Q4 2019 Earnings Call
Good morning, Thank you for joining Lincoln financial group's fourth quarter 2019 earnings conference call. At this time all lines are in listen only mode. They do we want announced opportunity for questions and.
And instructions will be given at that time, if you need assistance at anytime during the call. Please press star key Starkey.
But to zero and someone will assist you now I would like to turn the conference over to corporate Treasurer, Chris Giovanni. Please go ahead Sir.
Thank you Catherine good morning, and welcome to Lincoln financials fourth quarter earnings call before we again I'm. An important reminder, any comments made during the call regarding future expectations trends in.
Conditions, including comments about sales and deposits expenses income from operations.
Our repurchases and liquidity in 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.
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 2018 annual report on form 10-K. Most recently most recent quarterly report on form 10-Q and from time to time.
In our other filings with the FCC. These forward looking statements are made only as of today and we undertake no obligation to update or revise them.
To reflect events or circumstances that could occur after this date.
We appreciate your participation today and invite you to visit Lincoln's website Www Dot Lincoln.
So dotcom, where you can find our press release and statistical supplement which include a full reconciliation.
The non-GAAP measures used in the call, including adjusted return on equity and adjusted income from operations or 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 in head of individual life. After their prepared remarks, we will move to the question and answer portion of the cool I would now like turn the call over to Dennis Thank you, Chris and good morning, everyone.
Our dynamic business model and continued execution produced.
Record adjusted operating loss per share in the fourth quarter.
Results consistent with expectations, we communicated during our third quarter call for the quarter, we grew adjusted EPS, 12%.
Increased book value, excluding AOCI, I'd say over $71 a record and.
Adjusted or are we was nearly 14%.
Over the course of the year, we further advance strategic priorities and leverage the benefits of our business model and risk management culture to drive profitable top line growth.
Successfully executed our expense initiatives.
And.
Maintained a high quality balance sheet, all of which position us for continued financial success I.
Let me touch on each of these first on profitable top line growth.
Teacher product actions drove sales gains as new products, such as our index variable annuity and.
Our proprietary target date retirement products your path complemented our best in class product portfolio.
We also leverage our powerful distribution franchise to reach new customers, we don't have more than 99000 producers.
That's sold a Lincoln products over the past 24.
So 8% from the prior year as we participate in more distribution channels, such as property and casualty and gained momentum in other channels such as independent marketing organizations. This combination of product and distribution expansion resulted in strong growth in the fourth.
Order and the full year, specifically the annuity business delivered positive net flows every quarter of 2019.
Including positive flows in both variable and fixed annuities in the fourth quarter.
Life sales exceeded $1 billion for the year as we benefited from our broad.
Product portfolio and in the fourth quarter, we capitalized on upcoming regulatory change.
Group protection sales increase for the full year and in the quarter as we leverage our broader capabilities to enhance our overall offering all employer size segments.
And Rps generated positive net flows for the quarter and your marketing its fifth consecutive year of positive flows.
These strong topline results contributed to operating revenue growth in every business segment during both the fourth quarter.
And the full year.
Importantly, we stay disciplined with product repricing occurring throughout the year.
And we continue to shift.
Shift of our sales mix towards shorter duration products, which are less interest are less sensitive to interest rates. We are fiercely focused on growing.
The topline on terms attractive to our shareholders.
So expenses were elevated in the fourth quarter due to strong sales volumes and seasonality. We continued to six successfully execute on two significant expense saving programs during the year first.
Our digital initiative is progressing well.
As savings offset investments in 2019, consistent with our plan and we expect net savings to ramp up this year.
Second we are well on our way to achieving our target of 125.
Million dollars in expense savings from the Liberty acquisition by the end of 2020.
Lastly, on our high quality balance sheet prudent assumptions active risk management and disciplined capital management have long been evident at Lincoln.
In 2019, we made appropriate adjustments.
To our assumptions maintain discipline asset liability matching and utilize significant significant cash flow to both in best and opportunistic growth and recurrent return capital to shareholders.
As we entered 2020, our capital ratios are strong and our balance sheet as well.
<unk>.
Now turning to the business segments, starting with annuities.
Our strategic decision to broaden the product portfolio and participate in more segments of the marketplace enables us to meet varied customer needs expand distribution improve our organic growth rate and.
Maintain a diversified sales mix for the full year total sales increased 17% and net flows were positive for the fifth consecutive quarter, including in both variable and fixed annuities in the fourth quarter.
Full year net flows were positive for the first time since 2000.
Sales in 15.
Growth rate has improved by more than four percentage points in just two years as we successfully launched new products and increased total producers by 11% well repricing where needed.
Our most successful new product has been our.
Next variable annuity, which helped drive a 45% increase in sales have been days without living benefit guarantees.
As a result, we had a very balanced sales mix for the full year.
As VA days with living benefit guarantees VA days without.
Living benefit guarantees and fixed annuities each represented approximately one third of total annuity sales.
