Q3 2019 Earnings Call
Good morning, Thank you for join in Lincoln Financial Group's third quarter 2019 earnings Conference call. At this time all on terrorism listen only about later, we will now see opportunity for questions and instructions will be given at the time, if you need assistance at anytime during the call. Please press star followed by the zero.
On one let's just do.
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 financials third quarter earnings call.
Before we begin I'd been important reminder, any comments made during the call regarding future expectations trends and market conditions, including comments about sales in deposits expenses income from operations share repurchases and liquidity in capital resources are forward looking statements under the private Securities Litigation Reform Act of 1990 fives.
These forward looking statements involve risks and uncertainties that could cause actual results could differ materially from current expectations. These risks and uncertainties, including those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2018 annual report on Form 10-K , most recent.
Quarterly report on Form 10-Q , and from time to time in our other filings with the FCC.
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 Dot Lincoln financial Dot Com, where you can find our press release and statistical supplement which include a full reconciliation to the non-GAAP measures used in the call, including adjusted return on equity and adjusted income from operations were adjusted operating income.
To their most comparable GAAP measures presenting on todays call, our Dennis glass, President and Chief Executive Officer, and Randy Free Tag 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 today.
Thank you Chris good morning, everyone.
Third quarter earnings were disappointing.
But I'm confident that our strategies and management actions are driving and are going to continue to drive earnings growth.
I also want to emphasize that our franchising business model have the strength to deal with low interest rates headwinds facing us and the industry.
First the quarters negative operating earnings results there were three primary impacts.
We want.
Our annual review included significant charge with a component related to interest rates.
Well, our interest rate assumptions were already more conservative than most competitors, we still followed our rigorous process and made appropriate changes.
Number two.
Part of Dupes meaningfully underperformed as we wrote down the large private equity holdings. This isn't investment weve owned for many years.
The third impact was quarterly fluctuations, we see from time to time.
Randy will cover each of these in more detail shortly.
Turning to the ongoing strength to the franchise, we continue to benefit from actions taken by management to accelerate growth diversify sales the cheap appropriate returns and tactically tilt or sales mix towards shorter duration products, which are less sensitive to interest rates.
These actions helped drive double digit sales growth in annuities life insurance group protection and along with the Liberty acquisition resulted in 84% or total sales coming from products without long term guarantees.
20 percentage points compared to five years ago.
We're also successfully executing on our digital program and did you diligently managing expenses, which were down 3% compared to the prior year quarter.
Net savings from or digital program should begin to ramp up next year and along with further liberty integration savings provide a tailwind to earnings in the medium term.
Lastly, our diversified and attractive business makes enables us to consistently generate significant amount of cash flow.
Which we are both investing in growth and returning to shareholders or active share buyback program led to an 8% decrease in shares outstanding compared to the prior year and last night, we announced an 8% increase in the quarterly common stock dividend.
Now turning to the business segments, starting with annuities.
Our decision to broaden the product portfolio and participate in more segments of the market enabled us to meet different customer needs sustain our growth and maintain a diversified sales mix, even while we are adjusting pricing and product features in response to lower interest rates.
Total sales increased 12% compared to the prior year quarter and net flows were positive for the fourth consecutive quarter.
Consistent with our strategy, we have shifted our sales mix as five years ago over 70% of our sales were variable annuities with living benefit guarantees compared to this quarter were sales were evenly balanced among the a's with living benefit guarantees be a's without living through.
Guarantees and fixed annuities.
Expanding shelf space, and adding new pretty do Sears resulted in significant momentum and index variable annuity sales. This led to the 54% increase in sales a b is without living benefit guarantees, which improves our long term risk profile.
We're also expanding shelf space, and increasing wholesalers and fixed annuities, which resulted in 15% sales growth, including significant gains in independent marketing organizations, where we launched customized products for two large distribution partners last year.
So another quarter of strong momentum for the annuities business as growth metrics are clearly benefiting from our broad set of consumer solutions and our multichannel distribution model, where both client facing head count and total producers are up 12% over the prior year costs.
Sure.
When combined with disciplined pricing appropriate assumptions and its industry, leading hedge program.
We are well positioned to deliver strong results, even if consumer preferences and capital markets ship.
And retirement plan services, our high touch Hi Tech digitally focused model creates a competitive advantage in our target markets.
This differentiated service model continues to improve you experienced both plan sponsors and employees driving higher participation and contribution rates and benefiting retention.
As a result recurring deposits increased 12% over the prior year quarter with double digit growth in both small and mid to large markets and net flows remained positive.
