Lincoln National Corporation

Good morning, and thank you for joining Lincoln Financial Group's first quarter 2020 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. If you need assistance at any time during the call, please press the star key followed by zero, and someone will assist you. Now, I'd like to turn the conference over to the Corporate Treasurer, Chris Giovanni. Please go ahead, sir.

Thank you, operator. 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, trends in market conditions, including comments about sales, deposits, expenses, income from operations, share purchases, 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 are described in the cautionary statement disclosures in our earnings release issued yesterday and our reports on Forms 8K and 10Q filed with the SEC. These forward-looking statements are only made 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. 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 a full reconciliation to the non-GAAP measures used in the call, including adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable GAAP measures. A slide presentation, which provides additional information on our investment portfolio, is also included on our website. Presenting on today's call are Dennis Glass, President and Chief Executive Officer, and Randy Freetag, 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.

Thank you, Chris. Good morning. Good morning. The health crisis has been difficult on everyone. We hope you are staying safe and our thoughts are with you. I also want to recognize our Lincoln employees for their extraordinary efforts and unwavering commitment over the past few months. Lincoln has been navigating the current crisis by focusing on three priorities. First and foremost, doing what we can to help protect the health and safety of our employees. Second is operating the business in the best interest of our customers, partners, policyholders, and shareholders. And third is doing our part to help America overcome the challenges of COVID-19. Early on, Lincoln began monitoring the emerging pandemic and started taking actions to reduce this health threat, including restricting travel, eliminating non-critical face-to-face meetings, and setting social distancing guidelines. In March, we moved to a work from home model for 99% of our employees to help limit the spread of the virus within the Lincoln family and our communities. Because of our business continuity planning and significant digital investments, which we have discussed with you, the connectivity and productivity of our employees working from home has been excellent. We have maintained our commitments to our customers and partners during this difficult time with service at the same high standards we have always delivered. Finally, we remain committed to honoring our namesake through our actions as a responsible company. Our foundation has made significant financial commitments to help distribute food throughout the communities where we operate. And as a founding sponsor of People Plus Work Connect, we are bringing companies together to help get people back to work faster. This morning, we are going to handle our prepared remarks a little differently. I will briefly touch on the first quarter results before detailing the current environment and the potential impacts to Lincoln. Along with the strategies and actions we have in place to successfully manage through this period of uncertainty. Randy will then cover results in greater detail and speak to our strong financial position. So, our first quarter results were solid and largely unaffected by the virus. While we are now in a different environment, it is important to highlight that we continue to execute on our long-term strategic plan and this quarter's results. once again demonstrate that. Adjusted operating earnings per share were up 5 percent compared to the prior year quarter. Adjusted operating revenues increased 3 percent. Net flows nearly doubled, and we generated a return on equity, excluding AOCI, of over 13 percent. The annuity business, had a strong quarter as both the top and bottom line grew in the mid-single digits over the prior year quarter, and we produced positive net flows in both variable and fixed annuities. Notably, sales of VAs without guarantees exceeded VAs with guarantees for the first time in recent history, as sales of our indexed variable annuity which is much less sensitive to interest rates, gained further momentum. We expect this shift to continue as we expand shell space and add new producers. In retirement plan services, we also grew both the top and bottom line versus the prior year period. Net flows were once again positive in the quarter, with strong growth in recurring deposits and low withdrawal rates being the biggest drivers. Our high-touch, high-tech focused service model distinguishes us from the competitors and is a differentiator in our target markets. We are leveraging these capabilities, which are more important now in these uncertain times, to drive positive outcomes for plan sponsors and participants. Turning to life insurance. Operating revenues and operating income each grew in the high single digits compared to the first quarter of 2019. As expected, sales decreased compared to the prior year as increases in IUL and term, which are strategic focuses and less sensitive to interest rates, were offset by declines in other products, in part driven by pricing actions. We remain focused on leveraging our broad product portfolio to maintain product diversification. Lastly, on group protection, operating income decreased year over year, driven primarily by higher than expected mortality. This offset strong premium growth and expense deficiencies. Premiums are benefiting from improvement and persistency combined with renewal rate increases over the prior year. Our expense ratio improved 120 basis points as we continue to achieve synergies from the Liberty acquisition. In short, the positive results we saw in the first quarter again demonstrated the strength of our long-term strategic initiatives, which will be critical to our success when the health crisis subsides. Now shifting to the current environment, it is important to recognize that we came into this crisis in a position of strength in our businesses and balance sheet and is a markedly more favorable situation than we had heading into the global financial crisis. First on the businesses, we have a diverse mix of businesses that are all at scale. Our predictable enforced blocks combined with the long-term nature of liabilities results in an attractive and highly recurring revenue stream with over 90 percent of revenues persisting each year. We have also benefited from strategic actions taken over the past several years to reduce our sensitivity to the capital markets, and diversify our sales mix. This includes shifting to non-guaranteed products, which now represent over 80% of total sales, no single product being more than 16% of total sales, and achieving our target for 30% of earnings coming from mortality and morbidity sources. On balance sheet strength, let me address four topics. Liquidity in our life insurance subsidiaries is very strong with the vast majority of our investment portfolio in publicly traded investment grade securities. And we have strict asset liability management requirements. We also have additional flexibility with $7 billion of committed borrowing facilities which can be used to manage any cash flow stress that might develop. At the holding company, we have $760 million of cash and have pre-funded our 2021 debt maturity, which makes our next maturity not due for almost two years. Dividends from the life subsidiaries are more than sufficient to meet our current corporate interest expense and maintain the level of our shareholder dividend. In addition to the $7 billion of committed borrowing facilities I just noted, we also have a $2.25 