Q3 2021 Lincoln National Corp Earnings Call
[music].
Good morning, and thank you for joining Lincoln financial group's third quarter 2021 earnings Conference call. At this time all lines are in a listen I'll.
The mode later, we announced 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 key followed by the zero and someone will assist you.
Now I would like to turn the conference over to the Vice President of Investor Relations. Our copper Sano. Please go ahead Sir.
Thank you Catherine good morning, and welcome to Lincoln Financial's third quarter earnings call.
Before we begin I have an important reminder, any.
Any comments made during the call over to <unk> 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 of 995.
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 in our other filings with the SEC.
These forward looking statements are made only as of today and we undertake no obligation to update or revise any of them to reflect events or circumstances that occur. After this date.
We appreciate your participation today and invite you to visit Lincoln's website, Www Lincolnfinancial Dot Com, where you can find our press release and statistical supplement which include reconciliations of the non-GAAP measures used on the call, including adjusted return on equity and adjusted income from operations or adjusted operating income.
To the most comparable GAAP measures.
Presenting on today's call are Dennis glass, President and Chief Executive Officer, and Randy <unk>, Chief Financial Officer, and head of individual life. After.
My prepared comments, we will move to the question and answer portion of the call.
I would now like to turn the call over to Dennis.
Thank you al good morning, everyone.
Third quarter operating earnings were reduced by pandemic claims and other charges and helped by strong alternative investment results.
Adjusting out these various items, our underlying earnings and earnings growth potential remains strong our.
Our expectation remains to be at the high end or above our 8% to 10% EPS growth target in the intermediate and longer term.
Intermediate term expectations are primarily based on recovering sales momentum strong fees on assets under management.
Incremental expense management initiatives.
The combination of $900 million of buybacks related to our recent block sale and ongoing share repurchases.
Taking each of these in turn sales.
Sales year to date are consistent with our expectations of building off the levels achieved as we exited 2020.
We are also achieving returns in the low to mid teens on capital backing sales across all business lines overall.
Overall sales growth is reemerging due to our distribution strength.
Added shelf space digital capabilities and product innovation.
After introducing 10, new products since the beginning of the year.
<unk> the industry's first combined life plus long term care policy built on a variable chassis, we have more updates planned and additional products in development.
Expense efficiency has long been a key focus for Lincoln.
This quarter, we once again reported a lower expense ratio across most of our businesses. We also have a track record of delivering on past cost savings initiatives.
We expect spark, our new cost savings initiatives to drive savings well in excess of the impact of spread compression through 2024.
And to improve both our operational effectiveness and the customer experience.
Finally, our buyback strategy has just mentioned is comprised of two components first.
Our ongoing repurchases, which returned to pre COVID-19 levels. This year.
Driven by the capital efficiency of our products, including the impact of the recently announced VA living benefit flow reinsurance deal.
Low levels of credit losses, and net ratings upgrades and our high quality investment portfolio and are well managed hedge strategy.
Second.
The buybacks funded by the block deal.
Before turning to the business segments.
I want to congratulate Ellen Cooper.
In August the board announced that Ellen will succeed me as CEO after our annual shareholders meeting next may.
Since joining Lincoln.
2012, Ellen has worked with me and the rest of our executive team to shape and execute on Lincoln strategy.
She joined Us as Chief investment Officer.
And her responsibilities have grown to include leading our enterprise risk efforts and our annuities business.
One is a gifted leader with a proven track record of empowering high performing teams and executing effectively in challenging environments.
No that Lincoln will be in great hands with Ellen at the helm as she moves board and fully capitalizing on the exciting opportunities ahead for Lincoln.
Ellen will be joining Randy and me on the first quarter's earnings call.
Now turning to the business segments.
In annuities, we reported sales growth of 7% over the prior year quarter, driven by our industry, leading product breadth and distribution force.
Plus shelf space added over the last two years.
Sales were down sequentially as we lead the industry with rate reductions.
