the question-and-answer portion of the call.
I would now like to turn the call over to Dennis.
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Dennis R. Glass
President, Chief Executive Officer & Director, Lincoln National Corp.
Thank you, Al. Good morning, everyone. This quarter's earnings conference call is a special one as we approach
our CEO transition later this month. The transition is going very well, and I am incredibly confident that Lincoln
under Ellen's leadership will continue to build on our strong foundation. This is an exciting time for Lincoln. We are
pleased with our start to 2022 and optimistic as ever about what lies ahead.
Most importantly, we have a highly talented team of more than 11,000 employees who have risen to meet every
challenge that has come their way during the pandemic and before as I have seen them do every day of my 15-
year tenure as CEO. My Lincoln colleagues have shown an inspiring and unwavering commitment to our
customers, partners and communities. And to them, I say thank you for all you do.
I will now turn the call over to Ellen.
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Ellen Gail Cooper
Chief Executive Officer-Elect & Executive Vice President, Lincoln National Corp.
Thank you, Dennis, and good morning, everyone. I am excited about and confident in Lincoln's continued success
as I step into the CEO role effective later this month. Dennis has been a valued mentor and colleague for many
years and I look forward to working with him as he transitions into the role of Chairman of the Board.
I have met many of the investors and analysts joining today's call and look forward to having more opportunities to
discuss Lincoln with all of you. Although, the US continued to experience headwinds related to the pandemic,
Lincoln had a solid start to 2022. We are pleased with our underlying results and optimistic about the outlook for
our business.
Our current strategy has proven to be robust and we have an excellent track record of executing against it. As
demonstrated in part by having compounded underlying EPS at 11% over the past decade. As we have said, we
expect over the next few years to grow underlying EPS at or above the high end of our 8% to 10% target range.
I will now touch on some of the initiatives that are positioning us to meet this objective. First, we continue to
generate organic growth as strong new business returns meaningfully above target across our businesses, driven
by our broad product portfolio and our industry-leading distribution franchise.
Top line growth is enhanced by our reprice, shift and add new product strategy, which is enabling us to meet
evolving consumer needs. We have been able to drive a shift towards products with additional risk sharing
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Q1 2022 Earnings Call 05-May-2022
between Lincoln and customers that appeal to broader demographics and expand shelf space. We introduced 13
new products in 2021 and continue to innovate.
Second, company-wide margin improvement efforts are primarily centered around our Spark Initiative, which we
expect to generate $260 million to $300 million in run rate savings by the end of 2024. Investments we are making
in our business through Spark will enable us to operate more efficiently and effectively and to improve the
customer and employee experience, including the way we work here at Lincoln.
Additionally, we are focused on improving the Group Protection underlying margin through continued pricing
actions, improved claims effectiveness and Spark expense savings.
And last, we continue to focus on effective capital allocation, including returning capital to shareholders and
maintaining a strong balance sheet. Recently, we announced that we are bringing our individual life and annuities
businesses together under a senior leader who would join Lincoln in July and report to me.
Product manufacturing has long been a key driver of the success of these businesses, and we see this continuing
as we also place continued emphasis on in-force management, bringing the life and annuities businesses
together creates more opportunity to leverage our capabilities, share best practices and enable greater
innovation.
This new leader will also oversee Lincoln Financial Network, or LFN, which represents more than 11,000 advisors
and our growing wealth management platform.
Turning now to the business segments. Starting with annuities. Our products are generating strong returns as we
continue to sell on our terms across broadly diversified product segments with disciplined pricing and risk
management built directly into the product design. Critical to our success in meeting the needs of our customers
is offering a broad product portfolio through our industry-leading distribution force. We continue to enhance our
product offerings, including the launch of multiple new investment options and features that differentiate our
products and expand consumer choice.
Sales of $2.7 billion were down 4% and versus the prior year period due to a decline in indexed variable
annuities. However, IVA sales were up sequentially for the second consecutive quarter as we regained sales
momentum through our product innovation and an improved competitive pricing environment.
In fixed indexed annuities sales were up again significantly. Our differentiated investment options and higher rates
have restored momentum to the FIA product line. The breadth of our annuity portfolio is enabling our strategic
sales shift. And variable annuities with guaranteed living benefits remain under 30% of total annuity sales for the
seventh consecutive quarter.
Our ongoing sales shift also is further diversifying the total annuities in-force account value mix as variable
annuities with guaranteed living benefits again represented less than half of total account value.