This year, we expect further shift to be A's without guarantees as we continue to expand shelf space and new producers. So another strong quarter and you put the annuities business.
Business as growth metrics are clearly benefiting from our broad set of consumer solutions, our multichannel distribution model and consistent market presence.
When combined with prudently adjusting pricing and product features to respond to lower interest rates appropriate assumptions.
And industry, leading hedge program.
We are well position to live to deliver strong operating results.
And retirement plan services, we have a competitive advantage in our target markets as a result of our high touch Hi Tech digitally focused service model.
This.
Model distinguishes us from our competitors attracts new customers and drives higher participation and contribution rates, resulting in strong retention and sales growth.
In the fourth quarter per Se first year sales increased 47%.
With growth.
Across all target markets distribution expansion and New York.
Upright Terry alternative to dark target date funds continue to differentiate us in the marketplace.
Current deposits also increased 8% for the quarter and the full year with strong growth in both.
Both the small and mid large markets.
Flows were once again positive in the quarter and totaled more than half a billion dollars for 2019.
Overall, it was a strong quarter and year for the retirement business and we are well positioned to compete in our target markets.
Turning to.
Life insurance sales momentum has strengthened in recent quarters as we have expanded distribution and focus on fast growing industry segments.
This led to total life insurance sales exceeding $1 billion for the full year boosted by a particularly strong fourth quarter as we.
For two mystically increased sales at attractive returns.
Specific areas that drove strong growth include our you well, where we are benefiting from product actions taken earlier and year a fast growing are you all market and greater focus in segments of the market, where we were.
Underrepresented.
As a result, our sales more than doubled for the quarter and the full year.
Moneyguard sales also more than doubled in the quarter and were up 32% for the year ahead of price increases, reflecting new principle based reserving changes and lower interest rates.
And lastly, executive benefit sales, which can be lumpy were particularly strong for most of the year ahead of the transition to a new mortality table.
Additionally, our network of producers has increased 8% over the past year, which contributed to our strong growth.
As.
After this year, we anticipate sales levels decline given 2019 strong sales.
[noise] continued focused on maintaining appropriate returns on capitals, and we and we operate under new principles based reserving.
Turning to group protection.
We continue to capitalize on the competitive advantages created by the acquisition and effectively execute strategic objectives, including leveraging our larger book of business and expanding capabilities to cross sell additional lines coverage.
Sales increased 9%.
Fourth quarter compared to the prior year.
And 30% for the full year with strong growth in both employer and employee paid markets when combined with solid retention premiums once again increased sequentially.
Looking forward, maintaining disciplined pricing and achieving.
The expense efficiencies I noted upfront are important levers that will enable us to continue to achieve attractive margins.
Finally on investment results, we invested new money at an average pretax yield of 3.6% during the quarter and 4% for the full year.
Both.
More than 180 basis points over the average tenure treasury.
We continue to find good value in purchasing high quality less liquid assets, such as mortgage loans structured securities and privates, where we achieved attracted illiquidity premiums and have ample room to grow.
These strategies have also further diversified portfolio with public corporate bonds decreasing as a percentage of invested assets. Additionally remain focused on selective de risking and for the full year, we reduced our holdings of lower rated triple B and below investment grade bonds.
2%.
The alternative investment portfolio achieved a 7% pre tax and you were annualized return for the quarter and sharply recovered following the write down of the large private equity holdings in the third quarter.
We continue to target a long term pre tax return of 10% and expect.
Results in the first quarter of 2020.
In closing.
I am pleased with strong ended the year and our continued execution.
Low interest rates remained a headwind, but we have successfully dealt with this for many years.
We expect incremental spread compression to.
Mitigated by our normal expense discipline and additional initiatives such as digital programs combined with growth on the product from we will continue to reprice products, where necessary shift emphasis to existing products that are meeting our.
Or exceeding return.
And add new well priced products again, all actions, we have successfully implemented in the past.
To the extent sales or net flows decline in the short run because of our this.
Pricing actions, we expect to redirect capital two additional share buybacks.
Yes.
I'm confident our business model, an action oriented management team can sustain our track record of excellent financial performance and add further shareholder value I.
I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported fourth quarter adjusted operating income of $482 million are $2.41 per share a record and up 12% over the prior year quarter.
There were no notable items within the current or prior year quarter. However.
Are there were a few items driving some variability both up and down and I will touch on those in the business segments.
Let me briefly now that expenses were elevated in the quarter due to a number of items, including strong sales.
Costs associated with ending our Liberty.
Transitional service agreements and typical volatility in the fourth quarter.
Touching on the performance of key financial metrics in the fourth quarter compared to the prior year quarter.
Adjusted operating our we increased 40 basis points to 13.9.
Book value per share, excluding AOCI increased 5% to $71.27, an all time high.
Every business segment reported an increase in operating revenues and operating income.
And consolidated net flows.
<unk> increased 36%.
Finally, net income per share was $2.15 with the decrease relative to operating EPS driven by at loss from variable annuity nonperformance risk.