Total deposits decreased as prior year quarter benefited from a previously disclosed ill have a billion dollar health care plan.
Sales pipeline is strong as we entered the fourth quarter with your part your path our proprietary alternative to target date funds and another Great example of product innovation at Lincoln.
Which is a true differentiator in the marketplace. Additionally, we see an opportunity to expand your path adoption across our enforced block providing incremental growth.
Overall, it was solid quarter for the retirement business highlighted by another quarter positive flows and healthy bottom line growth.
[noise] turning life insurance strategically we had in our repositioning the life portfolio towards products that both meet consumer needs and drive profitable growth in the quarter individual life sales increased 26% demonstrating the life business franchise strength by shifting and growing.
The same time total sales grew 40% as we had a large executive benefits case in the quarter.
Our sales are benefiting from further penetrating the high you well market, which is large and fast growing industry segment, where we are taking market share.
<unk> sales are growing as we make significant process improvements and adjust prices more actually.
We're also maintaining our leadership position and to be well and hybrid markets.
The ability to grow and to a product sales isn't part accomplished through our industry, leading distribution platform our client facing head count is nearly 300 employees and up 8% over the prior year quarter. We are in every major life distribution channel and over the past two years over 66.
Thousand independent producers have sold at Lincoln life insurance product.
This past network distribution partners has helped us position our sales mix. We're now two thirds of our sales are not meaningfully effective.
The level of interest rates.
Manufacturing capabilities that created first by product portfolio, where no product represents more than 30% total life sales and this broad based strength has enabled us to maintain agora get returns above targets.
Nonetheless, we are making additional pricing changes where needed to reflect low interest rates.
Well life insurance earnings were most affected our annual assumption review the business remains well positioned moving forward with a proven record of disciplined growth and financial management, which has enabled us to overcome headwinds facing the industry.
Turning to group protection benefits from the Liberty acquisition and successful integration.
Once again demonstrated this quarter as sales.
Just premiums grew an after tax margins remained strong.
A national competitive environment has enabled us to effectively execute on strategic objectives.
And maximize the competitive advantages created by the acquisition.
This includes leveraging our larger book of business and expanding capabilities to cross sell additional lines of coverage and further penetrate the employee paid market.
Strategies contribute to 53% growth sales compared to the prior quarter.
With employee paid sales increasing at a faster rate than employer paid.
The 5000, plus market a historical strength of Liberty.
Seeing growth reemerge as distribution partners gain confidence in our post integration service and execution, while the 1000 to 5000 Midmarket segment is benefiting from the best of both companies.
The group business had another strong quarter and we're optimistic that we will continue to achieve attractive margins.
Shifting to investment results, we invested new money to pre tax yield of 3.7% 190 basis points over the average tenure treasury.
Additionally, as the credit cycle extends we have continued to focus on managing credit risk more defensively by de risking in sectors and securities that have greater risk credit deterioration under his stress scenario and further diversifying the portfolio.
We have decreased our overall exposure corporate credit, particularly in the energy and consumer cyclical sectors, while increasing our exposure to infrastructure consumer and on cycle. So excuse me consumer non cyclical and high quality loan to value commercial mortgage loans.
The portfolio credit quality is in great shape.
Below investment grade assets, representing less than 4% of total assets and triple B minus rated securities decreasing by more than 100 basis points from prior year quarter.
As I noted up front, we had a write down of large private equity holdings.
Our commitment to this single investment was $11 million and over the following five years the value increased to $138 million before being marked down this quarter $24 million over.
Over this period the alternatives portfolio achieved a 9% pre tax return, including this write down.
I would note. This particular investment was a uniquely concentrated position.
Within and otherwise highly diversified private equity portfolio.
Which includes 255 limited partnerships with an average size of less than $7 million and no. Other single investment with a carrying value greater than $36 million overall, we continue to like the construction and diversification of the alternatives.
Oil and believe our long term annual return target of 10% remains achievable.
Before closing, let me briefly comment on the current interest rate environment.
As we have noted in the past there are three areas potential impacts from low rates won new business returns.
To spread compression and three the balance sheet.
First on new business returns, we have benefited from the actions mentioned earlier by selling more products without long term guarantees and that are less impacted by low interest rates.
Nevertheless, we have been taking a proactive approach reviewing all our product features and pricing to make sure. We maintain this disciplined balance between customer value growth risk and returns.
We are comfortable selling where we are today, given our product mix combined with pricing actions, we have taken or expect to take we will continue to reprice when necessary to achieve appropriate returns on the capital we invest in growth.
