Q4 2020 Lincoln National Corp Earnings Call
Good morning, and thank you for joining on Lincoln Financial group's fourth quarter 2020 earnings Conference call. At this time all lines are in a listen only mode. Later, we will announce the opportunity.
For questions instructions will be given at that time, if you need assistance at any time during the call. Please press the star key followed by zero and someone will assist you.
Now I'd like to turn the conference over to the Vice President of Investor Relations Al Carte Pacino. Please go ahead Sir.
Thank you Catherine good morning, and welcome to Lincoln Financial's fourth quarter earnings call.
Before we begin I have an important reminder.
Any comments made during the call regarding future expectations deposits expenses income from operations share repurchases and liquidity and capital resources are forward looking statements on the private Securities Litigation Reform Act of 1995.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations.
These risks and uncertainties include those described in the cautionary statement disclosures in on.
Our earnings release issued yesterday.
As well as those detailed on our 2019 annual report on form 10-K.
<unk> most recent quarterly reports on form 10-Q.
And from time to time in our other filings with the SEC.
These forward looking statements are made only as of today and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur after the state.
We appreciate your participation today and have might you to visit Lincoln's website, Www Lincoln financial Dot Com, where you can find our press release and statistical supplement which include full reconciliations of the non-GAAP measures used on this call.
Including adjusted return on equity and adjusted income from operations or adjusted operating income to their most comparable GAAP measures.
Presenting on today's call are Dennis glass.
President and Chief Executive Officer.
Randy Free Tagg, 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'd now like to turn the call over to Dennis.
Thank you al good morning, everyone.
During 2020, Lincoln responded well to the immediate health economic and capital market challenges.
We also took steps to add new products and build distribution.
Improved cost effectiveness and strengthen the balance sheet.
Fourth quarter earnings were affected by elevated pandemic related claims in our life and group businesses, which was partially offset by another quarter of strong returns from our alternative investment portfolio.
Given this year's circumstances.
We saw quite a bit of variability in earnings.
When normalizing for several items in 2020, the largest of which were charges from our third quarter annual review.
And pandemic related claims.
We view, our EPS for the year at approximately $9.30.
And our O E. Excluding a OCI at 13%.
Based on our current views, we are poised to deliver 8% to 10% EPS growth off this level over the long term.
Focus items during the year included three initiatives.
<unk>.
Executing our REIT price shift and add new product strategy.
Two achieving expense savings, while improving the customer experience and three maintaining a strong balance sheet and maximizing our financial flexibility.
Let me touch on each of these.
First with a re price shift and add new product strategy.
Our aggressive and disciplined repricing actions targeted achieving appropriate returns on capital.
As we exited the fourth quarter, we generated at least a 12% return on new business and our current portfolio based on the forward curve across all our businesses.
As expected sales decrease that most businesses with growth expected to re emerge over the course of the year based on the shift and add new components of our strategy.
Also several competitors followed our repricing actions, making are repriced products more competitive as we enter 2021.
We are introducing eight new products during the first half of this year that will increase consumer choice and expand our customer value proposition.
These actions will further strengthen our product portfolio enable us to participate in more market segments and increase sales opportunities.
Our product breadth and distribution capabilities as part of our historic playbook that we will continue to execute on them.
To drive top line growth.
Second on our efforts to increase efficiency, while improving the customer experience.
Expense management is a key priority.
We are focused on actions that will further increase productivity across our manufacturing and distribution organizations and also enhance the customer and partner experience.
Accelerated implementation and acceptance of digital tools as part of the reason, we see the potential for further expense savings opportunities as an example.
During the fourth quarter, 99% of life policies were delivered electronically.
Nearly triple the prior year quarter.
Successes like this combined with our overall expense management capability are enabling us to start another meaningful expense savings program.
We'll update you later this year as the project plan is finalized and we size the opportunities.
Third on the balance sheet, we have successfully focused on protecting and further improving the balance sheet.
Our RBC ratio and cash at the holding company have increased and remain above our targets.
We also increased our financial flexibility through capital actions, including adding contingent capital and extending debt maturities out until September 2023.
The investment portfolio has benefited from Derisking actions and various government support programs as a result credit losses, and downgrades have been less than expectations at the onset of the pandemic.
Looking forward capital generation will face some near term headwinds from elevated COVID-19 related claims however.
Given our strong balance sheet and overall free cash flow generation, we will remain in the market repurchasing our shares during the first quarter.
Additionally, we have put more energy and resources into potential risk transfer deals with a goal of enhancing capital deployment.
