Q1 2021 Lincoln National Corp Earnings Call
Good morning, and thank you for joining Lincoln financial group's first quarter 2021 earnings conference call. At this time all lines are in total.
Later, we will announce the opportunity for questions and instructions will be given at that time, if you need assistance at any time during the call. Please press the star followed by zero and from a bullet that's true now.
Now I would like to turn the conference over to the Vice President of Investor Relations.
Please go ahead Sir.
Thank you Catherine good morning, and welcome to Lincoln Financial's first 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 under the private Securities Litigation Reform Act 1995.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations.
These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued yesterday as well as those detailed in our 2020 annual report on form 10-K. Most recent quarterly reports on form 10-Q, and from time to time and for 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 that.
Select events or circumstances that occur after this date.
We appreciate your participation today and invite 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.
GAAP measures used on this call, including adjusted return on equity and adjusted income from operations for adjusted operating income for the most comparable GAAP measures for.
Presenting on today's call are Dennis glass, President and Chief Executive Officer, and Randy Free Tagg, Chief Financial Officer, and head of individual lives.
After their prepared remarks, we will move to the question and answer portion of the call I would now like to turn the call over to Dennis.
Al Good morning, everyone Lincoln.
Lincoln had a strong start for the year against an improving but still challenging environment.
We have continued to execute our reprice shift and add new products strategy manage expenses improve the customer experience and maintain a strong balance sheet.
First quarter earnings were affected by elevated pandemic related claims.
Our life and group businesses, though this was partially offset by another quarter of strong returns from our alternative investment portfolio. We.
We are pleased with the earnings power Lincoln showed in the quarter and the outlook for our business is positive.
Now let me touch on the major initiatives that are helping bolster our franchise and earnings power for.
First as a result of our proactive and disciplined repricing actions, we are achieving targeted returns in each of our businesses.
As a result of our re price shift and add new product strategy and the fact that several peters for old a repricing actions our sales pipelines have begun to expand and we expect continued sales recovery in the upcoming quarters.
We're introducing eight new products in the first half of this year, which increased consumer choice broaden the product portfolio and enable our participation in more market segments.
Our new product strategy also gives us a great deal of Optionality.
If interest rates remain low our newly launched products will remain attractive given their strong consumer value propositions driven by innovative product design it for.
Rates continue to rise in addition to these newer products some offerings already on our show with once again resonate with consumers and that would also be beneficial to Lincoln sales results.
Second we're focused on actions to increase productivity across our manufacturing operations and distribution organizations.
Enhancing the customer and partner experience with.
We continue to report declining expense ratios in most of our businesses while at the same time investing in client facing digital tools our.
Our demonstrated expense management capabilities will guide us as we start another meaningful expense savings program later this year.
Third we have successfully focused on improving the balance sheet, both our RBC ratio and cash at the holding company have increased and remain above target, giving us the confidence to increase our share repurchase pace.
Furthermore, as we evaluate risk transfer deals we would expect for this to provide additional upside potential to our capital deployment if finalized.
Now turning to the business segments.
Starting with annuities, we continue to successfully leverage our industry, leading manufacturing capabilities to create new customer value propositions and expand our already broad product portfolio.
Last year, we establish ourselves as a leader in index variable annuities.
This year, we're seeing growth in both IV as and traditional variable annuities without living benefits with total sales of non living benefit be age up 44% versus the prior year quarter and 9% sequentially.
Growth in these products combined with continued market demand for guaranteed living benefits led to total VA sales growth both versus the prior year quarter and sequentially.
We had projected sales to begin the year at a similar pace to that seen in the fourth quarter and build over the course of the year as we benefit from products introduced both this year and last and we are pleased to see that sales growth is ahead of our expected pace.
In fact, this was the first quarter and a year that we saw sequential sales growth across all product categories in the annuities business.
While we experienced negative net flows in the quarter. This is a direct result.
Of management's actions to maintain rigorous return standards.
And to allow us to continue to direct capital to the highest and best use.
In 2020, one we expect that earnings continue to benefit from our high quality in force book that generates consistent cash flow as it returns and provides excellent value for customers.
In retirement plan services, we once again reported strong results driven by our digitally optimized model.
This model, where high Tech enables high touch differentiates us from the virtual environment.
Our innovative product development capabilities are driving results and we are excited about the continued success of our target date fund alternative your path.
As well as the recent launch of income America, and innovative and simplified income solution for retirement plan participants.