Variable annuities in response to market conditions.
As well as typical third quarter seasonality.
We remain pleased with our sales mix guaranteed and non guaranteed products.
Providing us diversification.
And attractive new business returns.
Looking forward.
We're expanding customer choice by adding new investment options and index strategies and have improved the attractiveness of our index variable annuity product setting us up for sales growth in the fourth quarter.
Finally, we expect our earnings to continue to benefit from the high quality and diversified in force book, we have built over the years.
In retirement plan services, we reported another quarter of excellent results and remain well positioned with award winning digital technology, a competitive cost structure and expanding set of product solutions and scale in our target markets.
Total deposits were up 2%.
By being negatively impacted by some sales shifting into the fourth quarter.
While we reported slightly negative flows this quarter.
Trailing 12 months net flows remained strong at positive $1 2 billion.
And we expect full year 2021 net flows to be positive.
Sales of your path.
Our alternative to target date funds remained strong.
We have continued to innovate enhancing our in plant income solution.
<unk> past builder income.
And integrating the solution inside our your path investment option.
As a result of the secure act.
Also see significant long term opportunities around <unk> guarantees.
Pulled employer plan solutions.
<unk> adviser managed accounts.
Finally.
The macro environment continues to provide a tailwind to retirement plan services and.
In addition to healthy equity markets. The economic recovery is contributing to better wage growth higher employee contribution rates and a greater employer deposits.
The retirement business is having an outstanding year as we continue to execute on our strategy.
In life insurance.
Our focus on expanding both consumer value propositions and distributions shelf space resulted in sequential sales growth of 32% this quarter with sales totaling $166 million.
All product categories.
<unk> double digit increases.
The focus on expanded customer choice aligns with our ongoing efforts to diversify our product risk profile.
As examples in the life business are variable money guard and our principle.
<unk> products offer the customer the choice of lower guarantees and higher upside potential.
Sales of these types of products have been growing faster than the segment wide sales.
Products are.
Less potential tail risk and better capital efficiency.
In addition to the property and casualty distribution partnership we added in the second quarter. We recently launched our variable moneycard product at two of our largest strategic partners, providing 25000 more advisers with access to this first of its.
<unk> solution.
Complementing our distribution and product expansion efforts are.
Our digital first focus continues to drive a lower cost per policy and an improved customer experience.
Looking ahead, we are enthusiastic about the future of the life business.
We are introducing new solutions that will further expand our customer and distribution reach.
With more introductions planned for the first half of 2022.
Lastly, our group protection business continues to be impacted by the pandemic, particularly as the Delta variant affected more individuals under age 65 driving increased claims.
While the pandemic continues to be a headwind the underlying fundamentals of the business are strong and we are pleased with the progress we are making.
We achieved 5% premium growth over the prior year.
Which is a result of a stronger persistency rate of nearly 90%.
And renewal rate increases implemented earlier this year.
Year over year sales are flat as we stick to our pricing discipline.
We're seeing more sales from our higher margin employee paid products year to date.
59% of group protection sales have come from these products as more individuals see the value of them.
Within this category, we have begun to quote our new hospital indemnity product rounding out our suite of supplemental health products.
Underlying margins after adjusting primarily for pandemic related claims were again in the middle of our target range this quarter.
We will continue to build on our progress and expect margins to grow towards the top end of our 5% to 7% target range.
We remain disciplined on pricing new business, reducing costs and managing claims.
Briefly on investment results.
Quality remains excellent.
<unk> account portfolio is predominantly comprised of fixed income investments of which 97% are investment grade equivalent.
We continue to expect a benign credit outlook and have seen favorable credit trends within our portfolio.
With minimal credit losses, and positive net credit migrations.
During the quarter, we invested new money at an average yield of two 6% with one half in shorter duration assets.
Versus one third.
Full year 2020.
Reflecting the increase in shorter duration product sales and our disciplined asset liability matching.