Lastly, before shifting to segment results. It is important to note that since our last conference call. In early November we have seen a number of favorable developments, including the rollout from COVID-19 vaccinations.
Further gains in the equity markets and an increase in interest rates and continuing economic stimulus all of these bode well for Lincoln overtime.
As I just noted our underlying earnings are firmly intact, and we are positioned for growth as COVID-19 impacts diminish.
Any medical experts forecast that COVID-19 deaths will peak in the first quarter and recede over the course of the year.
What mortality claims ultimately returned to normal levels, we see earnings momentum building in the second half of this year and into 2022.
Now turning to the business segments.
Starting with annuities, where we successfully leveraged our unique manufacturing and distribution capabilities.
We expanded shelf space and the number of producers selling Lincoln's index variable annuity products doubled in 2020, which helped cement our leadership position in the IV a marketplace.
Which is the fastest growing segment of the annuity market.
Total IV, a sales were $5 billion for the year.
Asset protection products like IV, a are resonating with consumers and producers.
This was contributing to our sales shifts toward variable annuities without living benefits. These.
These sales represented more than two thirds of total VA sales in 2020.
Based on our in force Va's without living benefits and other non guaranteed products.
Representing 47% of <unk>.
Total annuity account values.
Growth on asset protection sales combined with continued market demand for guaranteed living benefits led to positive annual variable annuity net flows for the first time since 2015.
As expected total annuity sales were down as we deemphasize the fixed annuity sales.
To return challenges in the current environment.
In 2021.
<unk> continued to benefit from our high quality in force book of business that generates consistent capital and strong returns we project sales to Goodyear.
Consistent with the $2 5 billion dollar run rate, we have produced in recent quarters and build over the course of the year as we benefit from our 'twenty 'twenty product introductions as well as products, we plan to add this year.
Our new products create additional consumer value propositions and expand on our already broad product portfolio.
In retirement plan services are digitally focused model.
Sure Hi, Tec enables high touch continues to differentiate us in a virtual environment.
While economic and pandemic related uncertainty weighed on most businesses this year.
Strong performance from our sales and retention teams drove a 6% increase in total deposits.
Including growth in both first year sales and recurring deposits.
Along with our sixth consecutive year of positive net flows.
Notably some of the headwinds we have seen from employers, reducing or eliminating matching contributions and workforce reductions have receded.
With recurring deposits up slightly year over year in the fourth quarter compared to a decline in the third quarter.
Overall, it was a strong quarter and year for the retirement business and we expect momentum to continue as we are well positioned to compete in our target markets.
Near term, we see further opportunities with your path.
Our alternative to target date funds and longer term, we see significant potential from key positions and secure act that facilitate providing protected income solutions to working Americans and multiple employer programs that address access to work site retire.
<unk> plans.
Within the life insurance business, our focus on 2020 was on re pricing and product innovation.
With an eye on introducing new solutions during the first half of 2021.
Given repricing actions combined with record sales in the prior year quarter sales declined year over year.
And we expect sales to remain at similar levels until our new products are introduced.
These new products offer consumers more choice and alternative the value propositions.
Positioning us for long term sales growth at attractive returns.
While we continue offering guaranteed solutions, our product portfolio expansion leverages separate accounts as the investment engine, providing non guaranteed upside benefit potential for our consumers.
<unk> of these new products include our money guard and B U L solutions.
As always we will couple this expanded product portfolio with.
With the strongest distribution platform in the industry positioning us well in 2021 and beyond.
Lastly on group protection.
<unk> in our seasonally strongest quarter.
Increased over the prior year.
Periods due to timing of when cases quotes.
For the full year sales declined 6% as gains in disability were more than offset by decreases in life and dental.
Strong persistency of 87% of <unk>.
350 basis points from 2020.
More than offset lower sales, which led to a 4% increase in premiums for the full year.
Importantly, the contraction in premiums we experienced at the onset of the pandemic is stabilizing.
Covid activity has resumed both of which are positive for premium growth.
Even adjusting for the pandemic margins were below target.
We are taking action.
And based on focused pricing enhancements, we began in 2020.
Along with expense initiatives, we expect continuous margin improvement over time building towards our 7% target.
Briefly on investment results as I mentioned earlier, our investment portfolio has performed well through this volatile period per capital markets Hi.
Highlighting the solid portfolio of construction and the high quality nature of our portfolio.
We manage credit risk defensively.
With proactive derisking as well as adjusted and our new money allocation to higher rated assets that match, our liabilities at attractive yields.
As a result of these actions the credit quality of the portfolio is in line with pre pandemic levels. Additionally, the alternatives investment portfolio performed well in the quarter.