Although total deposits were down slightly compared to the very strong prior year quarter. We are optimistic looking forward given our robust sales pipeline.
We reported positive net close once again this quarter.
And well flows can be lumpy, we expect this momentum to persist as we remain well positioned in our target markets.
It was another excellent quarter could retirement business and we expect to benefit from the tailwind of an improved economic backdrop, our ongoing investments in the customer experience and our expanding set of solutions aimed at helping Americans secure their return.
Yeah.
Within the life insurance business, we are positioning ourselves for growth for product innovation and distribution expansion.
Sales in the quarter were flat sequentially, but we expect will ramp up over the course of the year as we begin to reap the benefits of solutions, we recently launched into the market.
We're seeing good momentum with some key new product Rollouts.
Our expanded view all offerings continue to gain shelf space and our innovative money guard market advantage product is appealing to new market segments.
Additionally, we are beginning to attract a broader range of advisers with nearly a quarter being producers who had not previously sold a muddy guard product.
These new products, coupled with our existing life offerings and the industry's strongest distribution force.
<unk> Lincoln for long term success at attractive returns. Additionally, we are expanding our strong distribution network by adding our life insurance products to the shelf of a large P&C insurer, where we have an existing annuity distribution.
<unk> partnership.
We're seeing good early momentum.
Take care literally with our term excel solution, which is a fully digital experience and is enabling us to reach a different customer segment.
I'm pleased with the solid results for life insurance business reported I'm also excited that Lincoln is introducing products with new value propositions that are resonating with customers and helping to drive future growth.
Lastly on group protection.
Premiums rose more than 2% over the prior year quarter and nearly 7% sequentially.
Driven by improved persistency price increases and organic growth, resulting from the economic recovery.
Sales in what is typically a seasonally smaller quarter were down versus the strong prior year quarter. However, underlying drivers were positive as two thirds of our sales were employee paid products.
As we communicated last quarter, we are taking actions to increase group protection margins. We are already seeing improved results as factors such as pricing actions higher persistency and investments in our claim organization have put our margin.
Excluding the pandemic in excess alternative income.
The lower end of our targeted range.
We continue to expect further expansion building gradually towards the upper end of our 5% to 7% margin target.
Briefly on investment results as I mentioned earlier, our portfolio is performing quite well overall.
Overall credit quality remains high and has continued to improve in recent years, driven by our high quality, new money purchases and proactive derisking now.
96% of our fixed income assets are investment grade with 59% rated a or higher.
Our well diversified commercial mortgage loan book has continued to perform well during the pandemic with virtually no credit losses and minimal loan modifications. Additionally, our alternatives performance was once again strong driven by our portfolio construction debt.
<unk> buyout and growth equity strategies with a quarterly return of 8% Cigna.
Significantly exceeding our long term targeted quarterly return of 2.5%.
In closing I would note.
Sales momentum is building at attractive returns driven by new product introductions that resonate with our customer and.
And expanded shelf space across distribution channels.
Continued equity market tailwind should boost earnings from fees on assets under management in the annuities and Rps businesses.
The outlook for the life insurance business is strong.
As our new products are starting to take hold in the market.
Group protections underlying profitability is experiencing an ongoing recovery.
Expense savings initiatives will continue to contribute to earnings growth.
And our robust balance sheet high quality investment portfolio strong free cash flow generation and capital ratios as well as the opportunity to execute risk transfer deals all Lee Lincoln in an excellent position to fund expected sales grow while.
Increasing our capital deployment.
Based on these positive trends 2021 is shaping up to be a successful year.
I expect we'll improve on this quarters results.
I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported first quarter, adjusted operating income of $350 million or $1 82 per share.
There were no notable items within the current or prior year quarter.
However, this quarters result was impacted by a number of items.
First pandemic related claims reduced earnings by $222 million or $1.15 per share.
Second.
Results benefited from strong performance from the alternatives investment portfolio boosting earnings by $84 million for 43 cents per share above target.
Third.
There was $11 million or six cents per share of unfavorable tax adjustments.
Finally.
Within the other operations segment, there was $11 million or six cents per share of expense variability related to elevated deferred compensation costs, resulting from the increase in Lincoln share price during the quarter.
Adding these items together it was no doubt an extremely strong quarter that highlights our underlying earnings power.
Net income totaled $225 million or $1 16 per share.
With the difference between net incomes and adjusted operating income primarily being driven by a $144 million non economic loss from variable annuity non performance risk.
The VA hedge program performed exceptionally well with 99% effectiveness in the quarter.
