Q1 2022 Lincoln National Corp Earnings Call
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.
Including those regarding deposits expenses income from operations share.
Share repurchases and liquidity and capital resources are forward looking statements under the private Securities Litigation Reform Act of 1095.
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 2021 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 Dot 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 the call.
Including adjusted return on equity and adjusted income from operations or adjusted operating income to.
So the most comparable GAAP measures.
Presenting on today's call are Dennis glass, President and Chief Executive Officer.
Ellen Cooper, CEO elect and 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 would now like to turn the call over to Dennis.
Thank you al.
Good morning, everyone. This quarters earnings conference call as a special one as we approach our CEO transition later this month.
The transition is going very well and I am incredibly confident that Lincoln under Ellen's leadership will continue to build on our strong foundation. This is an exciting time for Lincoln.
We are pleased with our start to 2022 and optimistic as ever about what lies ahead.
Most importantly, we have a highly talented team of more than 11000 employees, who have risen to meet every challenge that has come their way during the pandemic.
And before.
As I have seen them do everyday of my 15 year tenure as CEO .
Lincoln colleagues have shown an inspiring and unwavering commitment to our customers partners and communities and to them I say. Thank you for all you do I.
I will now turn the call over to Ellen.
Thank you Dennis and good morning, everyone.
I am excited about and confident in Lincoln's continued success as I step into the CEO role effective later this month.
Dennis has been a valued mentor and colleague for many years.
And I look forward to working with him as he transitions into the role of chairman of the board.
I have met many of the investors and analysts joining today's call.
We look forward to having more opportunities to discuss link in with all of you.
Although the U S continued to experience headwinds related to the pandemic.
Lincoln had a solid start to 2022.
We are pleased with our underlying results.
Optimistic about the outlook for our business.
Our current strategy has proven to be robust and we have an excellent track record of executing against it as demonstrated in part by having compounded underlying EPS at 11% over the past decade.
As we have said we expect over the next few years to grow underlying EPS at or above the high end of our 8% to 10% target range.
I will now touch on some of the initiatives that are positioning us to meet this objective.
First we.
We continue to generate organic growth at strong new business returns meaningfully above target across our businesses.
Driven by our broad product portfolio, and our industry, leading distribution franchise.
Topline growth is enhanced by a reprice shift and add new product strategy, which is enabling us to meet evolving consumer needs.
We have been able to drive a shift towards products with additional risk sharing between Lincoln and customers that appeal to broader demographics and expand shelf space.
We introduced 13, new products in 2021 and continue to innovate.
Second.
Company wide margin improvement efforts are primarily centered around our spark initiative.
Which we expect to generate 260 to 300 million in run rate savings by the end of 2024.
Investments, we are making in our business through spark will enable us to operate more efficiently and effectively and to improve the customer and employee experience, including the way we work here at Lincoln. Additionally.
Additionally, we are focused on improving the group protection underlying margin through continued pricing actions improved claims effectiveness and spark expense savings.
And last we continue to focus on effective capital allocation, including returning capital to shareholders and maintaining a strong balance sheet.
Recently, we announced that we are bringing our individual life and annuities businesses together under a senior leader who will join Lincoln in July and report to me.
Product manufacturing has long been a key driver of the success of these businesses and we see this continuing as we also place continued emphasis on imports management, bringing.
Bringing the life and annuities businesses together creates more opportunity to leverage our capabilities share best practices and enable greater innovation.
This new leader will also oversee Lincoln financial network, or <unk>, which represents more than 11000 advisors and our growing wealth management platform.
Turning now to the business segments.
Starting with annuities.
Our products are generating strong returns as we continue to sell on our term across broadly diversified product segment with disciplined pricing and risk management built directly into the product design.
Critical to our success in meeting the needs of our customers is offering a broad product portfolio through our industry, leading distribution force.
We continue to enhance our product offerings, including the launch of multiple new investment options and features that differentiate our products and expand consumer choice.
Sales of $2 7 billion were down 4% versus the prior year period due to a decline in indexed variable annuities.
However.
<unk> sales were up sequentially for the second consecutive quarter as we regain sales momentum through our product innovation and an improved competitive pricing environment.
In fixed indexed annuities sales were up again significantly.
Our differentiated investment options and higher rates have restored momentum to the FIA product line.