Approximately 60% of our purchases were in investments other than public corporates provide.
Providing diversification and good relative value and yielding approximately 100 basis points over comparable for the rated public corporates.
Lastly, our alternative investment performance was once again strong with an 8% return in the quarter.
Seating our long term targeted quarterly.
Quarterly return of two 5%.
In summary.
Reported results this quarter continue to reflect ongoing impacts from the pandemic and life insurance and group protection.
Our product strategy distribution strength and ongoing innovation are helping to build sales momentum at attractive returns are.
Our new expense savings initiatives is expected to more than offset spread compression improve overall operational effectiveness and drive earnings growth.
And <unk>.
Ongoing share buybacks, driven by our strong balance sheet and free cash flow generation.
Bind with the incremental buybacks enabled by our recent bought deal will further boost to EPS and some.
Our underlying earnings power is improving and we remain confident in our ability to grow EPS at or above our 8% to 10% target range.
I will now turn the call over to Randy.
Thank you Dennis.
Last night, we reported third quarter, adjusted operating income of $307 million or $1 62 per share.
As noted in the earnings release.
Adjusted operating income included net unfavorable notable items.
$108 million 57 per share.
Including $93 million from legal related expenses.
And a $15 million net charge from this year's annual review of DAC and reserve assumptions.
Also.
This quarter's results were impacted by pandemic related claims, which reduced earnings by $180 million 95 per share.
While results benefited from strong performance in the alternative investment portfolio boosting earnings by $89 million.
Or <unk> 47 per share above target.
Additionally, we experienced some unfavorable non pandemic mortality in the life insurance segment that I will discuss further in a life commentary.
From a reported adjusted operating income standpoint, it was a bit of a noisy quarter.
But we have strong underlying earnings power as we exit the quarter.
Net income totaled $318 million or $1 68 per share.
Boosted by gains in the investment portfolio and strong performance from the variable annuity hedge program.
Moving to the performance of key financial metrics.
Consolidated adjusted operating revenue grew 9% from the prior year.
Which included growth in each of the four businesses.
Average account values increased 17%.
And book value per share, excluding <unk> grew 8% and stands at $76 96.
An all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $338 million.
Which included a $5 million net unfavorable impact from our annual review.
Compared to $196 million in the prior year quarter.
Which included a $101 million net unfavorable impact from the annual review.
Adjusting for notable items in both periods.
Operating income increased 15% from the prior year quarter, driven by record average account values.
$170 billion.
Up 17% over the past year.
The current quarter included $10 million of favorable alternative investment income.
The expense ratio improved 80 basis points compared to the prior year period as our focus on expenses continues to benefit the bottom line.
Return metrics remained solid with return on assets coming in at 80 basis points.
And return on equity at 26%.
Risk metrics on our VA book once again demonstrates the quality of our in force.
The net amount at risk at 63 basis points of our comp values for living benefits and at 43 basis points for death benefits.
So a great result for the annuity business with another quarter of high quality, earning strong returns and solid risk metrics.
<unk> is well positioned to finish the year with another excellent quarter.
Retirement plan services reported operating income of $60 million compared to $50 million in the prior year quarter.
With the increase driven by higher fees and account values.
<unk> expense efficiency and higher alternative investment income.
Which was $6 million favorable to our expectation in the current quarter.
Our annual review had no impact in the current quarter.
But it did have a net unfavorable impact of $3 million in the prior year quarter.
Favorable equity markets drove average account values up 21% to $97 billion.
The expense ratio improved 80 basis points over the prior year quarter as revenue growth.
Combined with continued diligent expense management contributed to improved results.
Base spreads excluding variable investment income.
Compressed 10 basis points versus the prior year quarter.
In line with our stated 10 to 15 basis point range.
Is crediting rate actions continue to take hold.
Overall, the retirement business had an excellent quarter.
Continues to be well positioned to drive strong results.
Turning to life insurance.
Operating income for the quarter was $93 million.