Moving to the performance of key financial metrics compared to the prior year Corp.
Adjusted operating revenue increased 6% with operating revenue growth in each of our four business segments.
Average account values increased 15%.
The expense ratio declined in all businesses, except group protection, where it remained flat.
And book value per share, excluding a OCI stands at $72.36, an all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $290 million.
Compared to $261 million in the prior year quarter.
The increase was primarily due to higher account values driven by growth in the equity markets.
As favorable alternatives investment income.
Was offset by $9 million of the unfavorable tax adjustment that I noted upfront.
Average account values of $160 billion increased 16% year over year.
And 6% on a sequential basis.
As equity market strength over the past year more than offset negative net flows.
This contributed to a 7% increase in operating revenues in the quarter.
Base spreads excluding variable investment income were down 18 basis points sequentially.
Primarily driven by non economic change in the spread calculation methodologies.
G&A expenses net of amounts capitalized decreased 3% from the prior year quarter, leading to a 100 basis point improvement in the expense ratio.
Return metrics remained solid despite fewer fee days in the quarter with return on assets coming in at 72 basis points and return on equity at 22.9%.
Risk metrics on the VA book continued to demonstrate the quality of our in force business.
The net amount at risk at 64 basis points of account values for living benefits.
And at 36 basis points for death benefits.
Growing account values, a quality book of business and expense discipline are all indicators of strong future performance from the annuity business.
Retirement plan services reported operating income of $57 million compared to $40 million in the prior year quarter here.
Youre from by higher account values.
Fence management.
And favorable alternative investment performance, which more than offset spread compression.
And $2 million of the unfavorable tax adjustment.
Deposits totaled $2.6 billion in net flows continue to be positive with 347 million in the quarter.
Consistent with recent periods.
These positive flows.
Combined with favorable equity markets drove average account values up 18% over the prior year quarter.
G&A expenses net of amounts capitalized were down 4% compared to the prior year quarter revenue 320 basis point improvement in the expense ratio.
Base spreads excluding variable investment income compressed 12 basis points versus the prior year quarter back in line with our stated 10% to 15 basis point range as credit interim rate actions take hold.
The retirement business started the year with strong results.
Including a 25 basis point ROA.
Continued momentum in flows and expense management, serving as positive drivers going forward.
Turning to life insurance.
We reported operating income of $107 million.
While down from $171 million in the prior year quarter due to the pandemic.
These results were solid and reflect strong underlying business drivers.
This quarter's earnings included $132 million excess pandemic related mortality.
Partly offset by $59 million of favorable alternative investment experience.
Underlying earnings drivers continue to show growth with average account values up 10%.
And average life insurance in force up 8% from the prior year.
G&A expenses net of amounts capitalized decreased 2% from the prior year quarter, leading to a 60 basis point improvement in the expense ratio.
Base spreads declined two basis points compared to the prior year quarter.
Better than our five to 10 basis point expectation.
Outside of the impacts from the pandemic the life insurance business had a strong quarter and key growth drivers remain positive.
We expect pandemic headwinds to decline over the course of the year as vaccines are more widely rolled out.
This combination of underlying growth and improving mortality results positions us nicely for improved results looking forward.
Group Protection reported a loss from operations of $26 million compared to operating earnings of $40 million in the prior year quarter.
With the decrease driven by $90 million of pandemic related claims.
With 61 million of direct COVID-19 mortality.
$7 million of morbidity.
And $22 million of indirect mortality.
This was partially offset by $6 million of favorable alternative investment experience.
The reported total loss ratio was 86, 8% in the quarter.
One percentage point better sequentially as an increase in the life loss ratio was more than offset by improvement in the disability loss ratio.
Excluding pandemic related claims from both periods the.
Total loss ratio was 76, 6% for the quarter down 2.3 percentage points sequentially.
The expense ratio remained flat year over year as increases in G&A expenses net of amounts capitalized related to investments we have made in our claims organization.
Were offset by premium growth.
Excluding pandemic related claims for the business had solid results, which as Dennis mentioned put us back in the low end of our target margin range.
While pandemic impacts continue to be headwind, we are optimistic about the outlook for the business is improving unemployment rates, coupled with vaccine rollouts should provide tailwind going forward.
Yeah.
Turning to capital and capital management.
We ended the quarter with $10.7 billion of statutory surplus.
And estimate our RBC ratio at 464%.
Up 13 percentage points from year end.
As a reminder, this includes 24 percentage points from non economic slowed will associated with the Liberty acquisition.
