Lincoln National Corporation

Good morning, and thank you for joining Lincoln Financial Group's third 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 the 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, Catherine. Good morning, and welcome to Lincoln Financial's third 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 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 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 full reconciliations to the non-GAAP measures used on the call, including adjusted return on equity, and adjusted income from operations, or adjusted operating income to their most comparable gap measures. 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. Lincoln is responding well to the health, economic, and capital market challenges, ensuring we maintain our competitive advantages and capitalizing on opportunities to become stronger. Third quarter adjusted operating results after normalizing for our annual review recovered significantly from the second quarter, consistent with our expectations. Returns on the alternatives investment portfolio were strong in the quarter, at nearly 7% compared to our targeted return of 2.5% or 10% annually. And while we continue to see effects from the pandemic related to elevated claims in our life and group protection businesses, ultimately we expect claims to return to normal levels after the pandemic. Low long-term interest rates are a headwind, but we are solving this through profitable top-line growth in-force management and expense efficiencies. Our underlying earnings are firmly intact and we are positioned for growth. We're taking actions to sustain market leadership positions across our businesses and on our terms by expanding product breadth and strengthening our world-class distribution. Specifically, We continue to aggressively execute our reprice, shift, and add new product strategy to bolster our businesses with enduring and all-weather product portfolios. Year-to-date, we have taken 86 different pricing actions across our product suite, and we plan to introduce eight new products during the first half of next year. This strategy will enable us to capitalize on the breadth of our existing product portfolio at appropriate returns while adding new products that increase consumer choice and expand customer value propositions. This combination will position us well to improve sales volumes and drive long-term top and bottom line growth. As we expand our portfolio of customer solutions, we are focused on designing more capital-efficient products, which will ultimately help improve our free cash flow. In addition to these top-line initiatives, we are taking actions that are enabling us to achieve expense savings and increase productivity while improving the customer experience by leveraging and accelerating digital capabilities. Notably, we see further and meaningful expense-saving opportunities given the increased digital adoption by both advisors and customers. Lastly, we continue to focus on maintaining a strong balance sheet to maximize our financial flexibility. We have increased our RBC ratio, added to our sources of capital and liquidity, and reduced risk in the investment portfolios. We are executing well on these initiatives as illustrated by several third-quarter highlights, including operating revenue increased across all our businesses. G&A expense decreased mid-single digits across all our businesses. Over 90% of all life insurance policies and our top annuity partners have adopted electronic applications and delivery. And our strong balance sheet, which when combined with this quarter's solid underlying earnings and a current business outlook that is more positive into 2021, is leading to our decision to resume buybacks for the fourth quarter. In our newties business, we continue to add products that are resonating in the marketplace and achieving good returns. Sales of our index variable annuity, which is the market leader in the fastest growing segment of the annuity market, more than doubled over the prior year third quarter, surpassing $1.5 billion. This led to positive variable annuity net flows compared to outflows in the prior year period. As expected, Total annuity sales were down as we reduced benefits on VAs with living benefits, and we continue to de-emphasize fixed annuity sales. We expect similar sales trends to persist into the fourth quarter. As we look to 2021, we are leveraging product innovation to create additional consumer value propositions, expanding our already broad product portfolios. Within the life insurance business, sales declined due to repricing. The industry has started following suit on our pricing strategy, improving our competitive position on our existing product portfolio heading into next year. Additionally, we are focused on offering consumers more solutions and alternative value propositions, such as reduced guarantees and but with the potential to meaningfully increase total benefits. By enhancing products with separate account investment engines, we see an opportunity to provide consumers with more upside in some of our core products, such as MoneyGuard, where we will be introducing a new product in the first half of next year. While we expect sales to be meaningful lower in the fourth quarter, in part, due to record sales in the prior year quarter, we will be entering 2021 with solutions that provide greater market reach. As we've done in the past, we will utilize our broad and expanding product portfolio and the strongest distribution platform in the industry to position us for growth in 2021. In retirement plan services, our digitally focused model where high tech enables high touch and is excelling in the current virtual environment. Our sales and retention teams have seamlessly shifted to more virtual platforms, driving