Which included a $26 million net unfavorable impact from our annual review.
Compared to an operating loss of $311 million in the prior year quarter.
Which included a $440 million net unfavorable impact from the annual review.
Additionally.
The current quarter included an unfavorable notable items of $19 million related to a legal expense associated with the reinsurance Arbitration Award.
Adjusting for notable items in both periods operating income increased 7% from the prior year quarter.
Given by higher alternative investment income as the current quarter included $65 million.
Third to $37 million in the prior year quarter.
Elevated mortality related to the pandemic with $60 million in the quarter.
Compared to $70 million in the prior year quarter.
This quarters impact for 10000, Covid deaths of $6 million was down year over year as expected.
But was up sequentially.
Severity of our average corporate claim was elevated.
We believe this elevation as normal volatility as we had a few larger COVID-19 claims in the quarter.
In addition to the impacts of the pandemic underlying mortality was negatively impacted by $34 million.
We believe this was driven by two factors.
First over the course of the pandemic when Covid cases have been increasing which they did in the third quarter.
We have seen elevated non COVID-19 mortality as well.
And second normal quarterly volatility.
I'd point out that we experienced favorable underlying mortality in the prior two quarters.
And when viewed on a year to date basis, our actual to expected mortality ratio remained under 100%.
And unexpected.
Earnings drivers continued to grow with average account values up 9%.
And average life insurance in force up 7% over the prior year.
Base spreads excluding variable investment income declined 13 basis points compared to the prior year quarter.
Above our five to 10 basis point expectation.
Our expense ratio improved 30 basis points over the prior year quarter as our efficiency efforts continue to benefit margins.
This was a noisy quarter for life earnings.
But growth and earnings drivers long term mortality results in line with expectations and continued expense discipline keep us confident in our underlying business.
Group Protection reported an operating loss of $32 million.
Which included a $16 million net favorable impact from our annual review our reserve assumptions.
Compared to operating income of $6 million in the prior year quarter.
Which included a $3 million net unfavorable impact from the annual review.
Adjusting for notable items in both periods operating income decreased from $9 million to an operating loss of $48 million.
By higher mortality impact from the pandemic.
The current quarter also included $6 million of favorable alternative investment income.
On a sequential.
Rental basis, and deneke related claims in the quarter negatively impacted earnings by $120 million.
Compared to $28 million in the second quarter.
And included $107 million in life claims.
And $13 million in disability claims.
In the quarter.
U S COVID-19 deaths significantly shifted to the working age population.
And then our group business. The average claim size for active employees across all ages consistently three to four times the size of those for retirees.
This significant increase in working age Steph coupled with the higher average claim size drove the sequential increase in mortality.
While I have been humbled by trying to predict the impacts of the pandemic I.
I do believe that this quarter's increased impact reflects the current state of the pandemic.
With a higher percentage of deaths occurring in the working age population.
Excluding the annual review of reserve assumptions pandemic claims and favorable alternative investment income the group margin of five 9%.
With consistent with the prior quarter and in the middle of our 5% to 7% targeted range.
The loss ratio was 87, 8% in the quarter and eight five percentage point sequential increase.
Excluding pandemic related claims and the impact of the assumption review loss ratio improved 20 basis points to 75, 9%.
Due to the expense ratio remained flat despite ongoing investments in our claims organization to address elevated claim volume from the pandemic.
Despite the tough quarter for group, we are confident that the underlying business fundamentals are solid.
And the strength of this business will reemerge as the pandemic subsides.
Turning to capital and capital management.
We ended the quarter with $10 $9 billion of statutory capital.
And estimate our RBC ratio at 463%.
As a reminder.
Our RBC ratio includes 25 percentage points from noneconomic goodwill associated with the Liberty acquisition that we expect will go away by year end.
Cash at the holding company stands at $754 million.
Above our $450 million target as we have pre funded our $300 million 2022 debt maturity.
We deployed $200 million towards buybacks in the third quarter in.