Next on spread compression previously, we anticipated a 2% to 3% headwind EPS growth from interest rates.
And to see that abate over time.
Given the current interest rate environment, we expect to be at the upper end of that range as spread compression is persisting longer than we originally anticipate however, it is important to recognize that this level of spread compression is consistent with recent years and the benefits from our diverse business.
Model has enabled us to grow as and generate steady percentage.
Percentage of earnings from capital markets sensitive businesses.
Third on the balance sheet, all the impact from unlocking was larger than usual. This year I would note that book value per share, excluding AOCI I still increased 5% compared to the prior year quarter and the charge was non cash.
We continue to expect mineable impacts on statutory capital from asset adequacy testing unless the 10 year Treasury rate is persistently and 1% range and even then we expect manageable impacts so while this quarter's results included significant net.
We have impacts we continue to successfully execute on key strategic initiatives that position Lincoln to sustain our track record excellent financial performance and create long term value for shareholders I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported a third quarter adjusted operating loss of $46 million or 25 cents per share.
As we noted in the earnings release this year's annual review of DAC and reserve assumptions resulted in a charge of $403 million.
For $2 per share.
Included in this was $291 million from interest rates.
Which $139 million came from the impact of the significant drop in rates on the starting point.
Additionally.
We lowered our long term ultimate interest rate assumption to 3.5% an extended our great and period to seven years, which resulted in a 152 million dollar negative impact.
Based on our review of industry surveys, we remain on the conservative side with respect to interest rate assumptions you continue to follow our normal process prudently responding to changes in the capital markets and appropriately, reflecting our experience across our assumptions.
Outside of interest rates, there was a $112 million net unfavorable impact with mortality updates and higher reinsurance costs coming at negative partially offset by several adjustments, including modifications to policyholder behavior assumptions and other items.
As part of this year's review, we did not unlock the reversion to the main corridor, which still provides an approximate $135 million after tax cushion against declines in the equity markets.
In addition to the significant impacts from the annual assumption review there were a few other items resulted in some large variability this quarter, including.
Negative returns and me alternatives portfolio, primarily from the write down Denis mentioned reduced adjusted operating earnings by $94 million or 47 cents per share relative to expectations.
And quarterly fluctuations in individual life mortality relative to our annual expectations, along with a higher group loss ratio.
Reduced adjusted operating earnings by $42 million are 21 cents per share.
When normalizing for unlocking alternatives in quarterly fluctuations in implies an EPS of approximately $2.40 and gives you a much better indication of our earnings power.
Moving to the performance of key financial metrics.
When normalizing for notable items and alternatives underperformance strong sales net flows and equity market strength resulted in all four businesses showing operating revenue growth over the prior year quarter.
DNA expenses net of amongst capitalize decreased 3% year over year and when combined with revenue growth the expense ratio improved 60 basis points.
Moving to the balance sheet capital ratios ratios are solid we have significant cash the holding company and strong capital generation is enabling us to both invest in growth and return capital to shareholders.
Before shifty the segment results our net loss in the quarter was $161 million. This included a $33 million charge from an early tender for debt.
And acquisition and integration cost of $31 million.
The hedge program performed well during a period of heightened market volatility was $22 million of net losses, and the general account performed well as credit losses were negligible.
Now turning to segment results starting with annuities.
Reported operating income for the quarter was $169 million, which included a $93 million unfavorable impact from our annual review primarily related to interest rates.
Adjusting for notable items in both periods.
This quarter's alternatives underperformance of $10 million and our Mod co reinsurance transaction earnings decreased slightly.
Return metrics, excluding notable items and alternatives under performance remained strong with our away at 81 basis points.
And they are are we have 22%.
Average account values of $134 billion increased 2%.
Excluding the reinsurance transaction driven by positive net flows and equity market gains.
Risk metrics remain solid as net amount at risk sits just above 1% of account value for living benefits.
And half a percent for death benefits.
So annuities results for a bit noise you have unusual this quarter, but underlying trends were solid as net flows remain positive and year over year earnings growth should reemerged following a year of a theme related impacts.
In retirement plan services, we reported operating income of $44 million up from $40 million in the prior year quarter, driven by great expense management.
Net flows totaled $272 million in the quarter, which when combined with favorable equity markets and further organic growth drove average account values to $74 billion up 4%.
A 3% decrease in GNS net of amounts capitalized combined with revenue growth resulted in a 100 basis point year over year improvement in the expense ratio.
Based spreads excluding variable investment income compressed six basis points versus the prior year quarter and our way came in at 24 basis points.