At our current sales mix, this proportion will continue to decline. To be clear, we have been undertaking this mix
shift for diversification purposes only as we believe in the value proposition of guaranteed living benefits for
customers and are achieving very attractive mid-20% ROE. We expect to see continued momentum as we look to
further grow the annuities business.
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Q1 2022 Earnings Call 05-May-2022
Retirement Plan Services continues to have success and achieved record first quarter net flows of $946 million.
First quarter total deposits of $3.4 billion were up 28%, including an 11% rise in recurring deposits and a 73%
increase in first year sales.
This sales growth, combined with high customer retention led to the quarter's excellent outcome. The retirement
business is benefiting from the strong labor market. US wage growth and increases in employee contribution
rates were the main drivers of this quarter's recurring deposit growth.
We also saw robust first year sales growth across our broad product portfolio. Another external factor, the
constructive legislative environment is also creating longer-term growth opportunities for RPS around in-plan
guarantees and pooled employer plan solutions as well as by creating greater incentives for employers to
establish plans.
Beyond these external tailwinds is the favorable competitive positioning of RPS with its broad innovative product
suite, enhanced digital capabilities and the power of Lincoln's distribution franchise. The retirement business
continues to produce strong returns and to drive positive net flows.
Our Life Insurance business continues to demonstrate broad-based top line momentum as sales of $155 million
were up 36% over the prior year period with growth across all major product lines. Since undertaking our reprice,
shift and add new product strategy, we have returned to a more typical seasonal sales pattern and expect sales to
ramp up through the end of the year.
Our life portfolio is achieving new business targeted returns and we continue to attract new financial professionals
for instance, with our successful rollout last year of the first of its kind variable hybrid life product, MoneyGuard
Market Advantage.
This ongoing product innovation is expanding our access to new customer segments, while advancing our sales
mix shift towards lower guarantees, risk caring solutions, which represent over 70% of total life sales.
We continue to expand upon and to see strong adoption of our digital capability. For example, in underwriting, we
are investing in automation and other technologies that drive internal efficiencies. We are also utilizing digital real-
time medical information. This is helping improve the producer and consumer experience by decreasing the
average issue time from five weeks to two with the capability to issue within the same day.
Lastly, on Group Protection, our results continue to be impacted by the pandemic. However, we are beginning to
see signs of improvement and are confident that underlying margins will build over time toward the upper end of
our target 5% to 7% range. The strong demand for employee benefits helped drive sales of $105 million, up 42%
compared to the prior year period.
We generated growth across all case sizes, primarily driven by increased sales to existing clients as our corporate
customers hire more employees, raise salaries and expand benefits offerings to include new lines of coverage.
Employee-paid sales represented 57% of the total this quarter.
We expect the proportion of employee-paid sales to continue to rise over time on an annualized basis, as we
focus on growing in this market, including supplemental health.
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Q1 2022 Earnings Call 05-May-2022
First quarter premiums of nearly $1.2 billion rose 4% compared to the prior year period, driven by new sales,
improved persistency, rate increases and employment growth. I am pleased with this quarter's underlying results
and confident our strategic actions will drive margin expansion over time to the top of our targeted range.
Moving to investment results. Credit quality remains excellent with 97% of our fixed income assets rated
investment-grade or investment-grade equivalent. Portfolio performance remains strong as we experienced
another quarter of negligible credit losses and positive net ratings migration. New money yields rose to 3.3% in
the first quarter, a nearly 50 basis point sequential increase driven by higher rates.
During the quarter, we invested 60% of new money in assets other than public corporates and expect to continue
to invest at this level, adding high-quality assets with incremental yield. Finally, alternative investment
performance was in line with our long-term expectations of a 2.5% quarterly or 10% annualized return.
In closing, Lincoln's underlying earnings power is intact. We expect to benefit from the recent significant decline in
pandemic hospitalizations and death and the rise in interest rates. Looking across our businesses, we are
progressing on several fronts. Sales momentum continues to build, driven by our broad and innovative product
portfolio and distribution strength. The Spark Initiative is on track and Group Protection margin expansion efforts
take hold. We will continue to allocate capital towards its highest and best use.
In closing, we continue to execute on our near-term strategy with an eye toward long-term profitable growth.
I will now turn the call over to Randy.
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Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp.