In line with our goal communicated last quarter to have full year buyback in line with pre pandemic levels of approximately $600 million.
Excluding any incremental buybacks from transactions.
Our Blackstone with resolution life, which we announcement September.
And closed on October one generated.
Approximately $1 2 billion of capital.
$900 million of which we plan to use for incremental share repurchases.
We expect these repurchases to be completed by the end of the first quarter of 2022.
And began the incremental buybacks in October via a $500 million accelerated share repurchase program.
Outside of the deployment of proceeds from the block sale.
We expect to continue our ongoing buyback program, although I'd point out that the timing of ongoing buybacks may be influenced by the accelerated share repurchase program.
We were pleased to have executed both a life block deal and a flow deal last quarter and we continue to be open to additional block and flow reinsurance deals.
Additionally, we announced a 7% increase in our quarterly dividend this quarter.
Now to provide some details on the spark initiative.
As we have been communicating for the past few quarters. We are excited to be embarking on another meaningful expense savings program.
Teams from across the organization has been hard at work identifying.
Identifying and prioritizing opportunities for us to invest.
And improve efficiencies through this initiative.
And they have been working with them and across departments to identify the best projects.
A maximize effectiveness as part of spark.
Because the strategic digital program is nearing its end.
We have decided to integrate the balance of that program into this new cost savings initiatives for ease of tracking and communication.
As of the end of 2020.
The total net recurring benefit from our strategic digital program is $80 million.
On track with our target.
In addition to these savings we expect to achieve $260 million to $300 million in run rate savings through spark as.
As we exit 2024.
With benefits growing steadily starting this year and ramping up in the out years.
The total expected one time investment to achieve the savings is $350 million to $410 million <unk>.
Including the $57 million and investments we've made already this year.
We expect investment spend to peak in 2022 and decline in subsequent years.
All numbers that I've, just discussed our pretax and pre DAC.
Spark will be focused on driving efficiencies throughout all aspects of our business.
From leveraging automation to simplifying and improving process efficiency.
And we will continue to focus on enhancing the customer and employee experiences.
While modernizing our technology footprint.
We are also targeting benefits beyond cost savings, including improving the way we work.
Focusing on Reskilling and Upskilling, our valuable employee base.
A detailed breakdown of the benefits investment and net impact for 2021.
Through 2025 from spark.
Combined with the remainder of this strategic digital initiatives can be found in this quarter's press release.
We will update you on our progress going forward tying back to this disclosure.
To conclude.
The pandemic environment continues to challenge, our life insurance and group protection segments.
However, underlying earnings in these businesses remained strong.
Our annuities and retirement businesses, both delivered excellent results.
In sum our underlying results and earnings power are both strong and growing.
With that.
Let me join Dennis It congratulating Ellen.
And 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.
Okay.
Thank you.
To ask a question you'll need to press star one on your telephone to withdraw your question press the pound key.
First question comes from Jimmy <unk> with J P. Morgan Your line is open.
Hey, good morning, So first just a question on.
Your elevated Covid claims that you saw and I guess, you had higher claims in group life business, which is partly related to the pandemic affecting more younger individuals then you have the elevated COVID-19 life.
Life claims in the individual life side, and then also I think non COVID-19 mortality. So out of these what do you think is sort of.
Something that might continue in the near term versus maybe being more of an aberration.
And just the result of normal volatility and mortality.
Hey, Jamie it's Randy.
I think as I said in my script.
When it comes to the group business.
We think that.
The results we saw in this quarter.
Reflect.
The state of the current pandemic.
Is that.
Sir occurring more frequently and.
In the working age population if you look at the numbers.
Pretty.
<unk> this quarter.
And when you CDC data here.
40% of the 100000 or so COVID-19 deaths were in the working age population.
And in previous quarters pretty consistently that had been between 15% to 20% so you've seen a pretty dramatic shift.
I don't know of any reason why.
That shift should not continue into the fourth quarter. So.