The breadth of our annuity portfolio is enabling our.
T J sales shift.
In variable annuities with guaranteed living benefits remain under 30% of total annuity sales for the seventh consecutive quarter.
Our ongoing sales shift also is further diversifying the total annuities enforced account value mix as variable annuities with guaranteed living benefits again represented less than half of total account value.
At our current sales mix this proportion will continue to decline.
To be clear.
We have been undertaking this mix shift for diversification purposes, only as we believe in the value proposition of guaranteed living benefits for customers and are achieving very attractive mid 20% Roe.
We expect to see continued momentum as we look to further grow the annuities business.
Retirement plan services continues to have success and achieved record first quarter net flows of $946 million.
First quarter total deposits of $3 4 billion were up 28%, including an 11% rise in recurring deposits and a 73% increase in first year sales.
This sales growth combined with high customer retention.
Led to the quarter's excellent outcome.
The retirement business is benefiting from the strong labor market.
U S wage growth and increases in employee contribution rates for the main driver of this quarter's recurring deposit growth.
We also saw robust first year sales growth across our broad product portfolio.
Another external factor that constructive legislative environment is also creating longer term growth opportunities for rps around implant guaranteed and pulled employer plan solutions as well as by creating greater incentives for employers to establish plans.
Beyond these external tailwind is the favorable competitive positioning of Rps with its broad innovative product suite enhanced digital capabilities and the power of Lincoln's distribution franchise.
The retirement business continues to produce strong returns and to drive positive net flows.
Our life insurance business continues to demonstrate broad based top line momentum as sales of $155 million were up 36% over the prior year period with growth across all major product lines.
Thanks undertaking our reprice shift and add new product strategy. We have returned to a more typical seasonal sales pattern and expect sales to ramp up through the end of the year.
Our life portfolio is achieving new business targeted return and we continue to attract new financial professional for instance, with our successful rollout last year of the first of its kind variable hybrid life product money guard market advantage.
Ongoing product innovation is expanding our access to new customer segments, while advancing our sales mix shift towards lower guarantee risk sharing solutions, which represent over 70% of total lifestyle.
We continue to expand upon and to see strong adoption of our digital capabilities for example.
In underwriting we are investing in automation and other technologies that drive internal efficiencies.
We are also utilizing digital real time medical information. This is helping improve the producer and consumer experience by decreasing the average issue time from five weeks to two with the capability to issue within the same day.
Lastly on group protection, our results continue to be impacted by the pandemic.
However.
We are beginning to see signs of improvement and are confident that underlying margin will build over time toward the upper end of our target 5% to 7% range.
The strong demand for employee benefits helped drive sales of $105 million up 42% compared to the prior year period.
We generated growth across all case sizes, primarily driven by increased sales to existing clients as our corporate customers hire more employees raise salaries and expand benefits offerings to include new lines of coverage.
Employee paid sales represented 57% of the total this quarter we.
We expect the proportion of employee paid sales to continue to rise over time on an annualized basis as we focus on growing in this market, including supplemental health.
First quarter premiums of nearly $1 2 billion rose, 4% compared to the prior year period, driven by new sales improved persistency rate increases and employment growth.
I am pleased with this quarter's underlying results and confident our strategic actions will drive margin expansion over time.
Top of our targeted range.
Moving to investment results.
Credit quality remains excellent with 97% of our fixed income assets rated investment grade or investment grade equivalent.
Portfolio performance remains strong as we experienced another quarter of negligible credit losses and positive net ratings migration.
New money yields rose to three 3% in the first quarter and nearly 50 basis points sequential increase driven by higher rates.
During the quarter, we can invest at 60% of new money in assets other than public corporate and expect to continue to invest at this level, adding high quality assets with incremental yield.
Finally.
Alternative investment performance was in line with our long term expectation of a two 5% quarterly or 10% annualized return.
In closing.
Lincoln's underlying earnings power is intact, we expect to benefit from the recent significant decline in pandemic hospitalizations and deaths and the rise in interest rates.
Looking across our businesses, we are progressing on several fronts.
Sales momentum continues to build driven by our broad and innovative product portfolio and distribution strength.
The Spark initiative is on track and group protection margin expansion efforts take hold we will continue to allocate capital towards its highest and best use.