And for the full year generated an 11% annual return slightly above our long term target.
In closing I'm very pleased with how Lincoln responded to this year's unique challenges.
Including product outcomes that further differentiate us in the marketplace.
Importantly, I want to recognize our employees for their extraordinary efforts and unwavering commitment last year.
We entered 2021, well positioned and a stronger franchise sales.
Sales momentum should build over the course of the year at attractive returns as we benefit from new product introductions, our digital tools and capabilities have never been stronger, which will enable us to further enhance the customer experience and improve productivity, we have a durable balance sheet.
With a high quality investment portfolio and strong free cash flow generation and capital ratios.
Underlying earnings power of our businesses are intact and as I said earlier, we are poised to deliver 8% to 10% growth over the long term even in the current low interest rate environment.
As a result.
I am optimistic about our ability to drive shareholder value.
I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported fourth quarter adjusted operating income of $346 million from $1 78 per share.
There were no notable items within the current or prior year quarter.
Over this quarters result was impacted by a number of items.
First.
Pandemic related claims reduced earnings by approximately $187 million or 96 cents per share.
This included a $174 million mortality impact and $13 million from disability claims.
Second.
Results benefited from strong performance in the alternatives investment portfolio relative to our targeted annual return of 10%.
Boosting earnings by $73 million or <unk> 38 per share.
Third there was unfavorable expense variability of $28 million or <unk> 13 cents per share and the other operations segment.
Related mostly to elevated deferred compensation costs, resulting from the increase in Lincoln share price last quarter.
Finally, there was $20 million or 10 cents per share of favorable amortization levels and life insurance.
Which was largely offset by seasonal unfavorable city and group protection.
Net income totaled $143 million or <unk> 74 per share as improvements in credit spreads drove a $240 million loss in the variable annuity non performance risk.
Outside of this non economic item credit experience with excellent and the variable annuity hedge program performed exceptionally well with 100% effectiveness in the quarter.
Moving to the performance of key financial metrics compared to the prior year quarter.
Adjusted operating revenue increased 3%.
With operating revenue growth in each of our four business segments.
Average account values increased to 9%.
Total G&A expenses net of amounts capitalized decreased 1%.
Or 7% when excluding unfavorable expense variability and other operations.
The 1% decline combined with operating revenue growth led to a 60 basis point improvement in the expense ratio.
And book value per share excluding E. L. T I stands at $71 59.
And all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $289 million compared to $269 million in the prior year quarter.
The increase was primarily due to higher account values driven by growth in the equity markets.
Average comp values of $151 billion increased 9% year over year and 5% on a sequential basis.
Additionally end of period account values exceeded average values by 4%.
Providing a tailwind into the first quarter.
Base spreads excluding variable investment income were up eight basis points from the year ago quarter.
Driven by active management of crediting rates and some quarterly noise.
G&A expenses net of amounts capitalized decreased 5% for the full year and quarter.
Leading to a 60 basis point improvement from the expense ratio for the quarter.
G&A expenses rose sequentially due to typical fourth quarter seasonality.
Return metrics remained healthy in the quarter with return on assets coming in at 77 basis points.
And return on equity at 21, 4%.
Risk metrics on the VA book continue to demonstrate the quality of the business.
As the net amount at risk fell to 70 basis points of account value for living benefits and the 34 basis points for death benefits.
Continuing a theme that has been in place for well over a decade.
2020 was another excellent year for the annuities business.
Earnings grew in line with account values.
And excluding the unlocking return on equity was very strong coming in at 21%.
Looking into 2021, we expect more of the same.
Retirement plan services reported operating income of $49 million.
Compared to $47 million in the prior year quarter.
As favorable alternative investment performance expense management, and higher average account values more than offset spread compression.
Positive flows combined with favorable equity markets drove average account values up 10% over the prior year quarter.
G&A expenses net of amounts capitalized were flat compared to the prior year quarter and down 5% for the full year driving a 140 basis point improvement in the expense ratio in.
In 2020.
Base spreads excluding variable investment income compressed 28 basis points versus the prior year quarter.
Spread compression was above normal primarily due to lower yields on floating rate securities.
On the crediting rate on the matched liability adjusted less quickly.
We expect this to moderate and return to a more typical 10 to 15 basis point range in 2021.
The retirement business ended the year with strong results, including a 23 basis point ROA in the quarter with.
With momentum in sales and expense management, serving as positive drivers going forward.
Turning to life insurance, we reported operating income of $144 million compared to $179 million in the prior year quarter.
This quarter's results included $113 million of pandemic related mortality.