strong new sales growth and outstanding retention results. First-year sales were up 20%, and total deposits increased 6% over the prior year quarter, and client retention was excellent at 98%. While we continue to see some headwinds related to the economic environment and the pandemic, including employers reducing or eliminating matching contributions and workforce reductions, the impact has been manageable and lessened due to the markets we serve, particularly our prominent position in the healthcare sector. Net flows were once again positive as our focus on retention has been a key driver of account value growth. Looking forward, we continue to expect sales of YourPath, our alternative to target date funds, to remain strong. Also, as a result of the SECURE Act, we see significant long-term opportunities related to simplified in-plan guarantees and pooled employer plan solutions in the defined contribution space. Lastly, on group protection, strong persistency more than offset lower sales and the contraction in covered lives due to the economic and employment environment, which led to a 3 percent increase in premiums compared to the prior year quarter. Sales in the quarter decreased over the prior year period due to delayed quote activity and the timing of when cases closed. We have seen activity resume, which should benefit our sales in the seasonally strong fourth quarter. We continue to expand our focus on growth from in-force customers by cross-selling our suite of complementary employee-paid products. This has resulted in 56% of year-to-date sales being generated from employee-paid, up 11 percentage points. While the pandemic has put near-term pressure on earnings, it has increased employee awareness of the importance of our protection products. We are taking actions to enhance our margins to the upper end of our targeted range, and we expect this to emerge as the pandemic subsides. So bottom line, as expected, we saw decreased sales in most segments as a result of our aggressive and disciplined repricing strategy and that ensures we achieve appropriate returns on capital and best positions Lincoln for long-term profitable growth. That said, I would emphasize several important points. First, because we led the industry in repricing and are starting to see competitors follow course, we expect sales to bottom out in the fourth quarter, particularly for our annuity and life businesses. with growth re-emerging in 2021 and beyond based on our strategic actions. Second, as we enter the fourth quarter, we are now achieving at least a 12% return on new business based on the forward curve across all our businesses. Third, market demand and pricing changes has resulted in the sales of non-guaranteed products to exceed 80% of total sales, a trend we expect to continue. And finally, distribution has been and will continue to be an advantage that distinguishes Lincoln. Our distribution model is growing and operating effectively in the current environment. For example, we have added over 8,000 new producers year-to-date and hosted over 1,400 virtual group meetings, which were attended by more than 50,000 advisors. Regarding other strategic areas of focus, as you know, expense management remains a key focus with all near-term targets, including Liberty Synergies, digital savings, and our additional $100 million program for this year on track. Since our second quarter earnings call, we have identified opportunities preserve this year's savings program in 2021, predominantly through virtual sales effectiveness and capabilities, along with acceleration in digital adoption. Looking forward, we expect even further run rate savings opportunities, but these could require some incremental investment. Since the onset of the pandemic, we have successfully focused on protecting and further improving the balance sheet. For example, our RBC ratio and cash at the holding company have both increased. We have also enhanced our financial flexibility with our next debt maturity not due until September 2023. And in the third quarter, we completed a contingent capital facility. Within the investment portfolio, de-risking actions and benefits of various government support programs have led to benign RBC impacts from credit losses and downgrades. Experience to date is more favorable than our expectations at the onset of the pandemic, and we expect that to continue as our credit outlook has improved. In closing, we recognize potential industry headwinds that are responding. We are well on our way towards restoring sales growth in 2021 after actively repricing products to achieve appropriate returns and preserve capital. We have targeted programs to reduce expenses and are committed to further improving efficiencies and lowering costs while enhancing the customer experience. We entered this crisis well-prepared and have continued to strengthen our balance sheet and reduce risk in our investment portfolio, while our variable annuity hedge program has performed exceptionally well. And we've acted to accelerate capital deployment. Recall, we were one of the first companies to reinsure annuity blocks, both fixed and variable, and have improved our free cash flow over time by reducing new business strength. As a result of confidence in our balance sheet and capital position, solid underlying earnings and our more positive business outlook as we move into 2021, we are pleased that the Board of Directors approved a 5% increase in our quarterly common stock dividend and that we will be returning to the buy market with an opportunity to buy our shares at a price that we believe presents an exceptional value. I couldn't be more confident about the actions we are taking to execute our plans and deliver long-term value for our shareholders. I will now turn the call over to Randy. Thank you, Dennis.