I think what you saw in the group business reflects the state of a pandemic today, even though we do believe.
The impact of the pandemic right. The number of people dying should continue to trend down over time is.
Immunizations, both natural and the vaccination continue to increase over time on the life side, we think of the impact which was largely driven by severity. This time is more random.
Consistently over the first five quarters or so of the pandemic the average Covid claims.
So it's right in the 130 to $140000 range and this quarter was simply an outlier average corporate client. We saw this quarter was about 260000. There is really no example, if that sort of impact and any preceding quarter. So I think of it as more random this quarter in the life business really driven by.
By a few large claims that we saw.
That helps me.
And then on the retirement.
<unk> business.
I think you mentioned some.
Flows were obviously negative you mentioned some of the sales shifted into <unk> can.
Can you talk about what youre seeing in terms of employer behavior on matching employee behavior on deferrals and stuff and how the underlying trends are in that market.
Jim just in general.
Dennis.
Hans.
As I mentioned in my script.
Recovery in the economy is occurring.
People are contributing a little bit more.
To their plans and employers.
Our increasing or.
Returning to making contributions so in general it's a pause.
A story.
Thanks, and just lastly on the accounting changes.
Wondering where you are internally on.
And sort of figuring out what the impact is on Lincoln and when do you think youll actually end up sharing that with the street.
Quantifying at least some of the impact.
Yes, Jimmy I think we've been pretty consistent in saying, we see a discussion with investors in the middle of next year.
Most likely timing in terms of when we discuss I know I've listened to some of the calls I've read some of the questions.
I do know that there were some questions around impacts that some companies in the group business.
We're talking about this quarter, we don't see that as the biggest.
Driver of any potential impact for us in fact, I've said that impact we would expect to be rather small in terms of if you want to spike out specifically the impact on group.
Claims reserves.
Okay.
Okay. Thank you.
Yes.
Okay.
Thank you. Our next question comes from Erik Bass with Autonomous Research. Your line is open.
Hi, Thank you can you provide some more details on how you expect the upfront investment related to the spark initiative to flow through the P&L from a timing perspective, and then also where should we expect the savings to show up across the different businesses.
Thank you for the question we're going to.
Follow the methodology that we did with <unk>.
The strategic digital program and that Youre going to see the investments slow through other operations.
We will probably just to continue that.
That methodology going forward for this program and the benefits themselves.
Youll see appear throughout the company.
Through the through the four businesses now.
Now in terms of what you should expect from a dollar standpoint, we had a disclosure in the press release.
If you compare to 2021.
Where we had net incremental benefits of 50, and we're anticipating we'll have roughly $75 million of investments. This year for a negative $25 million impact you would expect that net impact to roughly grow by if I use the midpoint roughly $20 million next year, so a relatively modest incremental negative when you think about.
The outer years, we ultimately expect the net benefit to grow into the $260 million to $300 million ratio pretty substantial.
Impact across the organization and something that will be very supportive and wide Dennis.
We're very confident we've talked about our ability to grow at or above the top end of our 8% to 10%.
Yes.
I hope that helps you.
Yes, so I guess I was thinking more specifically where some of the savings.
And maybe sort of.
If you can give any more details on what you're kind of where the savings are coming from and are they going to be more allocated to specific businesses or should we think of it as sort of proportional to their contribution to earnings.
Yes.
Let me just jump in just for a second this is not specifically the question that you asked but it might be helpful.
To the answer.
Generally speaking first of all we're very excited about this product project and.
We're investing in technology automation processes and capabilities across Lincoln to help our businesses operate more efficiently.
Part of this is investing in ongoing development growth for our employees. So these enhancements across the company they will improve the customer experience.
As Randy has just mentioned we will have a positive impact on our bottom line over time.
I don't want to mention on this as I mentioned in my remarks that we have a good track record when we get to the point, where we share this information with me.
Investor groups.
That pretty much nailed down.
Okay.