Partly offset by $53 million of favorable alternative investment experience.
And the favorable amortization I noted upfront.
Underlying earnings drivers continued to show growth.
With average account values up 6% on.
On average life insurance in force up 9% over the prior year.
From a full year outside of the pandemic mortality was in line with our annual expectations.
G&A expenses net of amounts capitalized decreased 13% from the prior year quarter.
Leading to a 140 basis point improvement in the expense ratio.
Base spreads declined 25 basis points compared to the prior year quarter due to a previously noted non economic change in our crediting rate methodology.
We expect base spreads to return to our more typical five to 10 basis point rate of decline in 2021.
Looking forward to the first quarter.
We continue to expect headwinds from the pandemic.
Over in the coming months, the worst should be behind us.
And key life insurance earnings growth drivers remain strong.
Group Protection reported a loss from operations of $42 million compared to operating earnings of $54 million in the prior year quarter.
With the decrease driven mainly by pandemic related claims.
Group earnings were impacted by a number of items during the quarter, including.
$74 million of claims related to the pandemic.
$15 million to $20 million of seasonally higher fourth quarter disability claims and expenses.
And a slowdown in social security approval that negatively impacted results by $8 million.
Partly offset by $5 million of favorable alternative investment experience.
The reported total loss ratio was 87, 8% in the quarter up four six points sequentially.
This was driven in part by an increase in pandemic related mortality and hospitalizations, which resulted in elevated claims including $39 million of direct COVID-19 mortality.
$13 million of direct COVID-19 disability.
And $22 million of excess mortality.
Excluding pandemic related claims from both periods. The total loss ratio was 78, 9%.
Up three percentage points sequentially.
As improvement in group life and dental.
More than offset by an increase from the disability loss ratio.
The sequential increase in the disability loss ratio was driven by typical fourth quarter seasonality.
As well as the previously mentioned a slowdown in social security approvals.
G&A expenses net of amounts capitalized.
Decreased 6% from the prior year quarter, and 5% from full year.
Excluding the pandemic and other items I mentioned.
The earnings of the business were below our expectations.
However, as Dennis mentioned, we are confident that the actions we have been taking will over time get us to our targeted margin.
Turning to capital and capital management, we ended the year with $10.3 billion of statutory surplus.
And an RBC ratio of 452%.
Which includes 23 percentage points from a non economic goodwill associated with the Liberty acquisition.
That we expect will go away at the end of 2021.
Cash at the holding company stands at $754 million.
Above our $450 million target as we have pre funded our $300 million 2022 debt maturities.
Additionally, we added a $500 million contingent capital facility earlier this year.
This combination of strong life company capitalization.
Cash at the holding company.
Pre funding of debt maturities until 2000, and twenty-three and new sources of contingent capital puts us in a stronger more diversified position than we were a year ago.
We resumed buybacks in the fourth quarter and deployed $50 million towards share repurchases.
As a result of our confidence in our capital position, we plan to increase our buyback to $100 million in first quarter and we'll provide additional updates on our next earnings conference call.
To conclude.
This year's results included a large impact from COVID-19.
And we continue to expect headwinds from the pandemic in the near term.
Looking past that we see strong underlying earnings and solid drivers of EPS growth, including.
Record end of period account values.
A strong record of expense discipline across the company.
The ability to grow sales looking forward.
Pandemic related headwinds that we believe will decline over 2021.
And a robust capital position, providing us an ability to increase the pace of capital deployment.
And as a result, we reiterate our plan to grow EPS at an 8% to 10% rate over the long term.
With that let me turn the call back over to al.
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 one follow up and then re queue. If you have additional questions.
With that let me turn the call over to Catherine to begin Q&A.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw.
Your question press the pound key.
For optimal sound quality. Please do not use the speakerphone. Please speak directly into your receiver or use a wired headset with a microphone.
Our first question comes from Andrew <unk> with Credit Suisse. Your line is open.
Hey, good morning, everyone I wanted to focus on the individual life segment and starting off with sales in the quarter on I understand you repriced many of your life products.
Net interest rates really aren't a big factor with term life and per our producer survey.
Was an expectation in the fourth quarter from mid single digit sales growth, whereas your term sales were off.
17%. So im wondering did you re price the term product and why might you.
Why might you think it kind of dropped off in sales.
Andrew This is Randy.
Thanks for the question.
Andrew.
Me up I'm going to get to that question, but al Let me know this morning that.
There were a number of questions.
Concerning.
A report that you recently were published on Lincoln and so.
Let me take this opportunity, though hopefully.
Clear up some of the confusion.