Retirement business had a strong quarter.
With organic growth and expense discipline remaining key drivers going forward.
Turning to life insurance, the annual assumption review and this years and this quarter's alternatives underperformance had the greatest impact on the life business as we reported an operating loss of $245 million.
In total.
And that assumption changes reduced operating earnings by $320 million, including $225 million from interest rates.
As noted earlier there were several other unlock it adjustments that had a net unfavorable impact of $95 million in the life segment.
Additionally, $69 million of alternative investment underperformance impacted the life business.
Adjusting for notable items and this quarter's alternatives underperformance.
Operating earnings were $144 million compared to $196 million in the prior year quarter.
The decline was related to $29 million, an unfavorable mortality relative to our annual expectations in the current quarter.
Compared to $22 million, a favorable mortality in the prior year quarter.
Underlying drivers were solid average life insurance in force up 8% over the prior year quarter, an average account values increasing 4%.
Both of which helped drive a 3% increase in operating revenues excluding impacts from unlocking.
And the underperformance and alternatives.
Base spreads excluding variable investment income compressed six basis points when adjusting for an unfavorable impact in the prior year quarter.
So the challenging earnings quarter for the life business. However, key growth drivers remain solid position us nicely moving forward.
Group Protection reported operating income of $61 million compared to $63 million in the prior year quarter.
With this quarter's alternatives underperformance, reducing earnings by $7 million.
The loss ratio in the quarter was 74.1% up 50 basis points year over year and sequentially as a higher underlying loss ratio was partially offset by favorable reserve review impacts.
DNA expenses decreased 7% as we continue to benefit from integration synergies, which resulted in a 120 basis point improvement in expense ratio compared to the prior year quarter.
Overall business trends remain positive, which resulted in an after tax margin of 6%.
Favorable impacts from expense savings and pricing discipline should enable us to sustain attractive margins.
Turning to capital and capital management.
Thats very surplus stands at $9.4 billion and our RBC ratio ended the quarter at approximately 425%.
Holding company cash came in at $765 million.
Head of our $450 million target as we Prefunded, a 300 million dollar debt maturity due in February 2020 to take advantage of attractive rates.
During the quarter, we returned $224 million of capital to shareholders included $150 million of share buybacks.
To conclude.
Third quarter earnings were definitely noisier than usual with significant impacts from our annual assumption review.
Underperformance of alternatives and other quarterly fluctuations looking through those items, we continue to see strong underlying earnings.
While the impact from this year's annual review was larger than previous years, driven by a prudent change to our long term interest rate assumption. This is a noncash charge.
Does not impact or RBC ratio and leaves our balance sheet well positioned for low interest rates.
I would also note that over the past five years, we have grown book value per share excluding AOCI by nearly 40%.
Including a 5% increase this year to $69.33.
Importantly.
This quarter's results had several positives, including double digit sales growth in three of our four businesses.
Revenue growth in all four businesses when adjusting for unlocking the underperformance of alternatives.
Can you discipline around managing costs as DNA expenses declined compared to the prior year.
And all of our businesses continued to demonstrate strong core earnings power after adjusting for the items previously mentioned with that.
Let me turn the call back over to Chris.
Thank you Dennis and Randy we will now begin the question and answer portion of the call. As a reminder, we ask that you. Please limit yourself to one question and only one follow up and then re queue for additional questions and with that let me turn it back over to the operator.
Thank you as a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q and a roster.
Optimal Sao quality. Please use your hands a study your speaker phone.
And our first question comes from Ryan Krueger with KBW. Your line is open.
Hi, Thanks, Good morning, Randy do you expect much ongoing impact from the actuarial assumption review to future earnings.
Hey, Ryan.
As I've said in in prior Unlockings I'd expect a bit of a headwind from these changes but.
Sit down I take a look at.
Analyst expectations for the next quarter I.
I don't see much of an overall impact.
Think there a couple of items that I'd point out as we move into 2020.
Outside of.
That impact.
First as we mentioned.
The decline in rates has moved spread compression up little bit. So we've had been traveling in the.
2% range and I think we're up towards 3%. So if you do the math, that's approximately $20 million.
And the other thing I'd point out is that resolutions that we've had with some major reinsurance partners. This year.
I think would.
Imply a headwind of a similar magnitude.
But I'd also point out that we've been having these exact sorts of impacts over the past five six years and we're going to work hard.
To overcome them with things.
Like the digital program so.
Don't see much.
Other than the items I mentioned right.
Got it thanks, and then just higher level.