Thank you, Ellen. Last night, we reported first quarter adjusted operating income of $294 million or $1.66 per
share. The quarter's results included pandemic-related claims, which reduced earnings by $150 million or $0.85
per share and unusual items of $19 million or $0.11 per share, primarily related to a Group Protection customer
submitting a backlog of prior year claims.
As Ellen mentioned, alternative investment income was in line with long-term expectations. Net income for the
first quarter totaled $104 million or $0.58 per share, with the difference between net income and adjusted
operating income, primarily resulting from a loss related to variable annuity net derivative results.
The hedge program was 96% effective in what was a volatile quarter for the capital market. With the recent
increase in rates this year, I thought I would update you on spread compression at Lincoln. Our current
expectation is that spread compression will impact EPS growth in the near term by 0% to 1%. Improved from the
2% to 3% range I communicated on last quarter's earnings call.
Touching on the performance of key financial metrics compared to the prior year, excluding excess alternative
investment income in the prior year quarter and the impact of the third quarter 2021 block reinsurance transaction
on a consolidated basis.
Operating revenues were up 4%. Our expense ratio improved 20 basis points. Shares outstanding declined 10%
and book value per share, excluding AOCI, stands at $78.32, up 8% and an all-time high.
Now turning to segment results, starting with annuities, operating income for the quarter was $302 million
compared to $290 million in the prior year quarter. The increase was primarily due to higher account values driven
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Q1 2022 Earnings Call 05-May-2022
by year-over-year growth in the equity markets and expense efficiency. Average account values of $164 billion
increased 2% year-over-year.
Of note, and as Ellen pointed out, variable annuities with guaranteed living benefits now represent less than 50%
of our annuity account values. The variable annuities with guaranteed benefits, the net amount at risk is at 134
basis points for living benefits, and 107 basis points for death benefits. We expect these percentages to remain at
the very low end of peers, highlighting the lower risk nature of our in-force business. G&A expenses net of
amounts capitalized declined 3% from the prior year quarter, leading to a 50 basis point improvement in the
expense ratio.
Return metrics remained solid with a return on assets of 74 basis points, up 2 basis points year-over-year and a
return on equity of 23%. As a reminder, sequentially, there were two fewer fee days in the quarter, which reduced
earnings by roughly $8 million. Overall, a good result for the annuity business, highlighted by strong returns and
effective expense discipline.
Retirement Plan Services reported operating income of $55 million compared to $57 million in the prior year
quarter, as strong net flows and a year-over-year increase in the equity markets were more than offset by less
favorable variable investment income. Continued sales success has produced $1.1 billion in net flows over the
trailing 12 months, contributing to a 7% increase in average account values to $96 billion.
G&A expenses net of amounts capitalized were in line with prior year quarter. Base spreads, excluding variable
investment income, compressed to 6 basis points versus the prior year quarter, in line with our stated 5 to 10
basis point range as crediting rate actions take hold.
Benefiting from the increase in rates, we expect spread compression in the retirement business going forward to
be de minimis. This was another great quarter for the retirement business with strong net flows, and expense
management and an expectation as we exit the quarter that spread compression has become a non-event for the
business.
Turning to Life Insurance, we reported operating income of $58 million compared to $107 million in the prior year
quarter. The decline is due to less favorable alternative investment income, a more normal level of underlying
mortality and the impact of the Resolution deal, which combined more than offset improved pandemic claims.
This quarter's earnings were impacted by $69 million of pandemic-related mortality. Average account values,
excluding the impact of last year's block reinsurance deals rose 4%. G&A expenses net of amounts capitalized
decreased 1% from the prior year quarter.
Base spreads declined 12 basis points compared to the prior year quarter. We expect spread compression to
return to a 5 to 10 basis point stated range. Outside of continued pandemic headwinds, Life results were solid
with underlying mortality in line with our first quarter expectations, good expense management and growing sales.
Group Protection reported a loss from operations of $41 million compared to a loss of $26 million in the prior year
quarter. This quarter's loss is a significant improvement over a loss of $115 million in the fourth quarter as the
impact of the pandemic began to ease, and we saw improvement in underlying disability results.
As noted in my opening comments, this quarter's results were negatively impacted by $19 million of unusual
items. The pandemic impacted our group life results by $53 million and our disability results by $18 million. Group
Protection pandemic claims relative to US COVID deaths improved significantly from recent quarters due to death
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Q1 2022 Earnings Call 05-May-2022
transitioning back towards the non-working age population. Excluding pandemic claims and unusual items, the
group margin was 5.1%, at the low end of our targeted range of 5% to 7%.