Can you just hold your <unk> morning, Wow once that has been that has been created.
By that report so.
Let me make just a few points on that before I get to your sales. Your term sales specific question sure first.
There is a belief that.
We face a sizable charge in our life businesses as we only taken share.
$500 million of charges since 2011 and in the report represents that this is too small a portion of our.
Reserves risk charges that our peers have taken.
Unfortunately from my standpoint, I must correct the estimate of furniture origins.
Noting that we've actually taken charges of nearly $1 billion.
Since 2011.
Including charges for mortality.
You can find them.
Our SEC filings those mortality charges.
Have been focused on resolving many of the the industry issues that are referenced in the end result is.
That as we sit here today, we have mortality assumptions covering our business that are aligned.
With our credible experience and reflect the latest industry data on future.
Mortality expectations. So in short we're on this I'd say, we're very comfortable with all of our assumptions, including those.
Pertaining to mortality.
I think that additionally, adjust.
I'd just say as you have seen this us trying to be used in other areas using peers as the sole data point and deriving expectations for.
So Lincoln is really a blend estimate approach. So I think that really ignores. The fact that every euro assumptions are true up for experience and go through a significant amount of internal.
An external audit review so that's the first I think confused confusion that I want to clear up the second thing that's really just broadly on the adequacy of reserves as it pertains to GAAP.
Just to remind everybody 95% of our life reserves are governed by Fas 97.
And they've been been.
Been reviewed and updated every single year, when you turned of a small amount of business.
That would have that is governed by fast 60, we review those sufficiency of those reserves every year.
Getting into specifics I'll note that theres, a significant amount of <unk>.
Sufficiency.
When you turn the lands to statutory reserves or cash flow testing results indicate an overall sufficiency of $14 billion at the end of 2019 and additionally.
The new factor on I'd point out with rates haven't increased somewhat but I note that we now expect little to no impact.
From cash flow testing sub tests at the end of 2021, so it's such an item I wanted to clear.
Clear up some confusion on the surface on this.
Discussion are on the potential for large price increases on reinsurance center Recaptures.
We've discussed this extensively I think will discuss this more than any other company out there actually and in fact, we noted at our 2019 Investor day that.
This issue as part of our $250 million annual headwind that was embedded.
In our earnings.
As we sit at a day, we've reached resolutions covering 70% of our ceded face alone.
And I note that on additional 20% represents recent reinsurance treaties that are meeting all parties.
Expectations for that remaining 10%.
For the Romanian small, 10%, we've accounted for likely outcomes as part of our assumption set.
Setting process, so I really think we're in.
Pretty good shape there.
The fourth I might really digs into one of the reinsurers specifically so as it relates to Scottish re.
It's at 3%, it's a small piece of our wire T reinsurance it's included.
And that 10% that day.
No that is remaining and I'd also point out that we did take charges on both GAAP and stat.
In 2020 to account for for likely outcomes that might come from Scottish So you know on.
On this and I know it wasn't the specific question you asked but I, but I really think there was some confusion that I.
I wanted to clear up so just let me wrap up by saying that these represent the facts.
From Lincoln facts that we've really talked about over the years and well gladly discuss.
Any of these issues further or any one of the many meetings that we do with investors and analysts over the course of the year, so with that hopefully that clears up.
That confusion that I believe.
It was put into the marketplace. So let me get onto your question on.
Life sales broadly and in terms specifically.
The term market itself is one where you know.
It's a price sensitive market, so little movements here little movements, thereby by companies will push sales up and down you know I think broadly speaking in terms, we have continued to increase our position in that marketplace.
Our share of the term market has continued to grown I think driven by our digitally focused ability to both the.
Issue and deliver.
Policy.
Our automated underwriting capabilities.
Spelled especially for for policies under million dollars. So I think we're very happy with where we're positioned we.
We did make some small pricing tweaks here in the first quarter that I think will have a favorable impact.
Broadly on lifestyle.
What you saw on the in the fourth quarter was what we believe is.
A trough you know I think we are.
At Lincoln believe.
When it came to repricing products that really needed to be repriced.
Given the environment, specifically low rates.
We think we we moved first.
On money guard.
We moved first on other products and I, you know I think that negatively impacted.
Our level of sales I think I do think that others, followed and so you saw a little bit of a fire sale on going on at some of our peers.
In the fourth quarter on that probably negatively impacted our logo sales a little bit, but I think the real key to life from what we're really excited about is the work we did over 2020 to create whole new value props, especially in the <unk>.
On the garden space and in the variable space those products with growth rolling out here in the fourth quarter or in the first quarter excuse me of 2021, we would expect sales on those products.
