Lincoln National Corporation

Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lincoln Financial Group second quarter 2023 earnings webcast conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star 1 on your telephone keypad. Mr. Al Copresino, you may begin your conference.

Thank you. 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, including those regarding deposits, expenses, income from operations, share repurchases, and liquidity and capital resources are forward-looking statements under the Private Securities Litigational 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 2022 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 income from operations or adjusted operating income, and adjusted income from operations available to common stockholders to the most comparable gap measures. Presenting on today's call are Ellen Cooper, Chairman, President, and CEO, and Chris Nezapor, 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, and good morning, everyone. We entered 2023 with a clear focus on actions to support the rebuild of capital and to deliver long-term profitable growth by building on our solid foundation. We have a powerful franchise with a trusted brand, deep relationships, and a strong culture. Our distribution leadership and broad diversified set of product solutions across our four businesses and differentiated customer experience position us well to execute against our strategy expeditiously and successfully. Coupling these foundational tenets with a leadership team charged with steadfast execution gives us confidence as we reposition the company for sustainable growth, enhancing value for our customers and our shareholders. Over the past three quarters, we have demonstrated swift execution that is manifesting in our results. This quarter's results benefited from the continued excellent contribution from our group protection business as well as company-wide alternative investment income in line with our long-term targeted returns. Chris will take you through the quarter's results in detail. Before moving to our business unit highlights, I will spend some time discussing our progress in executing our strategy to rebuild capital and advancing our strategic objectives to improve our long-term free cash flow profile, lower our capital sensitivity to market volatility, and further diversify our earnings mix. Let me expand on this. We are continuing to make headway with three of our four businesses, annuities, retirement, and group, generating solid free cash flow for the company. It is worth noting here again the group business standout quarter driven by margin expansion efforts as well as a favorable industry environment. We continue to expect the group business to grow while sustaining margins over the longer term in the 7% range and become a larger part of our overall mix over time. And the fourth business, our life business, which continues to pressure our financial results, will generate improved cash flows following the close of the Fortitude Re block reinsurance transaction we announced in May. This transaction is another important step in rebuilding capital and improving ongoing free cash flow, as well as lowering our balance sheet risk. We have previously stated that we expect the transaction to improve our RBC ratio by 15 points at closing and increase ongoing free cash flow by over $100 million per year. We are awaiting regulatory approval and fully expect the deal to close in due course. Another contributor to improving our ongoing free cash flow is our SPARC initiative, our enterprise-wide expense program to enhance our business and drive efficiencies. We are on track with the implementation of SPARC and we expect current expense headwinds to lessen somewhat when the level of investment declines in 2024 and increased run rate savings take hold. Chris will provide further comments on our expenses more broadly. Our new business approach is also taking hold as we shift to a product mix with more capital efficiency and enhanced value creation. As we execute this strategic pivot towards an improved long-term cash flow profile, we continue to expect to deliver robust sales for the full year with a variety of product enhancements and targeted distribution efforts. Our repositioned VA hedge program with an explicit capital hedge is supporting our objective of reducing capital sensitivity to market volatility. And lastly, we are continuing to evaluate additional actions to further improve the capital generation of our in-force book. Regarding our current capital position, our second quarter estimated RBC ratio was approximately flat sequentially with strength in our group business, offsetting the headwinds we have previously discussed in our life business. Overall, we are executing swiftly on our capital rebuild and capital generation efforts while successfully positioning the businesses to deliver a more diversified earnings mix. As we look ahead, we also highlight our goal of reducing financial leverage and building our capital to levels that are aligned with a prudent approach to capital return, creating long-term sustainable value for shareholders. Now turning to sales highlights for each of our businesses. In retail solutions, the diversity of our product offerings and strength of our distribution franchise enables us to provide the right set of product solutions for our customers while supporting our financial objectives. In annuities, second quarter sales declined 4% versus the prior year quarter. However, year-to-date sales versus prior year are up 6%, and we expect to generate sales growth for the full year as we launch a range of product enhancements and actions with our distribution partners expected to elevate sales levels in the back