Framework here in all of the investments that we need.
Name behind it.
Outcome tied to put it into our financial plans. So we're pretty.
Pretty excited.
And so you can see it's across the businesses and some of it for example.
Is coming of our I T department cost reductions inside the IP Department.
Take our new ways of doing business and those cost reductions will flow into all of the businesses.
In the group area.
Randy had mentioned, where we haven't made as much investment in the digital space and in automation.
The last couple of years, because we are focusing on integration.
Some pretty big.
Benefits in that area. So.
So I hope that's more helpful. Randy you may want to.
Add to that.
Yes, I think you nailed it Dennis.
The benefits are going to be spread.
I'm going to be spread across the organization with.
Group, having maybe a little bit of an incremental boost just because for the last few years. They are focusing less on digital and more on integration. So I think you nailed it.
Okay, great. Thank you.
Mhm.
Thank you. Our next question comes from Thomas Gallagher with Evercore. Your line is open.
Yes.
Randy I just wanted.
To follow up on your answer to Jimmy's question about the severity.
In individual life Kobe claims.
Which I think put your sensitivity at 6 million per 100, K this quarter. So.
My right with your response that you would expect that to go down going forward closer to like the <unk> level of I think which was around $3 million.
Per per 10-K oar.
Can you just provide a little bit of color what sensitivity you expect on the individual going forward.
Tom I think that as you look forward and you think about the impact of Covid in the life business. The driver of any movements and the impact is going to be severity. So where do you sell into has come down very nicely as we've talked about.
Pretty heavy vaccination among the population that we insure in the individual life business. So incidents has come down substantially and what youre going to see now is the impact is driven by severity. We do see this particular quarter.
The average Covid claim of 260000 as an outlier.
Its way out of whack with any of the preceding five quarters. So we.
We do expect severity to come back down.
But once again you can get some volatility if you get a couple of big claims.
We do expect that to come down and revert more to what we've experienced over the first five quarters or so of this pandemic time.
Got you. Thanks, and then my follow up is Randy I think there have been some concerns.
That your GAAP earnings you are going to be disproportionately negatively affected.
The LD Ti changes, mainly because of your universal life business.
Im not asking you to give any.
Hardcore quantitative answer, but any anything to say at a high level, whether you think that will be directionally true or not or any any any comments on that topic.
Tom I can't talk about the proportionality does I don't spend time at the other companies, but I don't think the ongoing earnings impacts in the life insurance business I would describe it.
As large I mean really for.
To the best of my.
Our collection, the big thing Thats changing in the life insurance business as a pattern.
Tal you amortize DAC and unearned revenue right, we're going from a pattern that is driven by emerging some profitability.
A pattern that is more.
More locked and loaded in terms of.
Being more fixed so.
Tom.
Not an area, where I spent a lot of time thinking about pretty large impacts on earnings. So it could be some impact of course, but I don't see it as is.
It's very large.
That's helpful. Thanks.
You bet.
<unk>.
Thank you. Our next question comes from Ryan Krueger with K BW. Your line is open.
Hey, good morning.
One more on somewhat of an LPTA, but in.
As of now.
I believe you used the GAAP accounting framework inland barge to calculate your VA reserves.
Do you have any sense of if you can continue to use the current GAAP accounting framework post to LPTA given that this actually had more of an impact on how you think about.
Actual regulatory reserve requirement.
Yes.
Yes.
Ryan Thanks for the question, Yes, I don't want to Prejudge I think it's all part of the analysis of the impact of L. DTI how that impact.
The hedge program and how that impacts.
The underlying economy and that we have a member I think those are all part of.
The overall analysis and I think at the end of the day, they're all very manageable.
Opinion, so its not something that I'm, losing sleep over but is this something that we have to have the.
The deal with as we go about implementing this new approach no counting.
Yes.
Thanks, and then.
How would you what would you characterize spread compression.
Where it's running at this point it is still in that 2% to 3% type range right now.