As usual things start low slow, but we'd expect them to ramp up over the course of the year, but.
I think those are products that really speak to the environment right you're using the.
On a separate accounts.
Driver of value.
You're shifting some risk to the consumer when doing that and away from Lincoln.
You're shifting products away from products that are negatively impacted by interest rates. So Andrew.
Andrew that's a what I broadly say about about lifestyles and specifically about term.
Okay, and then I guess just.
From my follow up question I think I'll, just refrain from it because.
We're absolutely there is no confusion on.
On on our part.
This number.
Number one.
The term insurance under <unk> 16 does get more so that that could be it does not get mark so that could be a real issue.
Number two.
With regard to the assumption reviews. It absolutely came out to 500 million there could have been other stuff and then thirdly in terms of looking over a 10 year period, and saying don't look at your comps and you Didnt mentioned statutory numbers over 10 years, which was widely different from you versus.
All of your peers I mean, the earnings were just outside so I think over a 10 year period, given that we don't have the data at this point indications is quite a jump out given Lincoln's exposure and then thirdly, you mentioned that you recaptured most of the business and the points of <unk>.
Search, whereas at the companies that did recapture where anti selected against because the reinsurers had outsized information and ultimately recapturing the business and not leaving it with the reinsurers over the long haul should be problematic with regard to Scottish I get that it's small relative to everything.
Els, but over $12 billion in force on an absolute basis reinsured with a company that can rehab and could experience severe problems.
A lot of money on the Standalone basis, So I'll just leave it at that but there's absolutely no confusion on our end and I appreciate your feedback.
Hey, Andrew.
Let me say just a couple of thoughts one.
I own these financial statements I can add and.
You can add up to 500 million I'm, telling you factually its $1 billion. So.
I on the financial statements.
Looked at the numbers, it's $1 billion. So you can continue to stay at $500 million, but just let me say youre wrong period end of story on that topic.
Once again on.
On this whole concept of Fas 60, it's 5% of reserves.
Significant amount of sufficiency measures really don't expect any issue.
When it comes to L. DTI.
Around that small component of our.
Our business once again, so I'm just gonna pegged differ in terms on a stat earnings concept right. I mean, if you look under stat earnings over those years and by the way my numbers are a little different than your stance on materially different.
They represent just a fraction of GAAP reserves, which is what you would expect right its roughly 40% to 50% of GAAP reserves. That's what you would expect our GAAP earnings excuse me. It's what you would expect there is strain and issuing business and we're one of the leading writers of life insurance. So the results to me look.
Bright in line with what I would expect.
On Scottish I noted.
At the end, we did put up.
Impacts in our financial statements in 2024 potential impacts from anything that.
That happens there so yeah, I hope that answers.
Andrew you are.
With any analyst.
You are.
It's your job to go out and assess companies and you're open to come up with any opinion, one I'm just trying to correct. Some of the confusion created by some points in there that I just.
I don't think are correct and I tried to give the facts.
From Lincoln side, So I appreciate your thoughts and.
Thanks, Andrew.
No I appreciate it on.
My end as well I mean again term life is $6 700 billion and force a lot of money, we'll see how it plays out but I appreciate the feedback.
It's interesting on this whole concept of pulse level term.
Not really sure who your expert sorry, let me tell you we work with.
Every leading reinsurer in America, and there's a huge amount of really interesting research done by by some of the biggest reinsurers are on what's called post level term optimization.
So yeah, I'm not I'm not sure who you're industry expert is beam, but you might want to ask them those questions because there's a lot of very interesting research around optimizing <unk>.
Global term results.
Yes, we did and there were multiple we did and there were multiple concerns.
Thanks, Andrew.
Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.
Thanks.
That's a tough question a follow shell on my mind.
<unk>, probably be a little more benign.
Dennis I'd like to just follow up on.
What youre thinking on risk transfer.
Or are you thinking just from a product standpoint, more likely on fixed annuities life insurance or variable annuities are based on the work you've done so far and.
Based on kind of the work you've done so far are you anticipating.
A sizable transaction or something more modest.
Tom Thanks for the question, let me start by saying that Ah just.
When I look at the market per risk transfer.
It's pretty active.
It's active across a couple of spectrums and not only is it active but more capitals coming into the industry from a.
Players that havent been in the industry reports, so overall, it's a pretty active market.
In terms of.
Kind of activity it includes <unk>.
<unk> transactions Lincoln has done one as you know.
Includes strategic transactions that have been going on asset managed.
Asset management companies.
And theres been some flow transactions.