half of the year. In index variable annuities, or IDA, which is our RILA product category, although sales were down 8% year over year, they were essentially flat sequentially. IDA represented over a third of total annuity sales for the sixth consecutive quarter, and they are capitalizing on opportunities to further strengthen our market position through recently released product enhancements that will expand customer choice and our value proposition. In fixed annuities, sales were down sequentially. However, on a year-to-date basis, sales were up over 100%. While some competitive pressure remains in the fixed annuity market, we have targeted actions with our distribution partners that are expected to increase fixed sales in the second half of the year. Although traditional variable annuity sales were down year over year, they were up 19% sequentially at attractive returns. We recently enhanced our VA products and continue to develop innovative solutions that address evolving customer needs. In life insurance, Sales were down as we embark on our shift towards a more capital-efficient product mix. Indexed universal life, or IUL, sales were up slightly while we de-emphasized certain segments in both term life and variable universal life, or VUL, where sales declined. As we shift, we are launching new relationships with field marketing organizations to ultimately grow more accumulation sales. In our MoneyGuard suite of products, where sales were slightly down this quarter versus the prior year period, we continue to focus on expanding our distribution reach into new channels, particularly with our variable MoneyGuard hybrid product. Finally, executive benefit sales are primarily large deals that can be variable in their placement timing, period to period, and were down in the quarter. In our two retail businesses, annuities, and life insurance, the new business shift underway will take some time to fully gain traction, though we are benefiting from a diversified product mix that is meeting our capital efficiency targets and exceeding our new business return targets. We expect the new business from both annuities and life to be important drivers of future capital generation and profitable growth. In our workplace solutions businesses, where we serve more than 50,000 employers and close to 14 million employees, our differentiated product offerings and service capabilities have generated high customer satisfaction scores and strong retention, and we are beginning to see the results of ongoing investments in technology, the customer experience, our distribution franchise, and our claims organization. With group and retirement under one roof, we are uniquely positioned in the market, and we expect our workplace solutions businesses to be key cash flow and earnings growth engines for the company going forward. In group protection, premiums grew 6%, a direct result of the strong relationships we have with our customers and a reflection of the value proposition we are delivering across each of our focused market segments. These relationships and the positive customer experiences we deliver have enabled us to achieve strong persistency while executing on the pricing actions that are a core part of our margin expansion strategy. In what is not a seasonally large sales quarter, sales were down approximately 24%. However, following a strong first quarter of sales, on a year-to-date basis, sales are down approximately 3%. as we execute on our plan to drive profitable growth. Importantly, we continue to see strong momentum in employee paid sales, representing 55% of total group sales, up six percentage points year over year. This strong result was largely driven by supplemental health products, where sales rose 52% and where we see continued opportunities to grow. Lastly, in retirement plan services, we achieved another quarter of positive net flows with very strong retention helped by our digitally enabled high touch customer experience. First year sales were down as compared to an exceptionally strong prior year quarter that included one of our largest stable value sales on record and up sequentially as we are seeing strength in our core full service product offerings. Finally, Recurring deposits rose 4% as we see an increasing number of participants and higher contribution rates. Our workplace solutions businesses continue to meet or exceed capital efficiency and new business return targets. We continue to enhance our customer-focused strategies and expect our actions will lead to long-term sustainable growth. Turning briefly to investments, Our high-quality portfolio with over 97% investment-grade holdings continues to experience net positive credit migrations, and our commercial mortgage loan portfolio, including office, is performing well. We actively monitor the loans, have no material modified or restructured loans, no near-term maturity concerns, and are not experiencing forced extensions. Chris will provide details on the mark-to-market accounting loss related to the Fortitude retransaction that is largely a matter of timing and has no capital impact. In summary, our investment portfolio is performing well, and we would expect manageable capital impacts under a variety of economic and credit scenarios. In closing, We are making consistent progress executing against our priorities and delivering on our commitments. We remain highly focused on strengthening our balance sheet and improving our ongoing free cash flow. We are generating capital efficient sales with returns at or above targeted levels and our investment portfolio is well positioned, all of which gives me great confidence as we move forward. I will now turn the call over to Chris to take you through the financials in more detail.