Lincoln National Corporation

Good morning, and thank you for joining Lincoln Financial Group's second 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 star 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 second 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 and deposits, expenses, income from operations, share repurchases, and liquidity and capital resources are forward-looking statements under the Private Securities Litigation and 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 2019 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 the state. 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 the call, included adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable gap measures. A slide presentation containing supplemental second quarter 2020 earnings and investment portfolio information is also posted on our website in the investor relations section. 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, everyone. As we all know, the pandemic's course and economic consequences, including lower interest rates, are both challenging and difficult to predict. However, Lincoln is very effectively dealing with the immediate COVID-19 operating issues, such as working from home, and virtual selling. We're also aggressively responding to the overall health, economic, and capital market environment. Our near-term focus continues to be on maintaining our already strong balance sheet, actively repricing products to achieve appropriate returns, and delivering on expense savings targets. Additionally, over the medium to long term, our emphasis is on improving the way we operate by capitalizing on the benefits of the accelerated shift in digital and virtual selling to increase wholesaler and employee productivity, adding new well-priced products to complement our refreshed product portfolio and drive growth, and targeting additional expense-saving programs. We expect all these actions will create long-term competitive advantages. I will cover each of these items later. but first I will touch on second quarter results. Second quarter adjusted operating income was affected by elevated claims experience from COVID-19 and negative returns within our alternative investment portfolio, both consistent with our expectations. Excluding these items, adjusted operating per share would have been more consistent with the very strong prior year quarter. Based on the current level of equity markets, we see a lift in third quarter earnings related to higher fees on assets under management and a recovery in returns on the alternative investment portfolio. We also expect lower COVID-related claims. In aggregate, prior to any impacts from our annual assumption review, we expect adjusted EPS more in line with with results from the first quarter of 2020. As I just mentioned, we are responding aggressively to the current environment. In the individual life and annuity businesses, this includes active product repricing related to lower interest rates and, in some products, higher reserve requirements. Also, as we noted on our first quarter earnings call, we are reducing the amount of capital deployed towards new sales by approximately $400 million this year to help maintain our strong capital position. The overall product strategy is to continue to reprice products when necessary to achieve our targeted returns, shift our selling emphasis to products achieving good returns and providing a powerful consumer value, and add new products. In short, our reprice, shift, and add new product strategy. With this backdrop, I will go into more detail on each business, focusing a little more on product sales and net flows in the individual lines. Starting with the life insurance business, we have one of the broadest portfolios of life products in the industry and the strongest distribution platform. This has enabled us to target several products that do not require significant repricing, including term and index universal life, where sales are up 7% year-to-date, and executive benefits, which while lumpy quarter-to-quarter, have consistently contributed to annual sales. Life products most affected by price increases include Universal Life, MoneyGuard, and Variable UL, where we expect sales to be down materially in 2020. With changes to these products and as new products emerge, developments kick in, we are confident we will rebuild sales levels, achieving strong returns on capital, and contribute to future earnings growth. In the annuities business, we achieved positive net flows driven by lower surrender rates and strong growth in variable annuity sales without guaranteed living benefits, which represented more than half of our total annuity sales. Indexed variable annuities A great example of a product achieving good returns and providing a powerful consumer value were up 68% over the prior year quarter, surpassing $1 billion in sales this quarter. Total annuity sales were down as we reduced benefits on BAs with living benefits and de-emphasized fixed annuity sales due to lower interest rates. we are capturing the asset protection value propositions through our indexed variable annuity, which is more capital efficient and provides better new business returns. Though our collective pricing actions are dampening near-term sales, they are protecting the strong returns we have long had in our annuity business. Beyond our repricing, the shift in ad components of our strategy are will create additional opportunities as we look to 2021. Shifting to our employer-focused businesses, where repricing isn't as significant. In retirement plan services, strong growth in first-year sales generated a double-digit increase in total deposits. Net flows were affected by two large-case terminations. However, we expect to have positive net flows in the second half of the year, At the plan sponsor level, recurring deposits are facing some headwinds from employees reducing or eliminating matching contributions and workforce reductions. At the participant level, we have not seen meaningful outflows related to the CARES Act and our high-tech, high-touch model, coupled with our innovative product to help customers better navigate these uncertain times and drive our future growth. Lastly, on group protection, premiums increased mid-single digits as we benefited from improved persistency, renewal rate increases, and soft sales. We believe the pandemic has only increased national awareness of needs for life insurance and disability and lead management products as evidenced by our premium growth. Though we may see some disruption in new business sales due to the pandemic, We expect the benefits of our well-diversified customer base will continue to result in strong premium growth, while our focus on pricing actions and expense efficiency will improve our margins. Bottom line, across all businesses, we are in a good position of having created the broadest product portfolio in the industry, the best distribution, and a proven ability to combine these differentiators effectively to shift sales products with strong value propositions for the customer and good returns for Lincoln. Now shifting to other strategic areas of focus in the current environment. First on the balance sheet, where we remain in a very strong position. Our RBC ratio ended the quarter at 444% and positions us well to manage through this period of uncertainty. During the quarter, We also expanded our highly reliable and committed sources of liquidity within our insurance subsidiaries to approximately $9 billion, up from $7 billion in the first quarter. While we certainly do not expect any liquidity issues, these programs can be used to manage any cash flow stress that might develop. At the holding company, we have $774 million of cash and our next maturity is not due for three years. In addition, we have our $2.25 billion credit facility. Within the investment portfolio, we continue to manage credit risk more defensively by adjusting our new money allocation to higher-rated investments as well as proactively de-risking. As we've mentioned in the past, we began de-risking our investment portfolio a number of years ago, leveraging our multi-manager investment model to analyze a variety of adverse scenarios to identify those securities that have the potential for significant credit deterioration in an economic cycle. We continued with the execution of our program in the quarter, de-risking the portfolio by another $1 billion. We remained focused on high-quality new money purchases, and when combined with our de-risking actions, the overall quality of the portfolio continues to improve, with our exposure to BBB- and below securities decreasing 60 basis points on a sequential basis. Year-to-date, negative RBC impacts from the investment portfolio are running better than our expectations, supported by our de-risking program and the benefits of various government support programs, including the Fed's actions on credit markets. While we remain confident with our balance sheet and capital positions, we expect to see a pause on share buybacks for the third quarter, a prudent approach given that economic outcomes remain unpredictable. Expense management also remains a key focus in the near term, with Liberty synergies of $125 million nearly achieved, digital savings on track for $40 to $50 million this year and progressing towards our $90 to $150 million target. And we have also made significant progress on our third savings initiative, an additional $100 million this year to help offset near-term pressures. We expect to maintain this $100 million going forward by leveraging virtual sales capabilities, sustained increased workforce productivity, and capitalizing on the recent acceleration in digital adoptions by both advisors and customers, all of which enable us to conduct business more efficiently. We have a track record of responding with expense programs to help maintain margins and are optimistic about our ability to deliver on these targets. And we'll provide more details as we progress. In closing, Second quarter results were impacted by the pandemic and equity markets, but as I noted, we expect earnings to recover to more normal levels in the third quarter. Our balance sheet is in a strong position. We are making pricing changes where necessary and still selling a significant amount of new business at good returns and adding new products to drive future growth opportunities. and we are executing on existing and new cost-save initiatives to strengthen earnings. All of these position Lincoln for long-term success and deepen our competitive advantages in order to drive long-term shareholder value. I will now turn the call over to Randy.