And again as you know we have done those in the past and both on our fixed annuity portfolio and our variable annuity portfolio so active market.
Lincoln has participated in all dimensions of it over the past.
And we'll keep looking at.
Each of those components.
In terms of sizing.
I think we will have to wait and see on that.
Uh huh.
The soda harder.
Staying on what small.
But we'll be looking at.
Meaningful transactions I guess is the way I would respond to it.
So I'm quite encouraged.
On that there'll be opportunities.
Of the pie.
On transacted in the past.
For Lincoln.
Okay.
That's helpful Dennis on the.
Just my follow up question is I.
Historically, Randy you've converted.
GAAP to distributable free cash flow in the $50 to 55 per cent level I think.
Given the product mix shift that Lincoln has gone through and then and I know now you're talking about some recovery and no sales.
When we get to the other side of the pandemic what kind of conversion do you think we're looking at are we likely to be back on that.
55 ish range or do you expect it to be lower or higher.
Hey, Tom Thanks for the question.
I'm not going to update the range right now, but let me make a couple of points.
Hopefully help.
If you look at the pricing actions that we've taken and the impact that's had on.
The capital, we allocate to new business.
If you think about sort of the mix of sales that we have today being a little less capital intensive and I think it's fair to say that the amount of capital that we allocate to new business is lower today than.
And then it was a couple of years ago. So I think over time that will definitely.
Be a benefit I think you have to look through 2012.
'twenty one here because I think the pandemic is going to be providing some negative impacts to distributable earnings for at least the first half of the year, but yeah I think over time when you think about how we're allocating capital we're allocating less to new business and I think that could have.
Some positive benefits on distributable earnings over time, and we'll try to give more guidance later.
Thanks, Tom Okay. Thanks.
Yes.
Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, Thank you I wanted to focus on the group business and you noted that I think even ex Covid group results were a bit below your expectations. This quarter. So was hoping you could talk about where you're seeing the biggest variances I think you also mentioned some planned actions to improve margin. So hoping you could go into some more detail there.
Eric It's Randy.
So if you look at the quarter, alright lets start with the quarter on a week we.
We reported a loss of $42 million and if you listen to my script I spiked out.
Items that totaled <unk>.
Nine the low ninety's to midnight and needs to be a.
Sort of added that you'd be sort of at a normalized number of $50 million to $55 million.
In that five to five 5% range, which if you look back to last year is kind of where we were last year. When we exited 2019 in that five to five five per cent range.
What I think that.
The pandemic it was really sort of right shifted what is our belief.
Which is that.
When you start the pipe to five 9% level, we have clear vision on growing that to 7% over our planning cycle and it's really driven by four.
Big elements really executing on four four things pricing.
Its expenses.
It's claims management and its underwriting so we are inside of Lincoln have clear vision from going where we are today sort of in that five to five 5% range.
Towards that two 7%, which is our ultimate target as Dennis mentioned and that I think COVID-19 sort of caused it to be right shifted one year.
From where we were last year. So that's how we think about the group business as we sit here today here.
Thank you and then maybe just if you could go into a little bit more detail on the drivers of the increase in the group disability loss ratio on it I mean, I think you mentioned some higher STD claims from seasonality as well as from social security impacts. So maybe if you could just dig into that a little bit bit more please.
Yes.
Yeah.
Think about the quarter, we reported a disability loss ratio of 86, 2%.
And I spiked out two items specifically.
Our COVID-19 and social security slowdowns.
Security approval slowdowns, if you add those two items together, that's roughly four and a half.
And then when you think about the seasonality, which we typically see in the fourth quarter. You saw this year in the fourth quarter, we saw last year in.
In the fourth quarter, we should factor that in I think you'd get down to a sort of a range of 78 and a half to 79 and that compares to roughly.
77, 5% to 78 in the third quarter when you adjust for Covid.
So I think we're a little above where we were but underneath the noise that's been driven by COVID-19.
Security approvals et cetera, and on the seasonality I think.
We're just a little worse than what our target would be and I think that's really driven by one big factor, which is that we did lower our discount rate.
In the LCD business this year that set up a little bit of a negative impact now the good point there is that.
We had clear insight early in the year that that was something we were going to do and so we've been putting an end to price.
All year, all the bids we've put out and.
All of that just the nature of the group business is a lot of those cases will hit on January 1st So yes.
Feel good that the price to cover that discount rate decrease is coming in the first quarter, which hopefully can put us back into the more normal range.
Outside of any negative impacts that we might see from Covid.
Got it. Thank you that's helpful.
Yep.
