Lincoln National Corporation

Good morning, and thank you for joining Lincoln Financial Group's third quarter 2021 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 Vice President of Investor Relations, Al Capricino. 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, 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 2020 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 of the non-GAAP measures used on the 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, and Randy Freitag, Chief Financial Officer and Head of Individual Life. After their prepared comments, 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, Al. Good morning, everyone. Third quarter operating earnings were reduced by pandemic claims and other charges and helped by strong alternative investment results. Adjusting out these various items are underlying earnings and earnings growth potential remain strong. Our expectation remains to be at the high end or above our 8% to 10% EPS growth target in the intermediate and longer term. Intermediate-term expectations are primarily based on recovering sales momentum, strong fees on assets under management, incremental expense management initiatives, and the combination of $900 million of buybacks related to our recent block sale and ongoing share repurchases. Taking each of these in turn, sales year to date are consistent with our expectations of building off the levels achieved as we exited 2020. We are also achieving returns in the low to mid-teens on capital backing sales across all business lines. Overall sales growth is reemerging due to our distribution strength, added shelf space, digital capabilities, and product innovation. After introducing 10 new products since the beginning of the year, including the industry's first combined life-plus long-term product, care policy built on a variable chassis, we have more updates planned and additional products in development. Expense efficiency has long been a key focus for Lincoln. This quarter, we once again reported a lower expense ratio across most of our businesses. We also have a track record of delivering on past cost savings initiatives. We expect SPARC, our new cost savings initiative to drive savings well in excess of the impact of spread compression through 2024 and to improve both our operational effectiveness and the customer experience. Finally, our buyback strategy, as just mentioned, is comprised of two components. First, our ongoing repurchases, which returned to pre-COVID levels this year, driven by the capital efficiency of our products, including the impact of the recently announced VA living benefit flow reinsurance deal, low levels of credit losses, and net ratings upgrades in our high-quality investment portfolio and our well-managed hedge strategy. Second, the buybacks funded by the block deal. Before turning to the business segments, I want to congratulate Ellen Cooper. In August, the board announced that Ellen will succeed me as CEO after our annual shareholders meeting next May. Since joining Lincoln in 2012, Ellen has worked with me and the rest of our executive team to shape and execute on Lincoln's strategy. She joined us as Chief Investment Officer, and her responsibilities have grown to include leading our enterprise risk efforts and our annuities business. Ellen is a gifted leader with a proven track record of empowering high-performing teams and executing effectively in challenging environments. I know that Lincoln will be in great hands with Ellen at the helm as she moves forward in fully capitalizing on the exciting opportunities ahead for Lincoln. Ellen will be joining Randy and me on the first quarter's earnings call. Now turning to the business segments. In annuities, we reported sales growth at 7% over the prior year quarter, driven by our industry-leading product breadth and distribution force, plus shelf space added over the last two years. Sales were down sequentially as we led the industry with rate reductions on index variable annuities in response to market conditions, as well as typical third quarter seasonality. We remain pleased with our sales mix of guaranteed and non-guaranteed products, providing us diversification and attractive new business returns. Looking forward, we're expanding customer choice by adding new investment options and index strategies, and have improved the attractiveness of our index variable annuity product, setting us up for sales growth in the fourth quarter. Finally, we expect our earnings to continue to benefit from the high-quality and diversified in-force book we have built over the years. In retirement plan services, we reported another quarter of excellent results and remain well-positioned, with award-winning digital technology, a competitive cost structure, an expanding set of product solutions, and scale in our target markets. Total deposits were up 2%, despite being negatively impacted by some sales shifting into the fourth quarter. While we reported slightly negative flows this quarter, trailing 12-month net flows remain strong at positive $1.2 billion, and we expect full-year 2021 net flows to be positive. Sales of YourPath, our alternative to target date funds, remain strong. We have continued to innovate, enhancing our in-plan income solution, called Path Builder Income, and integrating the solution inside our Your Path investment option. As a result of the SECURE Act, we also see significant long-term opportunities around in-plan guarantees, pooled employer plan solutions, and advisor-managed accounts. Finally, the macro environment continues to provide a tailwind to retirement plan services. In addition to healthy equity markets, the economic recovery is contributing to better wage growth, higher employee contribution rates, and a greater employer deposits. The retirement business is having an outstanding year as we continue to execute on our strategy. In life insurance, our focus on expanding both consumer value propositions and distribution shelf space resulted in sequential sales growth of 32% this quarter with sales totaling $166 million and all product categories reporting double-digit increases. The focus on expanded customer choice aligns with our ongoing efforts to diversify our product risk profile. As examples, in the life business, our variable money guard and our principal BUL products offer the customer the choice of lower guarantees and higher upside potential. The sale of these types of products have been growing faster than segment-wide sales. The products have less potential tail risk, and better capital efficiency. In addition to the property and casualty distribution partnership we added in the second quarter, we recently launched a variable money guard product at two of our largest strategic partners, providing 25,000 more advisors with access to this first of its kind solution. Complementing our distribution and product expansion efforts, Our digital first focus continues to drive a lower cost per policy and an improved customer experience. Looking ahead, we are enthusiastic about the future of the life business. We are introducing new solutions that will further expand our customer and distribution reach with more introductions planned for the first half of 2022. Lastly, our group protection business continues being impacted by the pandemic, particularly as the Delta variant affected more individuals under age 65, driving increased claims. While the pandemic continues to be a headwind, the underlying fundamentals of the business are strong, and we are pleased with the progress we are making. We achieved 5% premium growth over the prior year, which is a result of a stronger persistency rate of nearly 90% and renewal rate increases implemented earlier this year. Year-over-year sales are flat as we stick to our pricing discipline. We're seeing more sales from our higher-margin employee-paid products year-to-date. Fifty-nine percent of group protection sales have come from these products as more individuals see the value of them. Within this category, we have begun to quote our new hospital indemnity product, rounding out our suite of supplemental health products. Underlying margins after adjusting primarily for pandemic-related claims were again in the middle of our target range this quarter. We will continue to build on our progress and expect margins to grow toward the top end of our 5 to 7 percent target range, as we remain disciplined on pricing, new business, reducing costs, and managing claims. Briefly on investment results, credit quality remains excellent. Our general account portfolio is predominantly comprised of fixed income investments, of which 97 percent are investment grade equivalent. We continue to expect a benign credit outlook and have seen favorable credit trends within our portfolio with minimal credit losses and positive net credit migrations. During the quarter, we invested new money at an average yield of 2.6 percent with one-half in shorter duration assets versus one-third for the full year 2020. reflecting the increase in shorter duration product sales and our disciplined asset liability matching. Approximately 60% of our purchases were in investments other than public corporates, providing diversification and good relative value, and yielding approximately 100 basis points over comparably rated public corporates. Lastly, our alternative investment performance was once again strong, with an 8% return in the quarter, exceeding our long-term targeted quarterly return of 2.5%. In summary, reported results this quarter continue to reflect ongoing impacts from the pandemic in life insurance and group protection. Our product strategy, distribution strength, and ongoing innovation are helping to build sales momentum at attractive returns. Our new expense savings initiative is expected to more than offset spread compression, improve overall operational effectiveness, and drive earnings growth. And ongoing share buybacks, driven by our strong balance sheet and free cash flow generation, combined with the incremental buybacks enabled by our recent block deal will further boost EPS. In sum, our underlying earnings power is improving and we remain confident in our ability to grow EPS at or above our eight to 10% target range. I will now turn the call over to Randy. Thank you, Dennis.