When adjusting for this non economic impact.
Net income was 101% of adjusted operating income.
Now turning to segment results starting with annuities.
Reported operating income for the quarter was $269 million compared to $258 million in the prior year quarter.
The increase in earnings was primarily driven by higher account values from equity market growth and positive net flows.
Operating revenues increased 6% from the prior year quarter and 5% for the full year.
As I mentioned earlier expenses were higher in the quarter due to a 13.
Percent sequential increase in sales and typical fourth quarter seasonality.
You will note that based spreads excluding variable investment income came down in the quarter driven by our mix of business.
However.
Fixed annuities earnings growth was in line with account value growth.
Looking forward I would expect spreads to be consistent with this quarter's results subject to our sales mix.
Return metrics remained solid in the quarter with our away at 78 basis points and a 22% ROI, we both largely consistent with the full year when adjusting for.
Our notable items.
Risk metrics also remained strong as net amount at risk as a percent of account value sit below 80 basis points for living benefits and 40 basis points for death benefits.
So another very good quarter and year for the annuity business.
With that.
Period account values, 3% higher than average account values and positive organic growth, we are well positioned to continue delivering strong financial performance.
In retirement plan services, we reported operating income of $47 million compared to $45 million.
Dollars in the prior year quarter.
With the increase in earnings primarily driven by higher average account values.
Net flows totaled $422 million for the quarter and $620 million for the full year.
When combined with strong equity market performance average account.
Values increased to $76 billion in the quarter up 10% compared to the prior quarter.
DNA expenses net of amounts capitalized were flat compared to the prior year quarter and down slightly for the full year.
Which drove a 60 basis point improvement.
And the expense ratio in 2019.
Based spreads excluding variable invest an income compressed 13 basis points versus the prior year quarter.
Assistant with our expectations.
Our away came in at 25 basis points in the quarter a basis point above.
Of the full year average.
The retirement business ended the year with strong results and momentum in sales and expense management should serve as positive drivers going forward.
Turning to our life insurance segment.
Operating income of 179.
$1 million increased 2% from the prior year quarter, driven by continued growth from the business and favorable mortality relative to the prior year quarter.
Offset by lower variable investment income.
Underlying earnings drivers were strong with average account.
I was up 6% over the prior year quarter and average life insurance in force up 10%.
Based spreads excluding variable investment income were down six basis points compared to the prior year quarter consistent with our expectations.
In the.
First quarter mortality was inline with our expectations for the quarter.
For the full year mortality came within one percentage point of our annual expectations a solid result.
As we move into the first quarter I would remind you that we typically expect seasonally higher mortality.
The early near and more favorable mortality in the back half of the year.
During the quarter amortization expenses were favorable to our expectation, but this was offset by higher DNA expenses that amounts capitalized primarily related to strong sales growth.
Over the course of the year the life business produced steady driver growth and culminated the year was very strong sales.
Positioning the business well as we enter 2020.
Group Protection reported operating income of $54 million up 8% from the.
Prior year quarter, driven by premium growth and a more favorable overall loss ratio, which came in at 74.4% compared to 75.8% in the prior year quarter.
This quarter's loss ratio included a net benefit of approximately $4 million compared.
To a more normal quarter.
As a higher disability loss ratio.
Driven by fourth quarter seasonality and an increase in severity impacted earnings by $15 million.
This was more than offset by favorable life loss ratio driven impart by management actions that helped.
Improve claims efficiency.
Gionee expenses increased 5% over the prior year quarter, as we incurred $9 million of onetime costs associated with the exit of the Liberty transitional service agreements and other nonrecurring expenses.
For.
The full year the expense ratio improved 60 basis points as we benefited from integration synergies and I expect the expense ratio to continue to trend down.
The after tax margin was 5.2% in the quarter and 5.8% for the full year, both up 30 basis points over the.
Terrible periods.
Looking forward, we expect to sustain attractive margins as we execute on our growth and expense saving initiatives.
Turning to capital and capital management.
We ended the year with nine point.
$7 billion of statutory surplus and an RBC ratio of approximately 435%.
Which includes 25 RBC points from non economic goodwill associated with the Liberty acquisition that will go away at the completion of.
Legal entity merger.
Holding company cash exceeded $700 million as we prepare to payoff for upcoming February debt maturity.
We continue to target $450 million of cash at the holding company.
During the quarter we.
Turning to $173 million of capital to shareholders and $938 million for the full year.
Fourth quarter buybacks of $100 million were slightly below our recent quarterly average as we opportunistically allocated more capital to new business with attractive.
Returns.
Looking ahead to 2020, we expect capital returned to shareholders to be at least $900 million.
To conclude we reported record adjusted operating EPS in the fourth quarter.
A 13.9%.
Adjusted operating ROE.
And book value, excluding AOCI increased 5%.
Over $71 per share.
And all time high.
While our annual third quarter assumption review impacted our full year results, we continue to see solid drivers of EPS growth.
Both including.