Thank you. Our next question comes from SUNY come off with Citi. Your line is open.
Hi, Thanks, good morning.
Wanted to circle back to the 8% to 10% long term.
S growth you guys are talking about I think back in 2019, when you had your Investor day, you talked about a 4% to five point.
Impact positive impact from net new business I know, there's a lot in motion now with.
New products.
Would it be fair to think about sort of 2021 is it a transition year and then as you get into 2022.
That you could get back to something like that four to five points from net new business.
Sidney it's Dennis.
The 8% to 10% growth.
So traditionally as you point out has 4% coming from sort of the new business versus the run off of business.
Some amount of margin improvement.
So I think we get up to 5% from management actions and we net out capital market.
The growth in equity markets offset by spread compression.
One to two points and then share buybacks.
And all of that adds up to 8% to 10%.
So over the long term, that's our expectations I think in the near term and we've demonstrated our success.
Accomplishing that some of those bars are higher some of them are lower because of circumstances.
I think as we rebuild sales at 4% share a little bit of time will be a little bit lower.
But the expense savings or margin improvement are.
<unk> is going to be higher so each of the borrowers can change given the circumstances that we find ourselves in macroeconomic conditions and that makes them so forth.
But management driving toward that 8% to 10%.
And.
To repeat what Randy and I have both said, we can we can see ourselves getting to that up from the $9 30.
And again, how we get there might be a little bit different.
Over the next.
Six to 18 months, but.
We can get there.
Got it and then sort of related to the same chart I think when you. When you guys talked about expense reduction in the past you were looking to offset I guess the spread compression or at least that was one way to think about it I would imagine the spread compression impact today is probably worse than what it has been what it was in 2000.
19 is that the goal of this new plan to try to offset that that spread compression as we think about getting more information I guess maybe on <unk>.
It's a neat Randy I think when you think about spread compression.
Yeah.
While back we talked about we talked about a two to three per cent range than we were.
We were at the low end of that.
Sort of coming out of 2019, and then as rates dipped significantly at the beginning of this year, we talked about how we might have moved a little above that I think where we sit today and then as we look out over our planning horizon I think we see it in that two to three per cent range, probably in the upper half of that two to three per cent range, but I think we're back inside of that range, albeit.
A little higher than we were.
Back in 2019.
I would say its.
Management's job when there is a pressure like there is from.
There's sort of.
Continuing spread compression but.
At a lower amount.
It's our job to replace those earnings.
So that's very much in our mind as we.
I'll get into this next financial plan as we move into the next couple of years.
Yeah.
Okay. Thanks.
Thank you. Our next question comes from Jimmy <unk> with Jpmorgan. Your line is open.
Hi, Good morning, So first just per Randy on changes in accounting L. D. P line coming up in a couple of years do you have better insight into how you're.
You'll be affected if not then.
When do you think you'll start sort of rolling out guidance or indications on what the impact might be.
Yes.
Yeah, Jimmy you know other than the comment I made a little earlier that we don't see a large impact from Fas 60 component really don't have any insights I can share with the day. They Jimmy I really think it's going to be.
2022, maybe in the middle of 'twenty 2022 range before we have.
Numbers that we can really start sharing on you know I think there's if you go back to the to the bad debt.
There's a reason that they differed on.
The implementation of LPTA a year, that's because there's a lot of work.
That work was somewhat.
Influenced by by everybody shifting to two.
The work from home environment. So yeah, I think we're in that somewhere in the 2022 area. We will start sharing data with you will be able to start sharing Davidson.
Yes.
And then just on your retirement business. Your flows have been pretty good and I think your business is holding up better than some of the sort of <unk> businesses.
The makeup if you could just talk about what you're seeing in terms of.
Trends in on deferrals on matching matching contribution and.
Just talk about the customer segments that you're in and how susceptible are not as susceptible to the economy there.
I mentioned.
Jimmy some of the statistics on.
No.
Contribution rates early in the year.
And later in the year from employees and matches and so forth from <unk>.
Employers on and that seems to be improving.
As improved both of course of the year.
The markets that we participate in are.
Our less susceptible on large part.
To depend Emmick education.
Health and government.
On a more stable employment in those areas.
So yeah, we've had a we've had a good run here.
No.
We expect it to continue.
Thank you.
That's all the time, we have for questions management will follow up with those in the queue. Later this afternoon I would like to turn the call back over to al <unk> for closing remarks.
Well. Thank you all for joining us this morning as always we're happy to take any follow up questions that you have you can email us at Investor Relations at L. S Dot com. Thank.
Thank you all on have a great day.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day speakers. Please standby.
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