That we expect will go away by year end.
Cash at the holding company stands at $758 million.
Above our $450 million target.
As we have pre funded our $300 million 'twenty 'twenty two debt maturity.
We deployed $105 million towards buybacks this quarter slightly above the $100 million retard.
Given our strong capital position.
Improving capital market and health trends and.
And our positive business outlook.
We expect share repurchase in the second quarter to be approximately $150 million.
In line with pre pandemic levels.
To conclude.
This quarter's results included a large impact from COVID-19.
But we expect these headwinds to abate over the remainder of the year.
Looking past that we.
We see strong underlying earnings and several positives.
Revenue growth in all four businesses.
Our positive outlook for sales looking forward.
Record end of period account values, providing a tailwind to earnings.
Continued strong expense discipline across the company.
And a strong capital position, which is contributing to our ability to investing growth <unk>.
And increase our capital returned to shareholders.
With that.
Let me turn the call back over to al.
Thank you Dennis and Randy.
We'll 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 requeue 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'll need to press star one on your telephone to withdraw your question press the pound key.
For optimal sound quality. Please do not use a speaker phone please speak directly into your receiver or use a wired headset with a microphone.
Our first question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, good morning.
First question.
Quarter on broker to your willingness to consider some type of risk transfer transactions on with both your annuity and your life fitness.
Our designers changed over the past quarter.
To your willingness to consider transactions and then could you just update us on timing or size of deals that you're potentially considering.
Yeah at least thank you for that question and you're absolutely right.
In terms of block sales, we're looking at across our individual life and individual annuity.
Books of business.
There is a active market for both of those.
Timing is always very difficult to speak to because they are complex transactions.
But where.
We have a lot of resources behind this idea.
And probably will continue to have resources behind this kind of <unk>.
Activity for some time the.
The other area that we're looking at is flow transactions.
And just broadly speaking and we've mentioned this couple of times.
So you know this we have.
We have done more or as many flow transactions.
The living benefit space and in the fixed annuity space as most companies have we of course, it's down a bit.
<unk> transaction already.
With the fixed annuity business. So we remain active we remain optimistic.
There's a lot of participants in the marketplace.
Randy do you want to add to those comments please.
Elyse Thanks for the question.
Probably reader pay to what Dennis said, but yeah. There's if you think about.
The block sale marketplace.
We continue to see a lot of interest on the buy side in fact lease regularly receive inbound calls.
Yes.
We have we know we have a very large.
Block of enforced business across the life and annuity business that debt buyer base is interested in and.
And we believe.
The in force value is not fully reflected in our share price and so that gives you the underlying thesis for why we are as Dennis said allocating.
Significant resources to proceed.
And if something makes sense, so elyse, we continue to be.
Free interested in the idea and actively working on it but I agree with Dennis it's always difficult to talk about guidance.
Okay, Great and then my second question is on the group.
You commented that youre working towards the upper end for 5% to 7%.
Margin target for it.
Just wondering a couple I guess questions. There if you know given that it seems like Brazil.
Non COVID-19.
<unk> came in.
Within that range.
Little bit better.
And what might have been expected in line with trending. So can you just give us an update on when you might kind of debt towards the upper end of that range.
Assuming that also assumes that once we get out of COVID-19.
Direct mortality for the 22 million that you saw in the quarter, but that would all kind of go away and normalized.
For example, it depend on net.
Yeah at least it's hard to predict exactly when that.
Top end of the margin will be.
Change.
In my script, I said moving from 5% to 7% gradually a.
Mentioned, a couple of initiatives underway, which.
Some repricing going on.
As business comes up for renewal strengthening pricing in some of our new business segments.
Those take time.
To enter into the margin.
Because it's new business alone.
Renewals were in force business.
So then we have cost initiatives that are underway.
Those also to do that type of thing effectively.
And to be able to get those numbers.
Somebody's name on them in into our.
Planning process, where we can be confident that we'll achieve the expense savings.
That takes time, so I think.
Just over time with us.
Without getting into big way.
Quantification of that but it's it's going to build gradually.
So we're going to start seeing some of that improvement.
Police I'll, just add a little bit further a bit a little bit for that right. It might be beneficial to think about what's happened over the last year and if you think about the first quarter of last year, we made $40 million.
This year, we lost $1 6 million.
We also know that this year in the first quarter, we had about $90 million of pandemic related impact alright, so absent anything else happening $40 million last year.
Net negative $90 million item you would have expected this to be around negative 50 million and we outperform that by about $24 million.