Strong sales and positive net flows which contributed to an increase in operating revenues for every business segment.
End of period account values.
Exceeded average account values, which provide a tailwind to future earnings.
Expense saving programs leave you leave us well positioned to achieve meaningful run rate savings in 2020 and beyond.
$640 million and buybacks brought our share count down 5% for the year.
Consistent with the average <unk> production over the past five years.
We also announced an 8% increase to our shareholder dividend for 2020.
And.
Looking forward, we will continue to focus on diligently returning capital to share capital to shareholders, while investing in new business when attractive returns can be achieved.
Bottom.
Online, we are well positioned to deliver strong financial results.
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. If you have additional questions.
With that Katherine will you please open up Q and <unk>.
Thank you to ask a question.
To ask a question press Star then one key on your Touchtone telephone.
Withdraw your question press the pound Keane for optimal sound quality. Please use your handset instead of your speakerphone.
And our first question comes from Jimmy Buehler with Jpmorgan. Your line is open.
Hi, Good morning of course for Randy can you quantify the.
Extra expenses you might have had this quarter because of the transition off of the de assays that liberty in the group business.
Jimmy as I mentioned.
In my script about 9 million after tax so roughly 11 million or so of pretax elevated onetime expenses.
And those will dominate which are most of which were associated with the the exit from that to USA.
Okay and Bill as you are expecting to be gone beginning and Tony Tony.
Yes.
And on buybacks. This I think this is the weakest quarter you've had in buybacks are the lowest amount in the last seven quarters since you've assumed by that any reason for why the amount dropped to 100 million.
Jimmy we had very clear visibility.
That we were going to have very strong.
Thanks sales in the fourth quarter.
And we also had very clear visibility that the returns we were going to get on those new sales were going to be very strong.
And so we made the decision.
To allocate a little more capital in the quarter.
To.
New business.
Than we did to buyback snow.
As I mentioned in my script.
When you move into the first quarter and into 2020, we fully expect to be back from a buyback standpoint in line with our historic practices as I mentioned.
At least $900 million of capital returned as our expectation for 2020 to shareholders.
With the dividend increase.
I mentioned.
Dividends shareholder dividends will be just a little over 300, what's the implication of that.
At least 600 million of buybacks or $150 million on average corridor, which is where we have been running and.
Key thing is I used at least because as we have been doing.
And for nearly a decade, we're going to do everything we can especially when we see an environment that exists like it does today.
Which is a share price that.
Objective Lee.
Is.
Well below book value and subjectively from our standpoint, as well below where it should be.
Based upon both past performance and what we expect going forward.
You can fully expect that we're going to do everything we can.
Too as I mentioned due at least $900 million of Cold total capital return to shareholders in 2020.
And in the past you've done.
Eastern 29.
And you did a little bit more early in the or and then a deeper dolphins the year bent on would you provided be more opportunistic and do more buybacks given your capital position early or should we expect them to be more sort of.
Lastly throughout the year.
I think as we've always Jimmy and we've had this discussion coming into any.
Year over in the past I'd start out with the average.
Ratably over the year and then understand that when we believe the opportunity arises renewed going to do everything we can to accelerate when we believe it makes sense and as I mentioned, we believe with share price where it is today that it makes sense. So we're going to do everything we can to the.
Extent, we are going to accelerate.
Above the $900 million to do it when we believe it's opportunistic.
Thank you.
Thank you. Our next question comes from Erik Bass Autonomous Research Your line is open.
Hi, Thank you I'm.
Just talk a little bit more about the outlook for expenses in the group business as we head into 2020 and how much room is there to bring those down now that you've exited the TSA is and where we start to see that immediately in the first quarter or will it come through over the course of the year.
Well the onetime nonrecurring expenses I mentioned there.
They are gone right, we wouldn't expect them to repeat.
I should say in the first quarter, so take those out right away.
Broadly speaking in my script.
I mentioned that we expect expense ratios continue to trend down.
In 2020 relative to where they were in 2000.
It was in 19 and.
Thats, what I would use when you think about where expenses will be in the group business.
If you go back to the first quarter of 2019, I believe our expense ratio came in at 13.7%.
Oh and absent a nonrecurring.
<unk> expenses like occur in the fourth quarter, we'd expect.
To improve over that level.
Got it is given the opportunity to bring down expenses would then be reasonable to expect you to be at the upper end of the kind of the 5% to 7% target range for margins.
Uh huh.
You know art, we came in at 5.8% for the year that was 30 basis points better.
Then we were.
The preceding year.
It's obviously well ahead.
Of where we thought we would be when we closed the acquisition of Liberty business.
From an integration savings standpoint, we exited 2019.
In line with their 100 million dollar expectation and as we look through 2020, we'd expect that to ultimately grow to roughly 125, I'd expect that to occur to occur ratably over the year, so you're going to get some benefit from.
Additional integration related savings, but I think we're very happy with the years results and as we talked about earlier overtime, our expectation for a group business is 5% to 7%, we said with the additional scale.