On the life side, our underlying loss ratio of 72.9% improved 240 basis points year-over-year, to 60 basis points
sequentially, as results benefited from pricing actions and good underlying experience. Our underlying disability
loss ratio of 80.4% improved 680 basis points sequentially, as the seasonally higher claims that we saw in the
fourth quarter returned to more normal levels.
Compared to the first quarter of 2021, our disability underlying loss ratio is up 290 basis points and remains
elevated compared to long-term expectations, as both incidents and severity are above historic levels. I'd estimate
that this hurts group's first quarter results by $10 million to $15 million.
We believe our underlying disability results are indirectly influenced by the pandemic, as delayed treatments and
lack of routine care during peak pandemic waves appears to be impacting the overall health of our claimants.
Our claims management efforts are focused on helping our customers recover and get back to work as quickly as
possible and should lead to improving underlying disability results over time.
Expense ratio was 12.7%, up 20 basis points, primarily due to elevated staffing levels, given the volume of
pandemic-related claims. We remain confident that the combined impacts of repricing, improved claims
management and Spark expenses will move us to the top of our 5% to 7% target range.
Turning to capital and capital management. We ended the quarter with $10.2 billion of statutory surplus and
estimate our RBC ratio at approximately 415%, while cash at the holding company stands at $755 million.
During the quarter, we paid off our $300 million 2022 debt maturity, and issued $300 million of new debt as a
partial pre-funding of our 2023 maturity. We executed a $400 million accelerated share repurchase program in the
quarter, retiring over 3% of shares outstanding.
As I mentioned, it was possible on last quarter's earnings conference call, with that level of repurchases, we
chose not to pursue any open market buybacks, but we expect these to resume in the second quarter.
In conclusion, while still affected by the financial impacts of the pandemic, our underlying results remain strong
and leading indicators are positive, such as spread compression, which has been with us for many years, has
come down dramatically. And as I noted earlier, now represents a very modest headwind to EPS growth of 0% to
1%.
Our Group Protection margin enhancement efforts are gaining traction, with underlying results returning to the
bottom of our targeted margin range. Investments that we are making in the Spark Initiative will drive significant
expense savings over the next three years.
While the pandemic is still with us, the combined impact of vaccinations and natural immunity can continue to
reduce the potential negative financial impact on Lincoln. And while investing significant capital at strong returns
to support new business that will drive our earnings of tomorrow, we are continuing to return capital to
shareholders through buybacks and dividends.
With that, let me turn the call back over to Al
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Q1 2022 Earnings Call 05-May-2022
Albert S. Copersino
Vice President & Head-Investor Relations, Lincoln National Corp.
Thank you, Dennis, Ellen and Randy. We will now begin the question-and-answer portion of the call. As a
reminder, we ask that you please limit yourself to one question and one follow-up, and then re-queue if you have
additional questions.
With that, let me turn the call over to the operator to begin Q&A.
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QUESTION AND ANSWER SECTION
Operator: Thank you. [Operator Instructions] We'll take our first question from Nigel Dally with Morgan Stanley.
Your line is open.
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Nigel P. Dally
Analyst, Morgan Stanley & Co. LLC Q
Great. Thanks. Good morning. So I had a question on capital. While you completed the ASR, you didn't buy back
stock above that. One that was potentially not possible, so I guess not overly surprising. But should we expect
some sort of catch-up in buybacks in the second quarter to reflect regular buybacks that you weren't able to
complete this quarter? Any color there would be helpful. Thanks.
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Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
Nigel, thank you for the question. I think when you think about buybacks in the second quarter, I'd go back to our
sort of overarching philosophy when it comes to ongoing share buyback programs, all the market programs.
Typically, we have used a more levelized approach. We think that makes most sense avoids the ups and downs
of the share price. So I'd expect us in terms of the buybacks, we're going to do over the remainder of the year to
spread them more evenly.
The other thing I'd point out, there's a fair amount of uncertainty in the environment as we see it today. There's a
war going, we've got inflation. There's a question on what the economy is going to do. So I think it's one of those
years where you lean towards prudence when it comes to that. More broadly speaking, Nigel, when it comes to
capital allocation in general, just as a reminder, right? We have -- we generate a lot of capital.