We had a number of things go against you this quarter. It sounded like I think in your prepared remarks, you sounded like you're pointing to $2.40 is still a pretty good run rate going forward just wanted to.
Just confirm that that that's kind of your intention to suggest that that's a better run rate going forward pass this quarter.
Right absolutely so.
I said approximately two four in my script.
We noted that the earnings himself reported were 25 cents negative.
But the three specific items, we mentioned.
Which worthy unlocking which was $2 per share.
Which was the alternatives underperformance primarily in that one.
One security was 47 cents. So if you add those two items to what we reported you get to to 22.
The other items, we mentioned where the individual life mortality that was $29 million and also mentioned that the group business itself at a a bit of.
Pick up a little bit of a pickup in their loss ratios and that was.
In the range of $13 million or so.
As I noted that that was offset by favorable reserve every impact, but so if you take the 20 913 that'd be another 2021 cents or so so if you have those items together you'd get you'd get up to the approximate $2.40 that I mentioned and.
Exactly consistent with sort of what we expect coming out of the quarter.
Great. Thanks, Randy you bet.
Thank you at our next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hi, good morning.
Well I guess my first question is just.
Corporate expenses I mean, it looks like it's hard at a higher level on.
Excuse me I know part of that is just prefunding.
Maturity next year, but I'd just be interested to hear.
Where do you expect that to run I mean, how much for that benefit from some of the things you're doing on efficiency side as we as we think about next year.
Hey, Alex Thanks for the question, let me just speak to.
Corporate or other operations in total.
I'd say that this quarter had.
A few negatives.
That primarily we're on the benefits line I think if you look in there we've seen some seasonality and benefits in the other operators operations segment typically in the third quarter. So I think there were some negatives maybe in the mid single digit range, but I'd point out that.
If you look across for instance in retirement I think they had some some small positives that probably from a total standpoint.
Sort of offset each other so other operations segment did have a little bit of a.
Negative.
Tinge this quarter, but I think that was offset by some other items across other businesses.
Got it.
Then follow if I had just.
Stock trading where it where it is.
Is there is there anything strategically you guys can do to take advantage of.
The the situation devaluation the environment.
Or is the macro where it is in rates as low as they are I mean does that kind of prevent you from from acting.
Oh, it's Dennis.
Our intention is to continue to review all options.
Oh.
Result.
Increase as a growth rate of earnings per share.
I think a lower interest rates.
Make that a little bit more difficult today.
But theres a flow of ideas that are coming through nothing is imminent.
So the answer is interest rates make a tougher.
We continue to review all opportunities.
To.
Both from a normal.
Oh perspective.
Yes.
Okay seasonal.
Unique item to grow EPS.
Alex I'd also point out that just if you look at this year.
We've been able to fund a substantial growth in sales.
In life and annuities, while at the same time continuing to return.
Capital shareholders I think year to date, we're at about 765 million of of capital return.
$540 million of that in buybacks, so not only have we've been able to fund.
The strong sales growth, we've seen but we've been able to continue.
And capital to shareholders and obviously, that's a that's our goal to continue to fund organic growth while at the same time.
In a disciplined manner returning capital to shareholders.
Thank you.
Thank you and our next question comes from Tom Gallagher with Evercore ISI. Your line is open.
Good morning.
Can you discuss Randy can you talk a little bit about what the underlying drivers were.
On the mortality and reinsurance pricing side.
The reason I ask is im just wondering if you have you reflected the rate thats been pushed through by the reinsurance currently or are you assuming further rate increases or put through just and I'm, saying that just because you know you've obviously had adverse mortality in three the last four key.
Orders now so I just want to know whether.
I don't know Theres, some there's some level of.
Assumed.
We'll call. It adversity. That's is that that's embedded in this review, whether its reinsurance costs or your own mortality or whether you're assuming that that normalizes or reverts back back to like normal trend.
Tom I think there were a couple of questions inside of there. So let me well hopefully tackle all them.
On the other impacts and as we mentioned the other impacts outside of interest rates.
Totaled $112 million $95 million of that.
It was in the in the life business will make a few comments on some of the components. So as we do every year.
Obviously, we analyzed mortality that's one of the big components.
Founders there was a small slice of business where mortality rates at the oldest ages.
We're little out of wax, we brought him in line with the rest of booking and that.
Drove one of the negative impacts I referenced.
On the reinsurance side.
Really look at this is the completion of what has been a six year process.
Which saw us back in 2014 put estimates in our models.
Reinsurance rates would go up to.
2019.
We completed negotiate negotiations with.