About a quarter of that is the strong ultra performance I mentioned, but the other three quarters is improvement in underlying profitability of the business and that's reflective of renewal price increases the strong work of our claims team and we've talked about the investments we're making there so that's an indication.
What we can do.
In just a year's time, so I hope that helps Lewis.
Yeah, but then just on you would expect price at $22 million of the indirect mortality.
Go away when for out of the pandemic.
Yeah, we do a lease now this is a.
An interesting topic.
Yes.
We spend a lot of time looking at the overall Mark tell the experience and so the question is why do you believe that indirect component is related to the pandemic.
And it's really.
There are a number of aspects of that the first thing we look at is.
You know just what is the nature of COVID-19.
And then nature of COVID-19 is that.
While it is.
More impactful than the flu it it acts like the flu and that it.
It hits people with Comorbidities harder. So that's just the nature of COVID-19.
We also know that when we look inside of our experience.
Where this indirect I'm just coming.
It's coming in areas, where you would expect for <unk>.
Morbidities to emerge.
Respiratory and cardiac which is just like the flu.
We also know that when it comes to Comorbidities is oftentimes the case and we see this with the flu.
It's not fluid rarely noted.
On the death certificate as the cause of death, but it's oftentimes what starts the.
The process. So everything that we know about COVID-19, all of our experience is what leads us to really assess this indirect component is related to the pandemic and something we believe will go away from.
When we get this pandemic behind us in the country.
Okay. That's helpful. Thanks for the color.
Yep.
Thank you. Our next question comes from Tom Gallagher with Evercore. Your line is open.
Thank you.
Dennis maybe just to start a follow up on <unk> question on on risk transfer.
I guess when when you first mentioned.
<unk> risk transfer Lincoln share prices in the thirties now it's in the sixties.
So.
And realizing you started from a very depressed level to just now.
Its still depressed, but less depressed level.
Hi.
When you think about and I realize you're still working on it but I presume you have some indication of pricing.
Among the various blocks, but is there still a big.
Positive arbitrage when you think about execution price relative to where your stock is.
Any color on that would be helpful.
Yeah, Tom as you're you're hitting the <unk>.
Squarely.
The issue as to why we would do a block sale, which is to direct capital out of that business life for annuities.
And into share buybacks and so both sides of the equation work.
For the prices today are based on our.
Valuations of the different blocks still works pretty well.
And so we're continuing to pursue it.
That's.
That's that's clear and Dennis could you say.
Again more high level, just from a pricing standpoint is the pricing most attractive on the life side or the variable annuity side or the fixed annuity side.
Yes.
Uh huh.
It varies.
But let me.
But right now we're sort of focused on individual life, because we already have done a big fixed annuity block.
Hmm.
We're also looking at variable annuity.
But again, that's a much more complex.
Transaction.
Fewer players would be available on the life side.
So.
Again, we're looking at everything.
What's the buyers discount rate expectations.
Is obviously an important in other words, what are they going down.
One is that return.
So I would just say that.
It's fluid.
Very fact dependent.
But as Randy just said.
Pretty large number of blocks on the individual life side that have value in them.
Those.
Those blocks has a characteristic typically are.
The reserves being backed by.
Our general account.
Therefore.
People, who have a <unk>.
Asset capability.
Would be buyers so a lot of considerations, Tom Randy do you want to.
Add or subtract from that place.
Now Dennis I think you've covered it quite nicely.
Okay. Thanks, Thanks, guys I appreciate the color.
Thank you. Our next question comes from Humphrey Lee with Dowling <unk> partners. Your line is open.
Good morning, and thank you for taking my questions. My first question is related to life insurance.
So if we were to back out the COVID-19 claims and the strong VII in the quarter I think that would get you to $180 million for the quarter, which seems pretty strong for a normal Q1, but can you talk about some other drivers that led to two two to two to 180.
Humphrey Thanks for the question it is a strong quarter.
A little stronger than the first quarter of last year, which was the 171, which was also a strong quarter, but I think it's a it's a big business Humphrey and I think it's fair to say that when you think about.
The pluses or minuses that go on in it inside of any big business debt in the life business.
Most of those items for a positive at this time and that leads to a strong quarter above your expectations, but I also think it's fair to point out that.
It's.
Across the broader Lincoln for instance, in the annuity business I think it's fair to say that the the items fell a little negative. So I think when you think across the broad organization.
We're very.
Happy and comfortable with the numbers, but yeah I think it's fair to say just inside of life alone that it was just a strong quarter where things went.