billion line of credit which is undrawn that can be used for general corporate purposes. Our investment portfolio has been materially de-risked over the past five years as we have been selling securities that have greater risk of credit deterioration under stress scenarios. This has reduced the potential impacts from both credit losses and rating downgrades. The actions have improved results of our rigorous stress testing, which factor in low interest rates and equity market shocks. Our stress planning focuses on maintaining our financial strength ratings and business franchise, preserving our shareholder dividends, and not having to issue equity. Based on our most current stress tests, we are confident we can meet these goals. Despite our comfort and given the wide array of potential outcomes from the virus and its economic consequences, we are taking additional steps to protect and further improve our capital position, including slowing sales, to reduce capital consumption, suspending share buybacks for the second quarter and possibly longer, and selectively trimming more positions in the investment portfolio. There are other areas where we are seeing or expect to see direct impacts from COVID-19. First, claims experienced from the virus, including mortality and morbidity impacts, We expect our virus-related claims experience to be an earnings impact for Lincoln and not a balance sheet event. We did not see many COVID-19 mortality claims in the first quarter, but we expect an increase beginning in the second quarter. In terms of morbidity impacts, we are seeing an increase in short-term disability claims and long-term disability claim recoveries have slowed. As a result, we believe morbidity trends and experience from COVID-19 and the economic fallout will have a larger impact than life mortality claims within our group business. The second area is consumer changes due to financial stress, such as missed premium payments or 401K hardship withdrawals. We are extending premium payment grace periods on a case-by-case basis for those with COVID-19-related hardships and following state-issued mandates as appropriate. As part of the CARES Act, we are waiving eligible withdrawal and loan initiation fees for retirement savers. We believe these are the right things to do, and while early, we have not seen meaningful activity in these programs, and do not expect them to have a large impact on earnings. The third area is distribution disruption. We entered this crisis with industry-leading distribution and customer solutions. Our shelf space and distribution breadth led to over 100,000 individual producers selling a Lincoln product over the past 24 months. We have efficiently moved to a virtual sales environment across all our distribution channels. We have launched training and armed our 1,500 customer-facing sales professionals with digital tools and appropriate insightful marketing materials. Interaction with our customers remains at a very high level, all virtually. The digital investments we have made are enabling us to conduct business effectively as our ability to receive applications and issue policies digitally is very good. Also, customers are adopting these tools, with take-up rates increasing by 50% or more in most cases. And fourth, resulting downdraft in the economy will result in some incremental credit downgrades and asset impairments, which I have said is anticipated in our stress testing. Let me turn to sales. As you have seen, our first quarter sales, which reflect our solid product and distribution positions, were good and highlight our potential for long-term sales growth. However, sales in subsequent quarters will likely be at lower levels than what we saw in the first quarter for several reasons. We are seeing consumers and companies being more cautious as they try to better understand their own situations and not make immediate purchase decisions. Also, at Lincoln, we have raised prices on several products and, in a few cases, suspended products where the return on capital or customer value proposition could not be supported in this low interest rate environment. These factors will decrease the amount of capital we invest in growth, but meaningfully increase our free cash flow, a prudent shift in the current economic environment. Let me expand on this by touching on our strategic approach to proactively respond to lower interest rates and increased economic uncertainty. Since the beginning of last year, we have been actively repricing products where returns are more affected by interest rates. This has been primarily concentrated in our life and annuity businesses, as new business returns in RPS and group are less affected by low rates. Products that have been particularly affected include fixed annuities, variable annuities with guarantees, universal life, and money guards. We're also shifting to emphasize existing products that meet or exceed return requirements. As I noted earlier, our index variable annuity continues to gain momentum, enabling sales of VAs without guarantees to overtake sales of VAs with guarantees, which is a great risk, capital, and return tradeoff. Bottom line, we're going to continue to sell products that solve consumer needs and while maintaining our focus on achieving appropriate returns on capital. We are in a fortunate position of having the broadest product portfolio in the industry, a proven ability to shift sales, and a demonstrated capability to add new, well-priced products, all of which should support long-term growth initiatives as the economy stabilizes. Lastly, on the investment portfolio, I noted earlier we have been managing credit risk more defensively by adjusting our new money allocation to higher-rated investments as well as proactively de-risking in preparation for a potential credit cycle. For example, within our commercial mortgage loan portfolio, more than 99% are rated the equivalent of investment-grade with an average loan-to-value of 48% and debt service coverage ratio of 2.4 times. Within the structured portfolio, 97% of CLOs are rated AA and above. We have also shifted our investment portfolio through de-risking actions, selling more than $5 billion since 2015, with 70% in securities rated BBB minus or below. These measures have contributed to below investment grade assets representing just 4% of rated assets and our energy allocation declining approximately 50%. And importantly, shifting the mix to subsectors generally less impacted by the price of oil. As I mentioned up front, Our rigorous stress testing of the investment portfolio involves a wide array of scenarios to assess significant credit deterioration, and this has informed many of the actions I just discussed. The power of our multi-manager investment model also becomes more evident in the current environment. We have leveraged our entire suite of managers since the onset of COVID-19 to analyze and a variety of extremely adverse scenarios on a name-by-name basis across all asset classes in the portfolio. While we do expect to see an increase in ratings migration and credit losses, we currently believe the impact will be significantly below our financial plan stress test results and be manageable. So, in closing, the impact from COVID-19 and the economic fallout remains unknown. However, throughout Lincoln's 150-year existence, we have overcome similar economic challenges, and our management team has a history of leading through difficult environments, including the financial crisis. Importantly, we learned valuable lessons and, as I have noted, taken several actions since 2008 prepare us well for this crisis. While we expect sales and earnings to decline, our liquidity and capital positions are strong, our financial planning and stress testing are robust, and I am confident that strategies we have in place, combined with actions we are taking, will drive long-term shareholder value. I will now turn the call over to Randy.