Most of our major reinsurance partners and really have good clarity on the on the few remaining pieces. So I believe that this puts this that issue largely behind us.
The favorable side modifications to policyholder behavior assumptions investment allocations and some of the other items. Like this is just the nature of us assumptions things emerge you see more experience, it's going to lead to some pluses.
Finally, this minus since minuses and hopefully.
Overtime equal out.
This year. Unfortunately, there on the negative side, but once again over time and we've actually seen this.
They have tended to even out I think I looked at this recently over the last decade.
And looked at.
The unlockings by with all the pieces and outside of interest rates. What you. What you see is that over the last decade all of the other items.
Really sound to a very small positive number actually which speaks to your goal.
We know when we price of product, we're not getting not going to get every single assumption right.
Try to make sure that we do a prudent job of coming up with some best estimates and then over time that the totality of those assumptions.
Will will equal.
At least from financial standpoint, the impacts are the numbers you have any pricing and that's that's what we've seen over longer period of time not to diminish the 112 million dollar negative impact that we have this quarter.
I think you also inside your question the head to head a comment or question about.
The last few quarters in fact that in three of last four quarters.
We've had negative or unfavorable mortality.
I think.
Inside of there.
Tom I think that's a bit of cherry picking because it's also a fact that.
If you look at the last eight quarters that I can say that five at the last eight quarters have had favorable mortality and that's what we expect right. So.
We retain more insurance. These days were less five six years, we have done summer captures so we expect that we're going to have more quarterly volatility, but once again over time, we expect that mortality will come in line with our expectations that will that's what we've seen over.
Over the last couple of years, that's what we've seen over the last decade.
And Thats, what we would expect going forward.
That that was that was helpful. Randy the and from what Dennis.
Mentioned on.
Impacts and I think you reiterated that point it sounds like there is not.
Not much of a statutory impact expected based on low rates, but what about a consequence of this charge is there any should we think about any reduction in stat earnings because I think at least the comments I heard seemed more be directed at the balance sheet I'm. Just curious whether you would expect there to be any impact.
To statutory earnings or cash flow.
Not going forward, Tom I mean, I think for this quarter, obviously, the alternatives that that flows through statutory earnings and this quarter's unfavorable mortality would flow through this quarter's earnings but not going forward.
I don't see an impact and as a reminder.
On our.
Statutory asset adequacy testing.
Dennis mentioned this we really don't see negative impacts until that tenure treasury using that as a proxy gets down to the 1% range, where we see roughly $350 million of.
Asset adequacy reserves required.
50 basis points on the 10 year goes to about $700 million those aren't small numbers, but those are manageable numbers in the context of a company with with 9.4 billion of.
A statutory reserves.
For statutory surplus excuse me.
Got it alright, thank you.
Thank you and our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, Thank you starting with the group business, you mentioned, a little bit of softness in terms of the claims experienced this quarter was just hoping you can give a little bit more color there on on what drove that.
Yes, so inside a group.
Which had $61 million of reported earnings you had a favorable impact from the reserve review this year of about 10 million and then offsetting that.
You had slightly elevated.
Loss ratios in the quarter and that was pretty much evenly split.
Between life and disability.
And in both cases, it was driven by severity so.
Life claims came in a little higher than our average expectation in the average reserve we put up on New Ltd clients came in a little higher than our expectations.
Got it. Thank you and then on the interest rate assumption change I'm going to realize you moved more than just the kind of long term rate assumption, but guilt kind of put in context. The change this quarter versus the guidance you had given I think at Investor day of 160 million impact for a 50 basis point change.
Yeah, Eric I'll take that so.
The guidance, we've given which has really been focused on a change in that ultimate rate assumption has been 160 million per 50 basis points. This.
Quarter, we reduce that assumption by 25 basis points, we saw pretty much exactly half of that 160, I think it came in at actually at $74 million. Additionally, you've heard us referenced in the past forget maybe it was a couple of years ago referenced the fact that at least.
Financial impact standpoint, we saw that five years of grade was roughly the equivalent of a 50 basis point cut and that once again, that's what we saw we extended or grade.
From five to seven and we saw roughly that impact that impact came in at 78. So you some goes up.
$152 million I think of what we did this year as being pretty much economically or financially equivalent to a 50 basis point reduction in the ultimate rate. So even a sum up to 25 basement reduction and the extension and the great I think about it as being pretty much equivalent from financial standpoint to 50 basis point.
Production.
Got it and then the remainder is just truing up for actual versus expected rates over the past year yeah.
This isn't.