In closing, we continue to execute on our near term strategy with an eye toward long term profitable growth I will now turn the call over to Randy.
Thank you Ellen.
Last night, we reported first quarter, adjusted operating income of $294 million or $1 66 per share.
The quarters results included.
And then related claims which reduced earnings by $150 million.
<unk> 85 per share.
And unusual items of $19 million or <unk> 11 per share.
Primarily related to a group protection customer. So we're building a backlog of prior year claims.
As Ellen mentioned alternative investment income was in line with long term expectations.
Net income for the first quarter totaled $104 million for 58 cents per share.
With the difference between net income and adjusted operating income, primarily resulting from a loss related to variable annuity net derivative results.
The hedge program was 96% effective in what was a volatile quarter for the capital markets.
With the recent increase in rates this year.
Today, we'll update you on spread compression that link them.
Our current expectation is that spread compression will impact EPS growth in the near term by zero to 1%.
Improved from the 2% to 3% range I communicated on last quarter's earnings call.
Touching on the performance of key financial metrics compared to the prior year.
Excluding excess alternative investment income in the prior year quarter and the impact on the third quarter 2021 block reinsurance transaction on a <unk>.
Validated basis.
Operating revenues were up 4%.
Our expense ratio improved 20 basis points.
Shares outstanding declined 10%.
And book value per share, excluding <unk> stands at $78 and 32.
Up 8% and an all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $302 million.
Compared to $290 million in the prior year quarter.
The increase was primarily due to higher account values driven by year over year growth in the equity markets and expense efficiency.
Average account values of 164 billion increased 2% year over year.
Of note and as Alan pointed out variable annuity.
Aaron he'd luby benefits now represent less than 50% of our.
Rudy account values.
For variable annuities with guaranteed benefits the net amount at risk stands at 134 basis points for living benefits.
And the 107 basis points for death benefits.
We expect these percentages to remain at the very low end of peers.
Highlighting the lower risk nature of our enforced business.
G&A expenses net of amounts capitalized declined 3% from the prior year quarter.
Leading 50 basis point improvement in the expense ratio.
Return metrics remained solid with a return on assets of 74 basis points.
Up two basis points year over year.
And our return on equity of 23%.
As a reminder, sequentially there were two fewer fee days in the quarter, which reduced earnings by roughly $8 million.
Overall, a good result for the annuity business highlighted by strong return.
<unk> expense discipline.
Retirement plan services reported operating income of $55 million compared to $57 million in the prior year quarter.
Our strong net flows and a year over year increase in the equity markets were more than offset by less favorable variable investment income.
Continued sales success has produced $1 1 billion.
Net flows over the trailing 12 months.
Germany and to a 7% increase in average account values to $96 billion.
G&A expenses net of amounts capitalized were in line with prior year quarter.
Base spreads excluding variable investment income compressed six basis points versus the prior year quarter.
In line with our stated five to 10 basis point range is crediting rate actions take hold.
Benefiting from the increase in rates, we expect spread compression in the retirement business going forward to be de Minimis.
This was another great quarter for the retirement business with strong net flows.
Expense management, and an expectation as we exit the quarter that spread compression has become a non event for the business.
Turning to life insurance.
We reported operating income of $58 million compared to $107 million in the prior year quarter.
The decline was due to less favorable alternative investment income.
A more normal level of underlying mortality.
And the impact of the resolution deal.
Which combined more than offset improved pandemic claims.
This quarter's earnings were impacted by $69 million of pandemic related mortality.
Average account values, excluding the impact of last year's block reinsurance deal rose 4%.
G&A expenses net of amounts capitalized decreased 1% from the prior year quarter.
Base spreads declined 12 basis points compared to the prior year quarter.
Spread compression to return to a five to 10 basis points stated range.
Outside of continued pandemic headwinds life results were solid with underlying mortality in line with our first quarter expectations, good expense management and growing sales.
Group Protection reported a loss from operations of $41 million compared to a loss of $26 million in the prior year quarter.
This quarter's loss is a significant improvement over a loss of $115 million in the fourth quarter as the impact of the pandemic began to ease and we saw improvement in underlying disability results.
As noted in my opening comments. This quarter's results were negatively impacted by $19 million of unusual items.
The pandemic impacted our group life results by $63 million and our.