We've generated a lot of capital over the years. We have two big places we put that capital. There's new
business, new business, which has historically been above 60% to 65% of our overall capital allocation. You've
seen us though at times, flex up or down, right? We flex down when the opportunity is not there. You saw that a
couple of years ago when we took sales down, then we flex up when the opportunity is there, both from a return
on a sales standpoint. And you really saw that in Ellen's comments. She talked about every business is getting
returns meaningfully above their target. There really has not been better time to be issuing new business in our
space in some time. So maybe one of those years when we flex up a little bit from a new business standpoint, but
we'll see if the sales opportunities [ph] are over the remainder the year (00:31:41).
Then obviously, the other big bucket is return to shareholders. We've done a lot, right? We -- if you look over the
last four quarters, we've done $1.7 billion, $1.4 billion of buybacks, $300 million of dividends. If you look over a
longer period of time, that was actually -- it was interesting. I was looking at our long history of returning capital to
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shareholders. If you go back over the last decade or so, we've actually returned $10.3 billion of capital to
shareholders, $7.9 billion of that through buybacks. That's I think it represents 46% reduction in our outstanding
shares. So yeah, we believe in returning capital to shareholders. We're going to get back to buying back our stock
in the second quarter, but I'd expect us to be more levelized over the remainder of the year, and I'd expect us to
lean a little on the conservative side.
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Nigel P. Dally
Analyst, Morgan Stanley & Co. LLC Q
Okay. That's helpful. Thanks, Randy. Follow-up is on group. If we back out COVID and other abnormal items, you
hit the lower end of your 5% to 7% range, which I think is a bit stronger than its expected. Is that a reasonable
base on which to build or are there other factors that we should be considering as we look at the four prospects.
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Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
Yeah. I think it is a very good spot to build from. Of course, there's always volatility in these businesses but if you
think what we've talked about, really, three big levers to growing group margins, pricing, and we did see nice price
increases in our renewal program in the first quarter. So there's price increases, there's claims effectiveness,
which we need to continue to work on. And then there's a Spark program, which is really just getting going from
an investment standpoint, you really should start to see the benefits of -- so yeah, I think 5.1% is where you end
up. I think it's a good place to start, and we're very confident, as both Ellen and I said, in moving towards the
upper end of that range over time.
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Nigel P. Dally
Analyst, Morgan Stanley & Co. LLC Q
Excellent. Thanks a lot.
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Operator: Next, we'll go to Tom Gallagher with Evercore. Your line is open.
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Thomas Gallagher
Analyst, Evercore Group LLC Q
Good morning. Just, Randy, a follow-up just to make sure I'm clear on the cadence of buybacks. So -- everything
you said, I think, makes sense the -- in terms of the environment and your new business was strong. So that's
probably going to be consuming some more capital. Should we expect something below the normal $150 million
of quarterly buybacks over the next couple of quarters here? And then also, I think from the capital that was freed
up from the life reinsurance transaction that was still an extra $150 million or so of buybacks that you had planned
to do. Should we assume those are unlikely to happen this year? Just anything you can give us on that sort of
cadence on near-term buybacks would be helpful. Thanks.
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Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
Well, let's -- first, let's go back to the Resolution deal. We generated about $1.150 billion of capital. And we said at
the time, we would put $900 million of that into buybacks and the remainder will go into debt reduction. And so
we've completed the $900 million of buybacks. So there's that.
In terms of -- I agree with you that historically, we've averaged $150 million, and that's, I think, over time, still a
long-term expectation. Just as a reminder, with the Resolution deal, that $900 million of incremental buybacks we
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Q1 2022 Earnings Call 05-May-2022
did. That represents about 15 years' worth of distributable earnings, we were going to get off that block of
business. But we did give up about $75 million or so of distributable earnings. So in the near term, we've given up
that $75 million.
Now, we'd -- obviously we'd expect our capital generation to grow over time. But the normal growth we're going to
get from our growing business is going to get a little [ph] math, at least, I think, (00:35:54) for this year. Equity
markets are down, those sorts of things. So I think you're not seeing that normal growth in capital generation that
we'd see in a typical year. So that would lead us to a starting point, a little below the normal $150 million a quarter
that you would typically see.
And then, as I pointed out and you pointed out in your question, I think the capital opportunity in new business,
well, probably if -- it's early in the year. So it's tough to project. But when you look at first quarter and what we
expect for the remainder of the year, I think about $100 million to $150 million of incremental capital in the new
business this year relative to a normal year.