A number which is banned in our results every year just at a much lower level.
But we've never seen.
Year over year, the kind of underperformance, we had this year.
So.
Help you understand this this quarter third quarter, we invested do money at Threeseventy, but there was deceleration.
The removing throughout the quarter and so the rate we embedded at the starting point was actually lower than 370. They came in over all the books of business on average at about 350 as a reminder, last year in the third quarter, we were investing money at 430.
At that time and of course that number in our and our intermodal would've been would have been great enough over time. So that can give you a sense of the magnitude of the drop in the starting point that drove that 139 million dollar impact.
Got it. Thank you that's helpful.
Thank you and our next question comes from Suneet Kamath with Citi. Your line is open.
Thanks, Good morning, I wanted to start with Rps.
Earlier. This week there was some chatter in the media about some reviews of the four or three d. business in particular, the K through 12 business. So just curious how big.
Businesses that for you guys within the Rps.
Segment.
Status.
10% of assets.
So and have a positive so it's not very big for us.
Got it and then I guess, maybe high level for for Dennis.
As you think about.
Current interest rate environment, I'm, assuming that we don't really see any material changes from here.
How are you balancing this trade off between kind of growth.
At the product level.
Using some of the free capital for a if you don't grow.
For for share repurchases.
And.
That's a big question.
And a good question a big question is a good question.
As I've said in my script, we have to balance.
Maintaining strength of the franchise getting the appropriate returns on capital repricing where necessary.
And using.
Capital both to grow the business protect the franchise.
And then use what's left over too.
Buy back shares increased the dividend.
So.
So.
Yes.
It's always a balancing act I.
I can tell you without question that if we aren't getting.
The returns on products that are appropriate for our model.
We will slow those product sales down.
And you see freed up capital to buy our shares back and we've been doing that on an off over the years.
Successfully so very much.
Daily decision about.
Where we can get the best return on capital not a daily decision, but an ongoing decision.
Okay. Thanks.
Thank you and our next question comes from John Barnidge with Sandler O'neill. Your line is open.
Thanks can you talk about the strong growth in group sales and maybe how much of this with new distribution partners versus maybe brokers taken you ought to the penalty box in your expectations going forward.
Uh huh.
All of the above we Oh, we saw.
Good.
Growth in our.
Like business.
The good growth in disability.
A little bit less growth.
Negative if dental and so it's across the spectrum.
I mentioned in my.
Remarks.
We're seeing a little success large case market.
Which is getting us out of the penalty box as I mentioned employee paid market, we're up quite a bit 45% that's cross selling more into of Liberty block, where they had not as much emphasis on.
Fully paid sales.
Within the book, we're seeing a lot of those upselling with existing customers I think those up pretty significantly.
Selling with significant customers is a client.
Has just use those or ltd, and they shift over to.
<unk>.
Adding.
A lifeline.
So there's all these specific issues because the overall strength.
Leo.
And bringing.
The overall strength to companies.
And using that to increase sales.
Great. Thanks for the answer on my follow up all yield.
Thank you and our next question comes from at least screen stand with Wells Fargo. Your line is open.
Hi, Thanks. Good morning. My first question is on the group business. So.
The loss ratio was a little bit higher this quarter, which you guys pointed to in the prepared remarks.
Turning to seasonality how should we think about I'm just thinking about the loss ratio for the fourth quarter any trends that you kind of what I'd like to us.
Elise I'd make a general comment that historically.
And that Doesnt, obviously guarantee its going to happen, but historically, we have tended to see a little bit of a tick up in our loss ratio in the fourth quarter.
I'd tell you exactly what drives that seasonality, but if you look back at our results. Thank you saw a little bit last year in the fourth quarter for instance, so the 74.1 reported which as I mentioned had two offsetting items.
Inside of it I think is.
Right line, maybe even a little better than our long term expectations, but.
Your direct question historically, we would expect to see a little bit of.
Pickup in the fourth quarter or we have seen historically, a little bit of a tick up in the fourth quarter.
Okay. Thanks, and then my second question. So what's your on annual or would you guys on.
Picked up the waiting period associated with your way to get seven years five you said.
I will just as you were giving you my view I guess can you just provide asking why you kind of settled on seven years is that as opposed to something else just kind of background there.
Thank you can any additional color.
You know lease I don't think Theres anything specific Kieran.
We can we can speak to other than it just felt like we're in an environment, where getting to a final answer if you will are getting too.
That that ultimate as a rate just.
Felt like it was going to take longer.
