Lincoln National Corporation

We saw a sales rebound in annuities up 21% from the prior year quarter as growth in index variable annuities and fixed annuities more than offset a decline in traditional variable annuities. Net flows were positive in the quarter for the first time since mid-2020, driven by sales growth. Total life insurance sales were up 3% from the prior year quarter, driven primarily by by an increase in indexed universal life sales. And in retirement plan services, or RPS, total deposits of 2.8 billion were up 16% from the prior year quarter, reflecting a 33% increase in first-year sales and a 9% increase in recurring deposits. Year-to-date positive net flows rose to 2.7 billion. In group protection, Sales were up 83% from the prior year quarter, reflecting strong results across all products and market segments. Premiums of $1.2 billion were up 8% compared to the prior year quarter. And finally, our high-quality investment portfolio continues to perform well, and higher interest rates have led to spread expansion following years of spread compression. Now turning to the RBC ratio. We started the year at approximately 430% risk-based capital and are projected to end the year with our RBC at approximately 360%. The year-end projection includes the expected fourth quarter statutory charge as well as other factors. Before I elaborate on those factors, and importantly, our actions underway to replenish capital back to our target, I want to emphasize the following. While we are not satisfied with our projected RBC ratio, we are taking swift and targeted actions to rebuild to our 400% target. We are confident we have ample capital to effectively operate the business as we get back to our targeted level. We have a clear understanding of the issues and have a plan in place to address them, as you'll hear this morning. Effective execution starts with leadership, and our new experienced and talented senior leaders will execute on the strategic objectives I introduced last quarter, which are first, maximizing distributable earnings and improving capital generation. Second, reducing capital sensitivity to market volatility and improving capital efficiency. And third, further diversifying our earnings mix with durable cash-generative income streams. Continuing this discussion on capital, our life business has been the source of three-quarters of our RBC ratio decline this year. with the three main contributors as follows. As I mentioned, the assumption review will increase our statutory reserves, which will reduce statutory capital and is included in the projected year-end RBC ratio I referenced above. However, the statutory 8D test utilizes prescribed trailing interest rates, and if rates stay at current levels, we would expect to release a portion of these reserves over time. Second, while smaller than the impacts of the prior two years, we continue to experience pandemic claims this year, particularly in the first quarter. We expect these impacts to continue to moderate over time. Third, setting aside the impact of the 8D test and pandemic claims, the life insurance business is a negative contributor to cash flow generation. A portion of this negative contribution is attributable to increased reserves in our BUL portfolio due to this year's equity market decline. However, there are other factors weighing on the life insurance business's ability to generate distributable earnings, including negative statutory earnings producing negative cash flow from our GUL block, which are not affected by the assumption change. an increase in recurring reinsurance costs, the loss of ongoing free cash flow from previous block transactions, and the transition to principle-based reserving, which has changed the pattern of distributable earnings and capital intensity for certain products, notably term life. The remaining 25% of this year's projected RBC decline is attributable to a variety of factors, including higher capital allocation to fixed annuity sales, and stable value offerings within our retirement business, as well as the impact of group pandemic claims and lower fees in our annuity business. Our annuity business has always been and remains highly cash generative and well risk managed. However, this year's market movements, specifically the declines in equity markets, and the increase in interest rates have negatively impacted both equity and bond fund returns, resulting in lower fees on assets under management and consequently reduced capital generation. Additionally, we hedge our variable annuity guaranteed benefits out of Lombar. The current hedge program has been highly effective and has focused on generating sufficient assets to fund future claims by minimizing gap net income volatility. This year's capital market environment has led to market volatility and increased hedge breakage that has resulted in reduced capital within Limbar. We intend to organically rebuild the Limbar capital position over time. And while we have taken an average of about 120 million of dividends per year out of Limbar, we do not expect to take a dividend for some time. In September, we announced enhancements to our VA hedging program that focus on maximizing distributable earnings and explicitly protecting statutory capital. The updated VA hedge program aligns with our increased strategic focus on capital generation. Additionally, I note that our two workplace businesses, Group Protection and Retirement Plan Services, are well positioned to deliver strong distributable earnings and contribute to the rebuilding of capital. I will now discuss the actions that the leadership team and I are taking to enhance the distributable earnings and capital generation of our business, where a number of the initiatives underway will support improvements in our life business, rebuild our RBC ratio to our 400% target, and strengthen our balance sheet. First, while we prioritize balance sheet resilience to replenish our capital, we are pausing share repurchases. We remain committed to returning capital to shareholders, will be maintaining the dividend, and expect to return to dividend growth and share repurchases over time. We have capacity in our capital structure beyond today's mix of primarily common equity and senior debt and are evaluating alternatives such as preferred or additional hybrid securities to provide additional margin given the uncertain macroeconomic environment and risk of potential headwinds from that environment beyond what we see today. And third, we are considering strategic alternatives for our in-force business, including potential block reinsurance transactions with a wider lens that incorporates our new strategic objectives. As I have mentioned previously, we have a fully dedicated and staffed-up team. While there are no commitments, if we find the right opportunity at the right price, we will look to execute. In addition to these three actions, we have several initiatives already underway to advance our strategic objective that will have a favorable impact to our balance sheet longer term. In particular, a number of the measures we are taking are designed to improve the distributable earnings profile of the life business. The three new leaders I introduced last quarter, Matt Grove, head of Individual Life, Annuity, and Lincoln Financial Networks, James Reed, Head of Workplace Solutions, and Chris Nazipour, our Chief Strategy Officer, are charged with implementing our strategic actions. As a team, we are keenly focused on our reprice, shift, and add new product strategy. In recent years, we have been focused on shifting the product mix to a diversified set of solutions with lower guarantees, more risk sharing with the customer, and improved capital efficiency. As we move forward, consistent with our strategy to maximize distributable earnings, we are refocusing our new business capital allocation process. We've previously focused on growing sales while exceeding our return thresholds. Going forward, we expect to allocate a targeted amount of capital to new business and we'll focus on maximizing our return on this capital. We expect this approach to allow us to allocate less capital to new business in 2023 than we did in 2022, while delivering a robust level of sales and more distributable earnings. This focus on the efficiency of our capital allocation is an important part of our go-forward strategy. Spark. We are ahead of schedule, and making substantial progress in the implementation of this enterprise-wide expense initiative to deliver run rate savings of $260 to $300 million by late 2024. We have achieved approximately 45 percent of the planned expense savings to date. We are also working on reducing the market sensitivity of our VUL product to mitigate the capital impact of potential further market declines and are exploring multiple avenues to accomplish this, including both hedge and structural solutions. And as I previously mentioned, our workplace solutions businesses comprised of group protection and retirement plan services continue to be critically important to our long-term strategy. Both businesses are focused on the customer driving differentiation in the market and delivering results. We have spoken with you about our goal of reaching and then sustaining the high end of our 5% to 7% target margins for group protection, which will have a positive impact on our capital generation. We continue to execute our group protection margin enhancement strategy of pricing and product discipline Improved claims effectiveness, such as by helping our customers return to the workforce and driving expense efficiencies through SPARC. And finally, higher interest rates, enabling a shift from spread compression to spread expansion. In closing, we are laser focused on advancing our strategic objectives as we increase capital and strengthen our balance sheets. delivering long-term value for our stakeholders. With a talented leadership team in place, a strong franchise, and a long-standing track record of disciplined execution, we have a clear strategy that we will be executing on in the months ahead, and I look forward to updating you on our progress.