So that would put you down, Tom, more into the $100 million a quarter range, as a normal expectation. So I put it
at $100 million to $150 million. Just one other point, if you had asked me the same question in the first quarter of
last year, I would have said, the exact same thing probably.
I think we ended up doing $105 million in the first quarter of last year, and then we ended up doing $600 million
for the full year. So it's somewhat influenced, how the environment rolls out over the remainder of the year, Tom.
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Thomas Gallagher
Analyst, Evercore Group LLC Q
Got it. That's really helpful. Thanks, Randy. And Ellen, my follow-up is for you, a little more strategic as you're
taking over the new leadership role as CEO, any preliminary thoughts on strategic priorities where recognizing
you've been there for a significant amount of time in a senior leadership role already.
So you're part of what's happened. But is there anything at the edges maybe that you're looking to potentially
change or pivot, whether that's capital efficiency, cash flow distribution? Anything you could share on preliminary
thoughts would be helpful.
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Ellen Gail Cooper
Chief Executive Officer-Elect & Executive Vice President, Lincoln National Corp. A
So Tom, thank you for the question. And exactly, you said it very well. So you know, that I've been with Lincoln
now for 10 years, and very much and part of really architecting the existing strategy. And everything that we have
talked to you about, we are going to continue to execute on.
So all things as it relates to our reprice, shift and add new product strategy, and really focusing there on our
organic growth and you can see real evidence of that in this particular quarter as we are continuing to build
momentum there.
The second area is really around expense initiatives and all of the execution that we're doing and very much on
track, as it relates to the overall Spark Initiative. And we've also talked to you about the fact that, in addition to that
being a cost save program, that it very much is focused on improving overall efficiency as it relates to our
customers and how we face off with them. And also a real focus on the employee experience. So that's very
important.
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Q1 2022 Earnings Call 05-May-2022
And then the third area, which we've also touched on, is around restoring our group margin to the higher end. And
there, as Randy just talked about, and as we both highlighted in our script, we've got all of the pricing actions that
we're focused on there, of course, the expense efficiencies through Spark and then the claims effectiveness. So
all of that, we're going to continue to execute on.
As we think about longer-term and we have talked to all of you about the fact that as I'm stepping into the CEO
role, we are also thinking about longer-term strategy and overall longer-term direction.
And so, I'm way too early to communicate anything at this time, but what I will share with you is, one of the first
things that we have done as part of the transition, is we've looked at our overall organizational structure and how
that will align with us, thinking about executing on the near-term strategy, while we are also focused on building
out what that longer-term strategy looks like. And so we've appointed a Chief Strategy Officer that is focused on
that now 24/7 and really taking a look at that. And then also our focus on combining the individual life and annuity
businesses together, along with LFN and bringing that together is also very much strategic as we think about that.
And so if I just step back for a second on that, we very much – as we think about, for example, our product
strategy and how we have focused on product manufacturing over the years, we're starting to see more
opportunity for synergy and innovation across the two individual businesses. And so examples of that are
products that have shifting investment engines, shifting value propositions, where both are thinking about risk,
sharing is another example there. We see opportunity as it relates to the overall the customer experience and
operations.
And then this other part that I highlighted, which is a continued emphasis as it relates to overall in-force
management and some opportunity there. So more to come. Yes, we'll also take a look at capital management as
part of everything that we're going to be doing longer term. I mean, as soon as we have something more definitive
to be able to talk to you about, we'll, in fact, do that.
.....................................................................................................................................................................................................................................................................
Thomas Gallagher
Analyst, Evercore Group LLC Q
Okay. Thanks Ellen. Good luck.
.....................................................................................................................................................................................................................................................................
Operator: Next we'll go to Ryan Krueger with KBW. Your line is open.
.....................................................................................................................................................................................................................................................................
Ryan Krueger
Analyst, Keefe, Bruyette & Woods, Inc. Q
Hi, thanks. Good morning. I was hoping you could expand a little bit on the comments about this being a very
favorable environment for new business. And just curious what you think are some of the key reasons, certainly, I
mean, I guess, higher interest rates is probably one of them. But if you've seen any change in the competitive
environment or other factors that's leading to this?
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Ellen Gail Cooper
Chief Executive Officer-Elect & Executive Vice President, Lincoln National Corp. A
Sure. So Ryan, thank you for the questions. So as it relates to a favorable environment, I think we see a couple of
things there. The first is, clearly, from a capital markets perspective, we have higher rates. And in general, when
we think about higher rates and we have the 10-year now at 3%, this is an opportunity now to be able to invest
new money higher, and that translates into offering customers higher value propositions. And so across the
board, we think that that will benefit the overall industry, and it will benefit Lincoln as well. So that's one piece.