And it did coming in this week, we came into this year at fibers, we felt good about that but as as we looked around and thought about all the things that Ken.
Our impacting interest rates just felt appropriate to us.
To think about a little longer period of time before all those various items on won't.
And there's a lot of Uh huh.
Forward looking backward looking.
Analysis that we do but other specific issue one of the examples of what we would be thinking about is a historical look back at how quickly.
Other.
Historical periods.
Interest rates moved up from one level to the other one so that would be an example of what we.
What we've looked at along with other issues the form judgments around seven versus five.
Okay. Thank you very much.
Thank you. Our next question comes from John NATO with CBS . Your line is open.
Hey, good morning.
I realize that.
It does the challenging environment today and I also realize that the the question I'm going to ask.
It may seem a little bit extreme.
But it sounds like you've probably given us the path to do this man.
In any case.
If if Randy.
You know if someone said to the entire life insurance industry Lincoln included.
No no more of this because you know assumption of rising rates overtime and your balance sheet needs to reflect the courage rate environment as it is today period.
So so let's just put it in round numbers and say instead of a 3.5% 10 year in seven years.
Let's just assume it sticks it you know 175 or 2% for the foreseeable future.
How big given the impact would that be.
One.
Whether its book value per share or just you know common equity.
And in similarly would there be any related impact on a statutory basis from that kind of an extreme.
So.
Let me take a crack to your question and I doubt that I'm going to be able to answer it exactly but.
We have an assumption of the 10 year treasury reverting to 3.5%, which seems quite reasonable given all the expectations for growth and everything but.
Today, the 10 year Treasury is about 175 basis points lower than that.
So we have an estimate that each 50 basis points reduction.
Is approximately $160 million, we havent tested we don't have guidance out there and 175, but typically we've seen that that.
Size adjustment has been fairly static for each 50 basis points. So you can okay yep that's ratable.
And I also talked about talked about.
Rates at this level in the statutory balance sheet. Once again, we don't see at this level of interest rates.
Any need for.
Additional.
Any material need for additional asset adequacy reserves, so really not much impact on the statutory balance sheet. The other thing I'd point out to you is that we carry in our.
Overall book value.
$30 $32 per share of unrealized gain so if you're to mark your liabilities to market you would logically think about that.
Rather healthy unrealized gain which from a dollar standpoint, it's over $6 billion after tax I believe.
I'm going against any sort of impact like that.
Yes, I know, that's that's what I'm trying to get out I mean, it's.
I know the stock is down like it is today and on the surface. This is a.
It is a pretty significant charge relative to the impact of the last several years.
You know, but even still if we if we went to that extreme it feels to me like.
It's somewhere in the three to $4 per share impact.
Noncash and.
I guess, that's what I was trying to get us so thank you.
You bet.
Thank you. Our next question comes from Josh Shanker with Deutsche Bank. Your line is open.
Yes, thanks for picking up at the end of the call I'm going to need now kind of ask my questions, but I was wondering if we could dig a little deeper.
This FCC investigation into the K through 12 can you opponent on what they're looking for and then the past has the kind of regulatory issues kept you from growing organically or inorganically in that segment of the market.
I'm not.
I'm not giving we can't get in a depth on that.
In that market, we have salaried.
Please.
So I think our practices are.
Right.
Pretty good.
But I really don't know what is.
Driving those inquiries.
Okay, and then on if we go back to last year.
I'm just wondering about the timing the process.
What was sort of the gap in time between your recognition that there was something wrong between the stock price and the fundamental value of your business and you sign a deal with a theme to bring some earnings into the future too.
Celebrate shareholder return I guess.
That's true today, I'm wondering how how how long process.
I mean wanting to do something and being able to do something has there been.
Oh, that's a pretty tough.
Question.
Because we're always talking to people.
And if.
We've been talking for a long time, but but in sort of a negotiation it'll have a quick.
Quicker.
And vice versa. So, it's very hard to pinpoint any kind of a.
Non organic transaction in terms of what's the likelihood.
So I.
Just say that each one is different and we continue to look at.
Opportunities.
Okay. Thank you for the answers.
Thank you and that's all the time, we have for questions right now.
We will be able to follow up with fills in the queue. Later this afternoon I'd like to turn the call back over to Chris Giovanni.
Thank you all for joining us. This morning, we'll follow up with those that are still in the Q1 is all always we will take your questions on the Investor Relations line at 800, 237 to nine to zero, where via email at Investor Relations at LSG Dot com. Thank you all have a great day integrate Halloween.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you Ma'am you may now disconnect have a great day speakers. Please standby.