Ability results by $18 million.
Group protection pandemic claims relative to U S. Covid deaths improved significantly from recent quarters due to death transitioning back towards the non working age population.
Excluding pandemic claims and unusual items the group margin was five 1%.
At the low end of our targeted range of 5% to 7%.
On the life side or underlying loss ratio of 72, 9% improved 240 basis points year over year.
60 basis points sequentially.
As a results benefited from pricing actions and good underlying experience.
Our underlying disability loss ratio of 84% improved 680 basis points sequentially.
As the seasonally higher claims that we saw in the fourth quarter return to more normal levels.
Compared to the first quarter of 2021, our disability underwriting loss ratio was up 290 basis points and remains elevated compared to long term expectations as both incidents and severity are above historic levels.
I'd estimate that there's certain groups first quarter results by $10 million to $15 million.
We believe our underlying disability results or indirectly influenced by the pandemic.
Delayed treatments and lack of routine care during peak pandemic ways appears to be impacting overall health of our climate.
Our claims management efforts are focused on helping our customers recover and get back to work as quickly as possible and should lead to improving underlying disability results over time.
The expense ratio was 12, 7% up 20 basis points, primarily due to elevated staffing levels given the volume of pandemic related claims.
We remain confident that the combined impact of repricing <unk>.
<unk> claims management and spark expenses will move with the top over five years to 7% target range.
Turning to capital and capital management.
We ended the quarter with $10 $2 billion of statutory surplus.
And estimate our RBC ratio at approximately 415%.
Our cash at the holding company stands at $755 million.
During the quarter, we paid off our $300 million 2022 debt maturity.
And issued $300 million of new debt as a partial pre funding of our 2023 maturity.
We executed a $400 million accelerated share repurchase program in the quarter retiring over 3% of shares outstanding.
As I mentioned was possible in last quarter's earnings conference call with that level of repurchases, we chose not to pursue any open market buybacks.
So we expect these to resume in the second quarter.
In conclusion.
While still affected by the financial impacts of the pandemic, our underlying results remain strong and leading indicators are positive.
Such as.
Spread compression, which.
Which has been with us for many years has come down dramatically and as I noted earlier now represents a very modest headwind to EPS growth of zero to 1%.
Our group protection margin enhancement efforts are gaining traction with.
With underlying results returning to the bottom of our targeted margin range.
Investments that were making in the spark initiative will drive significant expense savings over the next three years.
While the pandemic is still with us.
The combined impact of vaccinations and natural immunity.
Tenure to reduce the potential negative financial impacts I'm Mike.
While investing significant capital at strong returns to support new business that will drive our earnings up Tomorrow, we are continuing to return capital to shareholders through buybacks and dividends.
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 the operator to begin Q&A.
Thank you if you'd like to ask a question simply press the star key followed by the number one on your telephone keypad, if you'd like to withdraw your question Press Star one once again for optimal some quality. Please do not use the speakerphone. Please speak directly into your receiver or usually wired headsets.
With a microphone, we'll pause for just a moment to compile the Q&A roster.
We will take our first question from Nigel Dally with Morgan Stanley . Your line is open.
Great. Thanks, Good morning, So I had a question on capital while you completed the ICL you didn't buy back stock above that one that was.
Thank you need all possible, so I guess not overly surprising.
Should we expect some sort of catch up in buybacks in the second quarter terrific regular buybacks that you weren't able to complete this quarter any color there would be helpful. Thanks.
Okay.
Nigel Thank you for the question.
When you think about.
Buybacks in the second quarter I would go back to our sort of overarching philosophy when it comes to ongoing.
Share buyback programs open market programs typically.
Have.
Used more level approach that makes more sense.
Looking forward to the ups and downs of the share price. So I would expect us in terms of the buybacks.
We're going to do over the remainder of the year to spread more evenly.
The other thing I'd point out.
There is a fair amount of uncertainty in the environment.
As we sit today.
We're going on yeah inflation Theres a question on what the economy is going to do so I think it's one of those years, where you lean towards prudent when it comes to that.
More broadly speaking.
Nigel when it comes to capital allocation in General just as a reminder, we have.
Generate a lot of capital we've generated a lot of capital over the years, we have two big places we put that capital.