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Q1 2022 Earnings Call 05-May-2022
The second thing that is very much important is that as we continue to manage through this pandemic, and we're
now more than 24 months in, we're seeing that it has definitely increased awareness and, therefore, demand for
financial protection and security. And so we're seeing real evidence of that, for example, in our Group Protection
business, where we saw that sales were up pretty significantly year-over-year. The primary driver of that was
inside of the existing clients and seeing increased demand there.
The other thing that's happening from a macro environment is that we all know that we're seeing evidence of
wage inflation, and we're seeing a direct relationship in terms of increased compensation that is leading to
increased for example, deposits in the retirement business. So across the board and also because there's such a
significant focus right now on the overall employment environment and needing to attract talent, we're seeing
expansion of benefits as well. And so that's another opportunity there. So I think across the board, there are a
number of areas that are providing overall opportunity from a macro and external perspective.
The other thing that I'll add is that, we have done so much in terms of product innovation over the last couple of
years that we are seeing that we have more and more attractive financial product. I mentioned in my script that
we introduced 13 new products last year in 2021. And so we're seeing that the expansion of product it's appealing
to expanded demographics and very much so is part of why we also view that this is a favorable environment.
.....................................................................................................................................................................................................................................................................
Ryan Krueger
Analyst, Keefe, Bruyette & Woods, Inc. Q
Thank you. And then on group and the pricing actions you're taking. Can you give any more detail on how much
rate you've been looking to get and if you've seen any impact on persistency?
.....................................................................................................................................................................................................................................................................
Ellen Gail Cooper
Chief Executive Officer-Elect & Executive Vice President, Lincoln National Corp. A
So we have mentioned previously that we've seen year-over-year overall pricing increases in about the mid-single
digits. And that really has been a combination of pricing as it relates to new business as well as overall
persistency and then also organic growth. And Randy, I don't know if there's anything you want to add?
.....................................................................................................................................................................................................................................................................
Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
Yes, Ryan, I think you really see that in the results also. So just as a reminder, mid-single digits, about a third of
our book reprices. You do the math. The upside of that is you probably see about -- somewhere between $10
million and $15 million of benefit in our financial statements. And it's part of that margin improvement story, and I'd
expect you'd see that over the next couple of years also.
.....................................................................................................................................................................................................................................................................
Ryan Krueger
Analyst, Keefe, Bruyette & Woods, Inc. Q
Great. Thank you.
.....................................................................................................................................................................................................................................................................
Operator: Thank you. Next, we'll go to Alex Scott with Goldman Sachs. Your line is open.
.....................................................................................................................................................................................................................................................................
Alex Scott
Analyst, Goldman Sachs Q
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Q1 2022 Earnings Call 05-May-2022
Hi. First one I have is on annuities. The ROA this quarter came in a little bit lower than sort of the 75 to 80 basis
points. I think you guys have talked about over time and I was just interested in if the market declined, probably
playing some role in that. And just if you still have confidence even in a more volatile market, you can kind of get
back up into that range and how interest rates affect that over time?
.....................................................................................................................................................................................................................................................................
Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
Alex, first thing on the 74, and I tried to point it out in my -- I did point it out in my script, it's actually up over the
first quarter of last year, right? So it was 72 basis points last year, 74 basis points this year. So there is
seasonality inside of the ROA mentioned, it's about $8 million, if you look at the first quarter compared to
sequentially the fourth quarter. So that is an impact. But to be fair, when the markets go down, you get less fee
income. And that influences ROA. So I think whether we're at that high 70s or 80 range, well, somewhat depend if
the markets stabilize and start to move back up, right? It isn't so much volatility in the markets that drive ROA. It's
whether they go down and stay down. You get less fee income that influences the top line, and that'll give you a
modest and lower ROA. I think when you look over the -- look to the broad sweep of time, markets will stabilize,
we believe markets will start to move back up. And in that environment, we fully expect to move into that 75 to 80
basis point range again.
.....................................................................................................................................................................................................................................................................
Alex Scott
Analyst, Goldman Sachs Q
Thanks for that. And to the second question, just given rates are moving up and equities going down to sort of the
macro inputs moving in different directions for annuities, I was interested if you could just provide an update on
the LNBAR entity? How is the hedge program? And just any update on the hedge performance? And if you could
provide an update on the capital position there and how that changed?