What are the way of the life business.
So like did you see maybe non COVID-19 mortality being favorable or like how should we think about it in terms of like I think in the past you share the kind of actual versus expected for your life business. If you were to exclude COVID-19.
What would that be in terms of the actual to expected.
What we believe based upon probably us reading the same stuff you read Humphrey is that we didn't see the normal seasonality.
Elevated mortality seasonality that we've seen in the first quarter, we saw mortality on an underlying basis, it's more like we would see in the second quarter and for the upcoming second quarter. So.
That's our best estimate but.
Once again, what typically drives seasonality in the first quarter. The biggest driver is the flu.
We believe we read the same articles that you do that it was a very light flu season, but as I noted in response to an earlier question fluids actually rarely noted on the debt certificate as a cause of death. So we're hypothesizing a bit but we believe we didn't see the normal level of seasonality in the first quarter that we.
We do what they typically are.
Okay got it.
And then my second question is looking at the other segments.
Under the impression that the strategic digitalization expenses were done last year.
The cash came through things like 13, knowing this quarter should we expect any kind of additional spend in the balance of the year and then also I think in Dennis prepared remarks, you talked about expecting a meaningful expense save program to be announced later this year like so I guess.
And in low income housing is shall we expect any kind of these type of integration or a strategic expansion in 2021.
Humphrey.
Apologize if we weren't clear on this we have a couple more years of the original.
Project Conditioner strategic Digitization expense, what we expect is that the net benefit which was has been growing about $40 million per year will will grow that $40 million. So yes, there's expenses, but the benefits and you see that three of our business is actually had their expenses declined year over year.
Group was flat as we invested in claims so yes, there is still some expense, but the benefits are growing the net of those two items should be roughly an incremental $40 million of benefit. This year. We think we have about one more year of that net benefit growth across the organization, which will get us into the range that we originally guided.
To a number of years ago of 90 to 150 million of net.
Net benefits from that original program and then.
You know Andrew.
And as Dennis talked about a bit we are very focused on other opportunities across the organization.
Got it thank you.
Thank you. Our next question comes from Ryan Krueger with K B W. Your line is open.
Hey, good morning, I had a follow up on that.
The other expense opportunity that you're embarking on later this year is that related to.
Efforts to preserve the 100 million saves that you generated last year or is that something new.
B and in addition to what you talked about before.
Ryan the other.
[laughter] again, sorry to keep all these numbers are clear.
Lear for the benefit of.
Yourself and others on the phone but.
The amount that Randy talked about as separate from the new program of $100 million that we've captured.
In 2020 and is expected to stay in 2021.
<unk> there and then the savings program would add to those two.
Knight items.
And we were talking about it you've seen other companies speak.
Speak to.
Large scale expense reductions.
It's the right thing to do.
And we are but we would never actually size these numbers for for our investors until.
We're prepared literally to put them into a financial forecast.
With someone's name behind them.
What are they going to emerge how much it's going to cost.
And we're not going to be in a position to do that.
Until the second half of 2021.
Publicly.
Bring that incremental savings.
And for some type of estimate.
Got it.
Makes sense, Thanks, and then.
I guess Randy on the annuity ROA.
It was lower than the typical range I think you may have alluded to some things going against you, but any thoughts on where you'd expect that to trend going forward.
Okay.
Brian as I noted.
When you think about all the businesses I would say on balance in the annuity business. It was a quarter, where things fell a little negative sort of those pluses and minuses that hurt you or a little bit the other thing I'd point out is that.
The first quarter of the year and the annuity business is always the quarter with the fewest number of Eden.
And in fact, we actually have one fewer fee day this year than last year, because last year was a leap year. So.
Typically makes the arrow in the first quarter.
Lower than the other quarters of the year looking forward, we'd expect it to grow back into where we've been running for some time, which is in the upper 70 mid to upper Sevens.
Got it thank you.
Yes.
Our next question comes from Jimmy <unk> with J P. Morgan Your line is open.
Hi, Good morning, first I just had a question on the retirement business and flows have obviously been pretty strong for the last several quarters can you talk about.
What's driving that and what are you seeing in terms of trends on deferrals matching contributions.
And how that's changed over the past year or so.
Yes, Jimmy.
Okay.
I'm not.
Pearls in matching contributions dropped.
In 2020.
Because of COVID-19 the.
Difficulty in small businesses.
And actually those are beginning to come back with the improving economy.
So that's a positive.
The.
Activity in 2020.