That we've achieved with this acquisition that we believe overtime that we can perform in the upper half.
Of that range so.
I think.
Ill leave it at that we will have some additional integration savings in 2020, and we believe that over time, we should perform in the upper half of that 5% to 7% range.
Got it thank you.
Thank you and our next question comes from Ryan Krueger.
With KBW your line is open.
Hi, good morning.
I guess Randy following up on your comment on on the stock price I know I've asked you this before but.
Clearly.
The markets view of variable annuity value differs greatly from I think your own view of the value of your block.
Have you would you reconsider.
Any sort of.
A third party transaction just for a small piece of the block to prove out.
Prove out third party value is higher than the market thinks it is and I guess related to that does seem like there's a lot more.
Hey.
Now than there used to be no not just wanted to hear your perspective on that.
Yeah right. This is Dennis.
And it's a good question we've touched on it.
Quite a bit over the last couple of years.
The first thing.
The our book.
As clean or better and more profitable than the rest.
As to the industry.
And we continue to grow it.
On a basis consistent with that so we're very comfortable.
With our VA business from an economic perspective.
No.
To the broader question.
Well, we continue to look at.
[music].
The sale of blocks of business.
Including Deejays, yes, but we're going to do that on an economic basis.
Get the point of so trying to.
HM.
Use a fee a block too.
Get more comfort to the.
Treat about.
Now it's valued.
But were more driven by.
Economics, and we will consistently be driven by economics as it makes sense to sell something.
Use those proceeds.
In a more attractive way as we did with do you have seen transaction I.
I will tell you I'm, a little skeptical of the idea.
Revaluations as being a motive.
Over my years in the business.
Certainly in the M&A spare.
Really never have.
Got it on revaluation.
Hi.
As a benefit from it.
Action.
Premises.
Our the economics right for our shareholders.
Okay.
Understood. Thanks, Dennis and then for Randy.
I assume this is the case based on your capital management.
Right and some at least 900, but do you still view free cash flow in that same 850 to 50 range for 2020.
Yeah, Ryan we're largely in that range I mean, it continues to grow a little bit with so with the growth of the company.
And that's why I said, the at least 900 as opposed to.
The 850 to 950 that we've talked about before.
Okay got it thank you.
Thank you and our next question comes from Thomas Gallagher with Evercore ISI. Your line is open.
Thanks, Dennis just a follow up to Ryan's question.
I'm not not not approaching it from the variable annuity side, but more from the individual life side.
Boy transacted at by our calculation about a nine to 10 times.
Valuation when they sold their individual life block and that was a block in run off that.
At least in my view was inferior to the quality of Lincolns block show you have a.
Private market value that I think shows up pretty good number relative to certainly what I think your life blocks being valued at so I guess my question is.
It is.
Would you consider.
Oh, what maybe maybe even like a partial reinsurance deal.
And enforced treaty or something like that.
For your life insurance business, if there is that kind of.
I would I would call it considerable arb.
That that may exist to the.
And on life insurance that that's my first question.
Tom Absolutely Oh, we have an M&A group, we're in the flow of the market. If you will for all these types of transactions.
We find something.
That we can execute on any of our businesses.
Where we can though to use your term arbitrage the public versus private market.
For the benefit of our shareholders.
Absolutely we will do that.
Gotcha and then the my other question is Randy the the comment you made about the.
Practice this.
Life insurance sales in the quarter and how that was.
You know you've you viewed that as like a in attractive opportunity in a reason to.
Pivot capital deployment to life insurance I guess my question is.
If you're in the.
Process of raising prices doesn't that imply that's going to be a low we're returning slug of life sales in terms of the moneyguard into other.
Life sales or how do you kind of reconcile the fact that.
In the process of.
I presume meaningfully raising.
As yet you're you're you're saying there was it an attractive IR opportunity in the quarter.
Tom Thanks for the question.
The fourth quarter.
When it comes to life insurance sales is what I would describe as the the perfect selling environment for a company.
With.
Among the strongest capabilities in life insurance space.
In the business and so let me dig into that a little bit what do I mean by the perfect selling environment I mean that there was.
A number of reasons for consumer to the demand to be very strong.
Driven by regulatory changes.
Is that we're driving some price increases or.
A different value prop for consumers.
And on our side there were a couple of items, including the existence of very strong returns.
On the products along with a couple of initiatives that we had put in place which contributed to the very strong.
Sales growth.
Really need to go product by product to understand the phenomenon and how it impacted the quarter. So let's start with the executive benefits business, which was up significantly in the quarter. This is a business that is an accumulation focused business.
With the change in the underlying mortality table in 2020, what happens to accumulation products is that they have.
Less capability to put in.
Dollars for each unit of life insurance, you can put in less dollars. So the value prop changes. So there was a huge.
Factor that companies at to.
Take into account and what you saw as a lot of companies accelerating their plans to establish.
These these big cases.
We benefited from that.
At a very attractive returns.