There is new business, new business, which has historically been about 60% to 65% of our overall capital allocation.
You've seen us, though at times flex up or down alright, we flex down when the opportunity is not there you saw that a couple of years ago, We took sales down, but we flex up when the opportunities there both from a return and a sales standpoint, and you really saw that in <unk>.
In Alan's comments, she talked about every business.
As getting returns meaningfully above our target there really has not been a better time to issue a new business.
Our space in some time, so maybe one of those years, when we flex up a little bit from a new business standpoint, but we'll see if the sales opportunity to serve the Marina. There then obviously the other big bucket is returned to shareholders, we've done a whole heart.
If you look over the last.
Four quarters, we've done $1 7 billion $1 billion for buybacks $300 million of dividends.
If you look over a longer period of time that was actually it was interesting I was looking at.
Our long history of returning capital to shareholders. If you go back over the last decade or so.
We've actually returned 10 $3 billion of capital to shareholders seven.
Seven 9 billion of that through.
Through buybacks.
I think it represents 46% reduction.
A reduction in neuro standing shares. So yes, we believe in returning capital to shareholders, we're going to get back to buying back our stock.
In the second quarter, but I would expect us to be more level life over the remainder of the year and I would expect us to lean a little on the conservative side.
Okay. That's helpful. Thanks, Randy follow up is on on group, if we back out Covid and other abnormal items. If you hit the lower end of your 5% to 7% range, which I think is a bit stronger than maybe if its expected is that a reasonable base from which to build or are the other factors that we should be considering as we look at the forward prospects.
Yes, I think it is a very good spot to build for them and of course, there is always volatility in these businesses, but.
If you take what we've talked about really three big levers to growing group margins pricing.
And we did see.
Nice price increases in our renewal program.
In the first quarter.
So there's price increases there's claims effectiveness, which we need to continue to work on and then there's the Sparc program, which is really just getting going from an investment standpoint, you really should start to see the benefits of so yes, I think five 1% is where you end up I think it's a good place to start and we're very confident as both Alan and I said.
And moving towards the upper end of that range over time.
Excellent Thanks, a lot.
Mhm.
And next we'll go to Tom Gallagher with Evercore. Your line is open.
Good morning, just Randy a follow up just to make sure I'm clear on the cadence of buybacks. So.
Everything you said I think makes sense the in terms of the environment and your new business was strong so that's probably going to be consuming some more capital.
Should we should we expect something below the normal $150 million of quarterly buybacks.
Over the next couple of quarters here and then also I think from the capital that was freed up from the life reinsurance transaction that we're still an extra $150 million or so of <unk>.
Buybacks that you would plan to do should we assume those.
Unlikely to happen. This year, just just anything you can give us on that sort of cadence in the near term buybacks would be helpful. Thanks.
Well, let's first let's go back to the resolution deal we generated.
About a billion 150 of capital and we set at the time, we would put $900 million of that.
In to buybacks and the remainder will go into debt reduction and so we've completed the $900 million of buybacks.
So.
There is that.
In terms of the amount I agree with you that historically.
We've averaged $150 million and Thats I think over time still a long term expectation just as a reminder, with the resolution deal now that $900 million of incremental buybacks we did.
That represents represents about 15 years' worth of distributable earnings we were going to get off of that block of business, but we did give up.
About $75 million or so of distributable earnings so in the near term.
We've given up that 75 now we would obviously, we would expect our capital generation to grow over time, but.
The normal growth, we're going to get from our growing business is going to get a little math at least for this year.
Equity markets are down those sorts of things. So I think youre not seeing that normal growth and capital generation that we'd see in a typically a typical year. So.
That would lead us to a starting point a little below the normal $150 million a quarter.
You would typically see.
And then as I pointed out and you pointed out in your question.
I think the capital opportunity in new business.
We'll probably if it's early in the year. So it's tough to project, but when you look at the first quarter and what we expect the remainder of the year I think about $100 million to $150 million of incremental capital in the new business. This year relative to a normal year. So that would put you down Tom.
More into the 100.
And a quarter range.
Angela has a normal expectations. So I'd put it at 100 $150 million just one other point.
If you had asked me the same question in the first quarter of last year I would've said the exact same thing probably I think we ended up doing $105 million in the first quarter of last year and then we ended up doing 600 million for the full year, so somewhat influenced by how the environment rolled out over the remainder of the year Tom.