Again, with a little bit lower because of.
COVID-19 and people wanting just to sit still and watch and see what was going to happen and so we're seeing.
Activity on the new business side.
Return to.
More what we would expect.
Absent COVID-19 not 100%, but.
Closer so we have.
Strong pipelines in the Rps business.
Pat was saying.
More contributions matching contributions coming back into the market. So overall, it's a pretty favorable.
Environment for our Rps business.
We expect to see that.
In the numbers in the second quarter sales from those and so forth.
Okay, and then on your comments on risk transfer it seemed like.
All of your interest is just motivated by the valuation multiple arbitrage and your multiple being low and obviously typically the simpler block the easier it is to transact and you'll get better prices, but.
If you don't do something on individual life as you mentioned one of the issues would be that total exposure to variable annuities would increase even more.
And which is whether it's warranted or not one of the main reasons for the stock trading at a low multiple so how does that how does the risk profile of your remaining business figure into.
You're thinking.
And do a potential risk transfer transaction, because I think you seem to be hinting that it's b is our sort of a low likelihood scenario there.
From a.
Okay.
Jimmy the.
If we.
Look at the source of earnings.
We think about forbidden mortality as a bucket where to think about.
Assets under management for this.
We look at.
Uh huh.
Investment spread.
Yeah.
Term loan debt.
Hugo.
There's not a material change because of the transaction.
If I step back maybe add something to your question, which is.
Out of guaranteed per section.
Individual businesses that were writing.
You'll recall.
It's been sometime since we focus from us but.
Company focused on 70% of our business being non guaranteed.
And maybe up to 30% guaranteed business.
Bumped.
Liabilities.
The first quarter.
Long term liabilities on the Capex.
Non.
Guaranteed business, which 90 per cent.
That was really driven by pricing actions.
As interest rates dropped in value proposition.
For the agent moving benefits wasn't as strong as for some of those sales go up a little bit.
So.
Picture I don't think risk transfer things materially change.
The source of earnings number.
And we're continuing.
I expect continued net guaranteed versus non guaranteed range better than the 70 30 for sometime to come again, driven by the level of interest rates product designs.
And all the factors that go into the sales mix.
Jimmy interest me add to that just on the whole topic of variable annuities at.
At Lincoln.
I'd point out that.
At the end of the first quarter.
$144 billion of liabilities, what is often times overlooked.
We should spend more time on it is that over.
Over 40% of those liabilities about $60 billion of those liabilities or our va's without.
Let me benefit.
Or ivs and that percentage.
42% in the first quarter is up five points over last year and that's all about.
Where are we selling today. So you are right.
A very large shift on.
On a year over year basis debt on.
I would expect that shift continue from just look at the existing sales mix. So, let's not conflate that 144 billion with.
With all of <unk>.
Something that has a living benefit tied to it.
And then just maybe one more on the shifts away from guaranteed products that you've undertaken over the past couple of years.
It seems like more of a strategic shift, but if the market stays strong and you do get higher interest rates.
Do you think you'll be back selling more products bid the guarantees with the appropriate prices or.
Do you intend to shift to be more of a permanent change in the strategy.
Yeah.
Okay.
The answer that is exactly right.
The value proposition for long term liabilities as dependent predominantly on interest rates.
And we don't see in our forward looking plans.
Interest rates rising so much that you can see a significant change in the mix.
Towards the 70 30 from the the 90 10, but that's very dependent on.
Mostly interest rates, but other factors.
We certainly wouldn't.
Strategically we want to go above the 3%.
I'll repeat for the foreseeable future.
So between the 90 10.
Sort of.
Somewhat higher than that but not.
Significantly.
Thank you.
Thank you. Our next question comes from John Barden with Piper Sandler Your line is open.
Thank you for the color on indirect mortality.
A number of participants talked about like debt to despair from and then impact from delaying care, particularly all timers and heart.
One talks about debt to despair being 20% the 80% being the remainder can you talk about what youre seeing on that side, that's probably independent of the indirect mortality.
John we're not seeing that so whether you're talking.
Let's say the word, but suicides or overdoses those sorts of things, we're not seeing an elevation in those causes of death as I mentioned it is in for things that are related to a virus like COVID-19 respiratory.
Uh huh.
Cardiac.
In terms of the delayed care question as well.
Talk to the doctors.
Here at Lincoln.
That is not sort of something that's going to impact mortality in the very near term something that will impact mortality in a very modest way over.
Over the longer term then it would probably be more than offset price we've talked about.