Yes at this Red Hot moment, I think we're sort of in the middle.
2% to 3%, but we continue to trend down over time. So if you go out a few years I think will be.
More than one 2% if not the low end of that 1% to 2%. So yes. It continues to trend down as the portfolio gets closer to the new money rates, but at this red Hot moment.
In the middle of the 2% to 3% range.
Yes.
Thank you.
Okay.
Yes.
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 question just to kind of drill down on the kind of the the severity impact on life insurance a little bit more.
Can you maybe size kind of how much more kind of large claims or maybe percentage wise.
This quarter that you saw versus kind of previous.
Previous quarters.
Humphrey. Thank you for the question.
In a normal typical quarter, if you just want to.
There's a number of different ways to slice large claims I'll talk about very large claims.
<unk> for instance that exceed <unk>.
$15 million to $20 million.
Typical quarter, we see a couple of those in this quarter, we happened to see.
About.
Three I think we were at about seven so that hope that helps you, but we're.
We're talking about the largest.
Large claims.
Right.
Okay.
That's helpful.
And then shifting to group protection.
Disability results seems to be pretty consistent over the past several quarters, but some of your peers have talked about.
There is a shift in terms of sdd versus the LTV can you just generally talk about what you saw in the quarter in terms of your visibility result.
Humphrey if you will.
Look at the loss ratios that we reported we were.
Just the reported numbers right the disability loss ratio.
79% last quarter 77, 7% this quarter and if you go in there and you adjust for the.
The pandemic claims that we've talked about.
And the benefit we got from the review of assumptions this quarter, what you would see as the underlying.
Disability ratio increased just a little bit it wouldn't went from 77 five to $78 three.
That was a little bit of an uptick in incidents.
I'll set by continued ongoing good performance from our claims resolution standpoint, but there was a little bit of an uptick in disability.
Incidents and I would say that occurred in both the LTV.
SUV space, but.
Talked about we're talking about 77 $578 three so I don't see it as a huge.
Item.
In the broad context of all the items that have an impact disability results.
Got it thank you.
Okay.
Yes.
Thank you. Our next question comes from Josh Shanker with Bank of America. Your line is open.
I just want to talk about the benefits business, a little bit it looks like sales were somewhat weak, especially I thought there might be a rebound post pandemic conditions a little bit.
I know third quarter is not the biggest quarter for renewals or whatnot, but fourth quarters pretty chunky can you talk about your positioning and how you see the growth map business performance.
Yes, Josh.
Take that.
The decline this quarter was driven primarily by lower sales from new customers.
I think in the mid <unk> that is the most competitive and price sensitive segment.
For sales at the moment.
In part because of the pandemic customers have been reluctant to move carriers.
And so that's where the majority of the sales decline occurred.
On the other hand, we are pleased with the amount of sales coming from existing customers.
As we deepen our relationships and while improving our margins and in this category the percentage of sales coming from existing customers made up 64%.
Up from 56% so.
We're getting prices increases.
<unk> customers developing.
Relationships.
And as the pandemic.
Hopefully.
Fades overtime, I think the opportunity for new business from new customers will increase.
This condition seem to bode for continuation into <unk> into <unk>.
We're seeing.
More opportunity for.
Bids.
But I don't think we're going to see a dramatic.
Uptick in the fourth quarter.
And new business from new customers, but maybe.
I had to predict right now.
And just again overall, we're pretty confident.
Maintaining our sales increasing our premiums increasing our margins in this business.
And so the temporary sales issues related pandemic again are going to.
Fade over time.
Yes.
Thank you for the answers.
Yeah.
Thank you. Our next question comes from Andrew <unk> with Credit Suisse. Your line is open.
Thank you. Thank you for taking my question.
I'm kind of.
Interested in the.
The demographics of the claims in life insurance that you had in individual life.
Both the Covid claims and the non Covid could you give a little color on the vintages of when those policies were written the ages of the individuals and and.