Thank you, Ellen, and good morning to everyone on the call. Before I discuss our earnings results today, I'm going to provide commentary around three topics. The results of this year's assumption review, where we expect to end the year from an RBC standpoint and the drivers behind that outcome, and lastly, the writing off of the remainder of the goodwill associated with our life business. Starting with the results of this year's assumption review, which in total reduced our earnings by $2.1 billion, with $2 billion of that impact in adjusted operating income with the balance below the line. Looking at the adjusted operating income impact of this year's assumption review by business unit, at positive $6 million and $1 million, respectively, the impacts in retirement and group were negligible. while the annuity business experienced a favorable impact of $217 million, driven by the impact of higher interest rates on projected profitability. Turning to the light business, which had a negative impact of $2.2 billion, driven by four primary factors. First, rate increased settlements with two reinsurance partners in 2022 drove an unfavorable impact of $81 million. Second, an unfavorable impact of $106 million associated with updates to our underlying morbidity assumptions. Third, an unfavorable impact of $223 million from updating our mortality assumptions. I'd attribute about 2 thirds of this adjustment to updates we made to expected mortality improvement as we aligned this assumption to overall industry expectations, and about one-third to adjustments to underlying older age mortality assumptions. Lastly, an unfavorable impact of $1.8 billion from updated policyholder behavior assumptions in our guaranteed universal life book. Digging into that impact, About 70% of the $1.8 billion impact was driven by changes in our long-term expectations around elapsation. As a reminder, a lapse occurs when a policyholder runs out of account value and decides to not pay additional premium to keep their policy in force. Coming into 2022, we have limited policyholder behavior experience. Combining our own data with the significant amount of experience contained in the industry study that I referenced on last quarter's call gave us the credible data needed to update our assumptions, with the result being that we now are assuming significantly greater persistency than we have been previously. As to the other 30%, I noted on last quarter's call that we saw a drop in lapse and surrender rates with the onset of the pandemic. In the case of GUL, we do not expect these to recover to pre-pandemic levels.

A little more color on our GUL book.