Let's go onto you well in term.
Those products.
Strong sales were the result of initiatives that we've talked about over the course of the year.
We.
Had in the first quarter over the year.
Really in a big way entered the value all space with a product that was competitive we actually.
Improved to the economics on that product.
As we moved into last after the year by lowering what's called the cap on the product.
So once again you had execution on initiatives.
In two products bases with very attractive returns.
Now you have moneyguard.
So you mentioned the word fire sale, Tom what are the fire sale to.
I think about far show that the definition is that you have a price increase coming in the next quarter and you're getting subpar returns in the current quarter indicates a moneyguard, we have a price increase coming in the first quarter, but the returns were still strong in the fourth quarter why is that it's because.
A significant.
Piece of the price increase is related to the implementation of PBR, which in the case of Moneyguard.
Hurts the product it requires a product to have more capital put into it up front will that didnt exist in the fourth quarter of 2019, now I would miss some of the price increases because rates have come down.
And so that means we weren't arbiters were a little below where they were a quarter before or two quarters before but they were still attractive returns.
So Tom.
Once again I think.
A very attractive environment.
For consumers to buy our products and a very attractive.
Of environment overall.
For us to sell products existed in the fourth quarter, we took advantage of it.
That doesn't make sense Randy show more on the money gartside statutory screen as opposed to being a you know a lower economic return.
Yeah It help.
I'll try to explain a little bit why that happens with PBR PBR for instance was something that helped to the term insurance business. So why does a product like moneyguard get get hurt it happens moneyguard is a relatively long product.
PBR was a great move by the regulators it was needed a single formula and with no longer working.
For the diversity of products that exist in our industry or wasn't going to work is if you looked forward.
So they came up with PBR, which where a company projects off its cash flows discounts and back and establishes a reserve makes a ton a sense one of the downside to PBR is that the approach. They took was to put a margin on each.
Assumption that goes into projection of those cash flows as opposed to a margin.
On the present value on a product a longer product like moneyguard that really gives you a significant amount of redundancy. When you project out those cash flows into the future in discount those those margins on each one of the assumptions and.
Why PBR for product like Moneyguard.
Our hurt the richert the expected return.
Was part of the reason we had to raise prices.
Got it thank you.
As simple as our costs are going up.
The next quarter and we're going to have to raise prices are costs.
Did not.
The increase in the fourth quarter.
So we could hold prices.
Okay. Thanks, guys.
Thank you and our next question comes from Humphrey Lee with Dowling and partners. Your line is open.
Good morning. Thank you for taking my questions. My first question for sure.
Related to the expectation full lower sales awful in life insurance in 2020 I was just wondering if you can remind us in terms of the sales training for every dollar sales I think you given that number for a new anything to pass, but maybe just remind us in terms of how should we think about every dollar of streamed.
In the life space.
Humphrey it varies by product, but broadly speaking in 2019, it was roughly 50 cents.
It's going up a little bit in 2020.
Because of what I talked about on a product like Moneyguard. It's one of the reasons you will see sales come down.
In 2020.
Got it so I guess in terms of thinking about capital return. So historically and I think you on also lowered that in your prepared remarks and stuff.
Any kind of sales decline you would anticipate or some of stems from from additional share repurchases. So for the 900 million of.
At least 900 million of capital return.
I guess, the above 900 million will refer Cindy the potential from.
Lower sales training into 2020.
It would reflect everything humphrey, including up whether sales come down more than we expect whether as Dennis talked about.
Well, we did some sort of block transaction I mean, there are many ways that capital.
Can be generated.
Or retained at Lincoln So.
I think it theres a number of factors and.
As we have in the past equally rest assured that we're focused on on.
Everything we can do.
Two as I mentioned take advantage of what we believe is a very attractive opportunity to buyer stock back.
Got it appreciate the color.
And then a question related to group protection. So you talked about how some of the.
Benefits from the expense synergy with.
Hum along in 2020.
Is the 120 million stool DNA mutation and then also compared to where you are deanne I guess how much.
Cost savings have you realize at the end of the at the end of the corner. So.
Let's think about how the.
The expense savings would immersion in 2020.
Okay.
We ended the year inline with our guidance, which was 100 million or so.
And we expect to grow that to a run rate of 125 billion by the end of the year.
For lack of better I'd, just say assume that ratably occurs over the year.
Okay got it thank you.
<unk>.
[noise].
Thank you and our next question comes from Andrew Klingerman with Credit Suisse. Your line is open.
Good morning.
I just.
Just just along the lines of.
Of those life sales that were so incredibly robust in the corner and then I'm trying to reconcile that a little bit with.
Your allo allocated capital to the life segment, which has been roughly 8% over the past couple of years. So what are these maybe you could give us maybe if you don't want to zero in exactly maybe give us a range of these.
Very strong returns as I think you said.
Randy.
Andrew we're not going to give the specifics, but I would tell you that they were at or above what we target for the life insurance business, which is 12% to 15%.