.....................................................................................................................................................................................................................................................................
Randal J. Freitag
Executive Vice President, Chief Financial Officer & Head-Individual Life, Lincoln National Corp. A
The capital position is still very strong. We actually get dividends from LNBAR in the first quarter. I believe it was
$85 million. We've averaged taking an annual dividend out of LNBAR of roughly $125 million over the last five
years. So we took $85 million in the first quarter. We did have breakage in the first quarter that followed a few
quarters of really good results. Last year, I would say that the program didn't have, I think, over the whole year, I
think it was about $120 million of breakage, which is a good year.
So it was elevated in the first quarter, I think that was really driven by two things. If you break up breakage into the
two big buckets, one fund basis went against us in the quarter. So, that was about a third, I would say of the
excess breakage. As a reminder, fund basis is one of those things where we can go back over any extended
period of time. It adds up to zero, but it can move up and down. So that hurt us this time.
I think the other two-thirds was really all about the volatility in the markets that we saw in the first quarter. The
total amount, the hedge target traveled over the quarter was about twice what we saw on average last year. And
when you see that sort of volatility, two things happen. We have to trade more and you get some second order
breakage. So and I think it was one of those quarters where we'll have a little elevated breakage. I think when you
look -- when we go out a couple of years and look back, what you see is that it'll be averaged out with some good
quarters and we'll get back to that long term expectation.
.....................................................................................................................................................................................................................................................................
Operator: Next, we'll go to Suneet Kamath with Jefferies. Your line is open.
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Q1 2022 Earnings Call 05-May-2022
Suneet Kamath
Analyst, Jefferies LLC Q
Thanks. Just wanted to start. I'm assuming this is Dennis's last call, so just wanted to wish him well, as he
transitions. My question was on indexed VA down, I think almost 30% year-over-year. I think in the script you'd
mention some maybe product changes that you made. So I was just curious, if you could talk about that, but also
the competitive environment just given we've seen so many annuity players enter that particular product.
.....................................................................................................................................................................................................................................................................
Ellen Gail Cooper
Chief Executive Officer-Elect & Executive Vice President, Lincoln National Corp. A
Absolutely, Suneet, so thank you for the question. So yes, as it relates to indexed VA, it is an important tale. And
so the first thing is that while you are correct that IVA sales year-over-year were down 30%, what we saw is that
in the first half of 2021, you may remember that we saw rates come down pretty significantly and market volatility
also come down. And so it required us to really do a pretty significant repricing at that particular time to be able to
meet our overall target returns.
And so, we did that and we actually led the rest of the industry down. And so, we knew at the time that we did that
because we will not offer product out on the shelf that is not meeting or exceeding our target returns. We knew
when we did that that we were going to see a pullback in sales and that's exactly what happened. And so the third
quarter really bottomed out in terms of our overall IVA sales and then we started to see sequential rebound.
And so you saw -- if you look at the trends you can see fourth quarter was a bit better and then when you look at
first quarter, it's up sequentially from where we were in the fourth quarter and actually even inside of there, what
we saw was momentum building so January was a little lower, February was a little bit higher from that and March
was even higher. So, we feel good in terms of where we are.
In terms of the overall competitive environment, yes, there are quite a few entrants now in the space and we know
that there are a number that are coming in as well in 2022. We feel really good about our broad product offerings.
In addition to being competitive with the rest of the market, we have a couple of new and really proprietary index
options that we've offered as well as new product features that are unique to our particular product.
So, between that and the power of our distribution, we feel very good in terms of our overall share of IVA and
continuing to sell and really sustain that momentum that we're seeing.
.....................................................................................................................................................................................................................................................................
Suneet Kamath
Analyst, Jefferies LLC Q
Got it. And then -- Yes, go ahead, Dennis, sorry.
.....................................................................................................................................................................................................................................................................
Dennis R. Glass
President, Chief Executive Officer & Director, Lincoln National Corp. A
Well, first of all, thank you for that nice comment. I appreciate very much. And I'd just like to thank everybody on
the phone for their interest in Lincoln over the last 15 years that I've been CEO and call out to yourself and the
other sell-side analysts who do such good work for the industry and asking the right questions, doing the right
work. We don't always agree with every opinion, but you guys all add valuable input and perspective on the
industry. So thank you all for that. And then I'll turn it back to you, Suneet.
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