On the life side.
<unk>.
The front end D&O claims that COVID-19 has caused which will probably benefit us all.
Over the next few years.
That's fantastic. Thank you for the answer.
Related fall a follow up.
Can't help but note you're talking about more detail on our public estimate around cost cutting in the second half of 'twenty, one and then juxtapose that with return to office.
Other participant talked about a hybrid model for their employees. This morning.
Is the cost cutting program going to take into account real estate as well.
It will.
It's a comprehensive look at all.
Questions around cost and effectiveness and execution.
A pretty okay.
Use the term of art, it's a pretty cool program that I think we're going to be able to execute on.
In general both.
Efficiency, but also upgrading skill sets of our employees, possibly some top line opportunities as well.
So.
On your specific question, we do believe.
Debt.
And we're referring to this as a long term employee model will have.
So significantly less.
People in the office.
On a daily basis.
So there will be some real estate benefit.
But it's.
So it'll be in there.
In the numbers that was.
Reported towards the end of the year.
But it's not.
You know, it's a meaningful number.
But.
And it'll be in there and I'll just leave it at that.
Thank you for the answer.
Thank you. Our next question comes from SUNY come off with Citi. Your line is open.
Thanks, Good morning, I wanted to.
Start with the life insurance sales it feels to me that the amount of sort of new product that you guys are rolling out this year.
Might be much much higher than than what's normal there just seems to be a lot of activity. So I'm. Just wondering if you can kind of give us a sense of the pace of the sales improvement.
With this much for their new product coming out your distribution you know could it take longer for them to kind of inflect, because they're just kind of dealing with so many new products.
Thanks for the question I think it's fair to say that life sales at least so far sort of rolling out exactly as we thought Dennis mentioned badly from.
The bottom then for the fourth quarter of last year, we ended up in the first quarter. This year with a number right in line with.
With that number and we expect to grow from here whats driving that.
As new product introductions.
But also changes that other some of our competitors are making in their pricing and as we said we believe we.
We went in front of everybody else do you think about two big product introductions for instance that we have enough for quarter.
The money guard market advantage, which is money guard on a variable platform.
And then a reduced guarantee the UO product for Fox didn't roll out until the middle of February.
And in fact, when you look at that Moneycard product.
It's not on our two biggest commodity guard distribution partners, yet and it's already making us by the way about 30% of our submit so we think we've hit the mark with those products for it.
It takes a while.
To get these things on to all the platforms you want.
And then ultimately really don't know the success on a on a life.
Product for probably six months before you really know whether you've hit the mark.
Hopefully that answers your questions.
Yeah. It does thats very helpful.
Let me just add to that I mentioned in my remarks.
Separate from the new business debt.
And.
The new products that we're putting out and as Randy said and if you said there is certain amount of education certain amount of shelf space that has to be acquired.
In other parts of the business or.
Some of the things that we've done in the past connected with expansion of distribution, we're seeing payoffs for the separate from that issue and that's.
<unk> large.
Relationship they have with <unk>.
I mentioned for the P&C.
Organization.
And I just want to mention that because the app count initially for that although small face amount has been pretty good but the reason that we're able to be effective with that new partner.
New partner for life is because of the investments that would make an automated underwriting.
So those sales are being digital or digital apps digital underwriting and digital issue.
I'd just like to point out that we've been making these comments about our digital program from a cost perspective, but the digital program is really.
As we go forward.
In many areas of the company is going to permit us to not have to staff up because you know in the Pea.
Past that they didn't have digital issue in app and things like that.
In order to improve your customer experience.
Experience you just had to add people.
But we don't have much now because for several hundred million dollars that we invested in digital.
Okay. That's helpful. And then just the last one I know, it's early days on tax reform, but.
Historically, I think higher taxes have been sort of a catalyst for some of your retail products.
That have tax benefits are you seeing anything in.
These initial proposals or even just comments coming out of Washington that COVID-19.
Impact your demand for your products, one way or the other.
Yeah.
Yeah. So the way we think some of the sales that we have already seen in the non guaranteed D. A.
In part motivated by People's concern about changing capital gains tax rates.
We have a product.
For life.
It's a very tax efficient way to distribute.
So some of them.
So we've seen some of it already.
But until we know what the final facts are.
It's hard to predict how much of an impact it will have.
Okay. Thanks.
Okay.
Thank you and that's all the time, we have for questions I'd like to turn the call back to al Cappuccino for any 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. F G Dot com.
You all have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect speakers. Please standby.
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