Got it Okay, and then shifting over to the annuity segment.
On on.
Crediting rates.
It looks like the normalized yields for fixed annuities came off at that 20, Bips and and your crediting rate actually went up one basis point. So the question is what what is your crediting rate flexibility there and I know everybody there were questions about selling the lifelocks in the.
Variable annuity block so why don't they throw in the fixed annuity blocks and ask if theres any possibility of.
Of doing another it seemed like deal.
Those are two very different half that question. So let me, yes for blood, which is is a question about spreads.
If you.
Look in the quarter, you'll see that are spread came down.
In the annuity business that I mentioned this in my script, but what you see there is really about.
Business mix and so let me dig into what I mean by when I say business mix, there's really three things I.
I'd point out.
The first thing is that.
Post.
The sale, we did to a theme we have a very young book of business.
And the nature of the fixed annuity business that is that in the early years, we'll policies life. Your targeted spread is a little bit lower and then you grade up modestly over the surrender charge period.
One thing I'd point out is the products that we sell today in 2019 or we did sell into those 19 have lower targeted spreads than products. We have sold in years past why did they have lower targeted spreads.
Commissions have come down so the average commission has come down which drives a lower targeted spread without changing the.
The economics.
The third thing.
The nature of the products we sell.
If I is fixed indexed annuities excuse me.
Index variable annuities.
It can create some inherent volatility that we would describe as noneconomic just in that calculation can have to do with when the.
Since pay offers when the anniversary is occurring just get some inherent volatility what I'd point you to Andrew is the earnings on the fixed annuity business and you can see this in our statutory supplement the earnings grew 38%, while the average account base grew 32% so.
I know the spread.
Mortgage spread at some noise, but the economics of the business are being maintained as evidenced by that earnings growth.
That's helpful.
And then and then the potential divestiture of blocks.
I don't think.
Andrew we have much more to.
What I said a minute ago, which is.
We're very focused on maximizing shareholder value and if we can do that through a sound economic transaction.
Selling in any of our business some of our in force, we'll do it.
Tennis, maybe is it very challenging right now in this low rate environment.
Due to do these type of transactions.
Yeah, Andrew absolutely well, let's let's put that into perspective.
If we sell a block of business.
We would expect by our shares back.
And so the economics are the balancing of whereas our share price at the moment.
Okay, and what's the price.
On the block transaction, that's why I come back to economics.
<unk>.
And so that those two things have to work together.
And when we did the theme deal.
It work for both parties, but [laughter] there wasn't much room left in that transaction from either.
There are side. So it was good transaction both parties.
Our share prices down a little bit from the point that we did that transaction and likewise interest rates are down a little bit from when we did that transaction.
The only caveat I would add to debt as response, which is correct.
What do you think about deployment.
For smaller size deals I agree completely the bigger.
The deals you do the more you have to think about do you have to allocate some of the capital to debt reduction for instance, yeah.
Good point.
Thanks very much.
Thank you next question comes from Suneet come off with Citi. Your line is open.
I'm not going to ask about block deals.
But I will ask about interest rates I think last quarter, Randy talked about incremental drag of 20 million from from low rates.
Is that still kind of your view.
Where we sit today.
Yes, the way I think I got their Suneet was.
If you go back a few quarters I go back to the beginning of year, we talked about 2% to 3% headwind.
To EPS growth from.
Spread compression and we said at the time, we were traveling in the lower end of that range you move into the ended the year and what we said is worth more in the.
Upper end of that range and simply 1% of our earnings is about $20 million I think as we move into 2020 with rates are they are I think that.
That fact remains the same were traveling in the upper end of that 2% to 3%.
Okay and then the other numbers went ahead I had was on annuities in the amortization expense there.
It looked like it was up maybe 16 million a year over year and I know there were some impacts in terms of what happened in the fourth quarter with the markets, but just any sense of.
How much over on the amortization was in the quarter versus what you'd expect on a go forward basis.
Yes, any thanks for the question if you look at the.
Double annuity earnings they're relatively flat I think they grew a million a fourth quarter 2019 compared to fourth quarter 2020. Despite the fact that account values were up so I.
I would explain the vast majority of why earnings Didnt grow in line with account value is having to do with.
Amortization related noise.
And what was that amortization related noise, if we have a phenomenon in our amortization patterns, having to do with how the equity markets perform in a particular quarter. So we see when we have very strong equity market performance is that during the quarter, you'll have a higher than average amount of policies where their.
Base reset tire.
We will then put those policies.
Into our process and the account value will get immediately pull down by the reversion process that will create some elevated amortization in that quarter that was about $4 million to $5 million in the fourth quarter of 2019 of extra amortization.
And.
Go back to the fourth quarter of 2018, when the markets were down a lot and you get the opposite phenomenon so year over year, it's roughly $8 million to $10 million.
Got it and then just the last one for group if I could another company in this space had talked about some increased.
Competition, particularly in the voluntary space.
