Lincoln National Corporation

Good morning, and thank you for joining Lincoln Financial Group's fourth quarter 2022 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 Vice President of Investor Relations, Al Coppersino. Please go ahead, sir.

Thank you. Good morning and welcome to Lincoln Financial's fourth quarter earnings call. Before we begin, I have an important reminder. Any comments made during the call regarding future expectations, including those regarding 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 2021 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 their most comparable GAAP measures. Presenting on today's call are Ellen Cooper, President and CEO, and Randy Freitag, Chief Financial Officer. 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 Ellen.

Thank you, Al. Good morning, everyone, and welcome to Lincoln's fourth quarter 2022 earnings call. Before we begin, I am excited to discuss the news we released last night that Chris Nezapur Currently, Lincoln's chief strategy officer will be appointed chief financial officer effective February 17th. Chris has more than 20 years of experience in the industry. He joined Lincoln in 2018 as head of investment risk and strategy and was named chief strategy officer and a member of our senior management committee in 2021. In the strategy role, quarterbacked the organization's shift to our current strategic objectives, working closely with the finance organization and our businesses, and built dedicated teams focused on corporate development, including evaluating potential transactions. Before joining Lincoln, Chris held a variety of roles in the life insurance industry, including as an analyst and an investor after having started his career as a CPA in and auditor of life insurance. Throughout his career, he has cultivated a deep knowledge of the complexities of insurance financials. Chris's leadership will be critical as we continue to fortify our capital position. Chris and I have worked alongside each other for five years, and I know that with his deep financial acumen, analytical expertise, and strategic understanding of our business, He will be focused on our balance sheet resilience and the overall drivers of our valuation. Chris will be succeeding Randy Freitag. Randy will remain CFO through February 16th and continue to work with us through the end of the first quarter to ensure a smooth transition. Randy has made many contributions to Lincoln over the years, and I would like to take a moment to recognize Randy and wish him the absolute best for his next chapter. I know you'll join me in congratulating Chris and also thanking Randy. This morning, I will provide an update on our strategic progress followed by some key business unit highlights. Since our third quarter earnings call, our new leadership team has been taking the necessary steps to rebuild capital and strengthen our balance sheet while positioning the overall franchise for profitable, capital-efficient growth. We have a differentiated business model with a powerful distribution franchise, broad product offerings, and a diversified, high-quality investment portfolio. These strengths set the foundation for successful execution of our enterprise-wide priorities. And as we move forward, we will continue to focus on the following strategic objectives. maximizing distributable earnings and improving capital generation. Second, reducing capital sensitivity to market volatility. And third, further diversifying our earnings mix. To this end, we have taken quick action and made substantial progress in the last quarter to rebuild capital and our ongoing pace of capital generation, including raising $1 billion of preferred capital, further improving our new business capital efficiency, fully repositioning our VA hedge strategy, putting a partial tactical hedge on our VUL Inforce, continuing to implement our SPARC enterprise-wide expense initiative, enhancing the profitability of our group business, and seeking to unlock the value of our Inforce book. I will further elaborate on each of these at a high level. As a result of the swift and targeted action we took in the fourth quarter, we raised $1 billion of capital through a preferred issuance and expect to end the year with an RBC ratio of approximately 383% and improvement as we drive towards our target of 400%. Turning to new business capital efficiency across retail solutions and workplace solutions, We are focused on delivering a more capital efficient product mix which will continue to produce a robust level of sales while requiring approximately $300 million less in new business capital this year. We are selling on our terms with new sales in all four businesses meeting or exceeding target returns. This focus on capital efficiency and profitability will also contribute to higher present value of distributable earnings from new business going forward. We are able to make this pivot by continuing to evolve our products away from long-term guarantees and to provide more options that are attractive for customers involving risk sharing. More tightly focusing this capital where we have differentiated products and long-standing relationships with key distribution partners with, for example, more of a focus on permanent products over individual term life, using flow reinsurance to enhance capital efficiency, and focusing on higher margin, more capital efficient products and segments across both our retail and workplace solutions businesses. We fully repositioned the variable annuity hedge program to align with our objectives of maximizing distributable earnings and providing explicit capital protection. As a result, we expect to see less capital volatility in Limbar. In addition, as we focus on improving profitability as well as future capital generation and earnings growth potential, We continue to make substantial progress in the implementation of SPARC, our enterprise-wide expense initiative expected to contribute run rate savings of $260 to $300 million by late 2024. We are also progressing on our group protection margin expansion efforts. We ended full year 2022 with an underlying margin of 5.3%. within our 5% to 7% target range. With a focus on disciplined pricing and underwriting, providing optimal return-to-work outcomes for our claimants, and implementing segment-level strategies to build a more diversified and balanced book of business, we expect over time to sustain a group after-tax margin in the 7% range inclusive of pandemic claims. Finally, To maximize the value of our Inforced Book of Business, our fully dedicated team remains engaged in evaluating internal and external opportunities, including possible block reinsurance transactions designed to advance our strategic objectives. As we focus on these capital and profitability improvement actions that will positively impact distributable earnings in 2023 and beyond, we are also experiencing headwinds, which we have discussed in the past, such as near-term capital market impacts, pressure on the life business, and higher inflation-driven expenses that Randy will discuss further. Accounting for these pluses and minuses, our 2023 distributable earnings remain in line with our prior expectations. And as we look to 2024 and beyond, Several of the initiatives that are well underway are expected to drive further improvement in capital generation. We generally expect the 2023 headwinds to begin to dissipate in 2024 or be offset by larger positives, for instance, the growing benefits of our profitability improvement initiatives. Going forward, over the longer term, we expect the distributable earnings, and gap earnings power of our business to reemerge. Moving to the quarter's results, we demonstrated improving loss ratios in our group business, positive flows in both retirement and annuities, and a sequential increase in life insurance sales. Let me now discuss some key business unit highlights. Fourth quarter life insurance sales were up sequentially in all products, except for term where we took pricing actions. Fourth quarter life sales were down from a strong prior year quarter. Those sales were up for the full year, particularly in indexed universal life. We have a broad, diverse product portfolio, and as we previously indicated, our distribution leadership is most effective in permanent life products. Annuity sales increased 7% from the prior year quarter, with positive flows reflecting continued strength in indexed variables and fixed index products. We continue to see a mixed shift away from products with long-term guarantees in both our sales and our in-force. Our workplace solutions business included a strong year and remained key to our long-term strategy. Group protection had a year of solid top-line and overall earnings results. premiums grew 7% for the full year as strong persistency and organic growth continue to generate premium increases. While fourth quarter sales declined 8%, full year sales rose 15% with increases across all products and case size segments. We continue to see heightened interest in our supplemental health portfolio and we're pleased with the sales in this category. In retirement, despite a 7% decline in fourth quarter total deposits from a strong prior year period, full year total deposits rose 10%. On a full year basis, net flows were a record $2.9 billion, marking the eighth consecutive year of positive flows for our retirement business. Finally, Lincoln's investment portfolio continues to be well-positioned in the event of a potential credit cycle given its diversification and high-quality nature. In closing, we have been fortifying our capital position, increasing our future capital generation, and positioning the franchise for future profitable earnings growth. While there is more to do, we have accomplished a great deal in a short period of time and have built the foundation and put the leadership team in place execute successfully on our plan. And with that, I will turn the call over to Randy.