Related to high sort of upfront commissions that maybe causing some churn and I think your voluntary businesses look different but I just wanted to get a sense is if you're seeing anything like that in terms of commission driven churn in the voluntary.
And not in our.
Markets.
So far cross.
Ordered the group business.
And we continued to see fairly rational pricing.
Okay. Thanks.
Thank you and our next question comes from at least Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, good morning.
My first question was also on the group business on you know we've heard some companies on kind of alluded to that pretty strong economy, leading to pretty good disability results on as you think about your business and more about 2020 I guess on are you expecting still pretty good trends in that business and.
Also within group on any internal remarks, Dennis I think you mentioned on some cross selling opportunities can you just give us a sense.
Where you sit on today versus what you would have expected to come from the cross sell side of things when you announced on the Liberty acquisition.
At least a good questions and the let me take a letter one first theres a lot of a benefits that.
Come out of the transaction besides cost saves.
For example.
In the voluntary space.
Guns old Lincoln before the merger.
Had more.
Tonnage of total sales coming from the voluntary.
<unk>.
Sales than pooled liberty to.
So as we brought the two companies together, we can take sort of some of the.
Advantages that we head or programs that we had at Lincoln and apply them too.
The merged companies book, So that would be an example, the.
Another example would be that.
We Oh, Oh Liberty had much better.
Since management capabilities.
And we were able to bring those.
In two or so 2000 5000.
Flow East segment.
And increased sales of there because of the combination. So we continue to see good potential.
From the combination of the company in a variety of ways.
Lease on the first part of your question agree completely that overtime, a strong economy and specifically low on a point that should create disability results that are an average better than your longer term.
Expectations.
And that's I think one of the reasons why we have outperformed the expectations that we had when we we did the.
The acquisition of the Liberty book of business.
In 2018 now quarter to quarter, you can get some noise. So as I mentioned, we expect.
Seasonally higher or loss ratios in the visibility business the fourth quarter, we saw that this year.
Okay. That's helpful. And then in terms of on be variable annuity accounting changes are you guys adopting those as of the started 2020 or you guys using a three year.
Your phase and.
I think you are talking about the statutory changes or.
Oliver Wyman VA driven be a reform yeah, we're gonna adopt that on 112020 as a reminder, we do not expect.
Any impact on RBC or our capital and.
We believe that the statutory reform is good in that it reduces the tales of the statutory noise that you can get.
When I mean, when I mean, what do I mean by noise I mean statutory.
Can move differently from the economics of the business and the reform has has improved bet.
Okay. Thank you for the color Yep.
Thank you and our next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hey, thanks for taking it.
First one ahead, we think group.
I know you assume one Q you guys typically have had a little seasonal DAC and I think it's been related in part.
Hard to some repricing.
The existing block and then I guess, the Liberty mutual block and so.
I was just interested to know if you'd expect that they continue and I also specifically if sort of the transition off the t. assays would would impact persistency and I guess, the thus the deck in one Q.
As well.
You are correct you have a good memory, Alex that has been improving over the last three years I think we may have a little bit of.
Uh huh.
Excess amortization due to that phenomena in the first quarter, but it will be at a smaller level, but it was.
As a last year. The other thing I would remind you about as we do have some intangibles.
Associated with the acquisition some amortizing intangibles.
And the amortization of those will step up a little bit in 2020, Chris can give you the exact numbers what it will step up.
Okay. That's helpful and then.
Oh, I guess just on the annuity segment I'd be interested if you could talk little bit about flows I mean, those have held up.
Yes, pretty darn law with with the interest rate environments. I was just interested to know what you're doing that's driving that do you think you can kind of continue the the deposit.
Flows into 2020.
Yeah.
Alex the the Pfos were positive across.
All of that.
Different types of products.
And.
We've been talking about price changes that could affect the level of sales.
Volume.
And.
Consequently, ER positive or negative flows.
Yeah, it's hard to predict today, whether we will have positive negative flows in 2020 from one I either deejays without he's with guarantees or fixed annuities.
Because this in part dependent.
With the competition does.
I guess I would say that to the extent that we did have a negative flow.
We come back to from an earnings per share perspective.
That would be because sales are lower.
Take the capital from that reduced sales and we'd expect to buy or.
Shares buyback so from.
Down to the bottom line EPS growth.
We'll be a little indifferent.
20, those two economic outcomes continue.
To focus on the franchise strength and maintaining a level of sales.
As consistent with keeping.
Our.
Quality distribution organization.
Our quality distribution partners.
And so it's a combination of all those things.
Go into.
The dynamics around.
Positive or negative flows.
Where it comes out from a long term.
Earnings perspective.
Got it okay. Thank you.
Thank you and I'm showing no further questions at this time I'd like to turn the call back to Mr., Chris Giovanni for any closing remarks.
Thank you all for joining us this morning as always we'll take your questions are our Investor Relations line at 800.
Three seven to nine to zero or through email at Investor Relations at LNG Dot com.
You won't have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect like speakers. Please standby.
[music].