Got it.
Really helpful. Thanks, Randy and Ellen.
My follow up is for you.
A little more strategic as you're taking over the new leadership role as CEO any any preliminary thoughts on strategic.
Strategic priorities, we're recognizing you've been there for cigna.
A significant amount of time in a senior leadership role already so you're you're part of what's happened.
But is there anything at the edges, maybe that youre looking to potentially change or pivot, whether that's capital efficiency cash flow distribution and anything you could share on.
On preliminary thoughts would be helpful.
So Tom Thank you for the question and exactly you said it very well. So you know that I've been with Lincoln now for 10 years.
And very much in part of really Architected, the existing strategy and everything that we have to talk to you about we are going to continue to execute on so all things as it relates to our reprice shift and add new product strategy and really focusing there on organic.
Growth and you can see real evidence of that in this particular quarter as we're continuing to build momentum there.
The second area is really around expense initiatives and all of the execution that we're doing and very much on track as it relates to the overall spark initiative and we've also talked to you about the fact that in addition to that being a cost save program.
Very much is focused on improving overall.
Efficiency as it relates to our customers and how we face off with them and also a real focus on the employee experience. So that's very important and then the third area, which we've also touched on is around restoring our group margin to the higher end there as Randy just talked about and as we both highlighted in our script.
We've got all of the pricing actions that we're focused on there of course.
<unk> efficiencies through spark and then the claims effectiveness. So all of that we're going to continue to execute on.
As we think about longer term and we have talked to all of you about the fact that as I am stepping into the CEO role. We are also thinking about longer term strategy and overall longer term direction and so on.
Way too early to communicate anything at this time, but what I will share with you is one of the first things that we have done as part of the transition as we've looked at our overall organizational structure and how that will align with us thinking about executing on our near term strategy. While we are also.
Focus on building out what that longer term strategy looks like and so we've appointed a chief strategy officer that is focused on that now $24 seven.
And really taking a look at that and then also our focus on combining the individual life and annuity businesses together, along with <unk> and bringing that together is also very much strategic as we think about that and so because I just step back for a second on that.
We very much as we think about for example, our product strategy and how we have focused on product manufacturing over the years, we're starting to see more opportunity for synergy and innovation across the two individual businesses and so examples of that are products.
That have shifting investment engines shifting value propositions.
They're thinking about risk sharing is another example, there.
We see opportunity as it relates to the overall customer experience in operations and then this other part that I highlighted which is a continued emphasis as it relates to overall in force management and some opportunity there so more to come.
Yes, we will also take a look at capital management as part of everything that we are going to be doing longer term.
As soon as we have something more definitive to be able to talk to you about willing.
We will in fact do that.
Okay. Thanks, Alan Good luck.
[noise].
Next we'll go to Ryan Krueger with K B W. W. Your line is open.
Hi, Thanks, good morning.
I was hoping you could expand a little bit on the comments about this being a very favorable environment for new business and I'm. Just curious what you think are some of the key reasons certainly.
Higher interest rates is probably one of them, but if you've seen any change in the competitive environment or other factors that's leading to this.
Sure. So Ryan. Thank you for the question so as it relates to a favorable environment I think we see a couple of things there.
First is clearly from a capital markets perspective.
We have higher rates and in general when we think about higher rates of any of the 10 year now at 3%.
This is an opportunity now to be able to invest.
Investing money hire and that translates into offering customers higher value propositions and so across the board, we think that that will benefit the overall industry and it will benefit Lincoln as well so so thats one piece.
The second thing that is very much important is that as we continue to manage through.
This pandemic and we're now more than 24 months in we're seeing that it has definitely increased awareness and therefore demand for financial protection and security and so we're seeing real evidence of that for example in our group protection business, where we saw that sales were up pretty significantly year over year.
The primary driver of that was inside of the existing clients. We are seeing increased demand there.
The other thing that's happening from a macro environment is that we all know that we are seeing evidence of wage inflation and we're seeing a direct relationship in terms of increased compensation.
That is leading to.
Increased for example on deposits in the retirement business. So.
So across the board and also because there is such a significant focus right now on the overall employment environment and needing to attract talent, we're seeing expansion of benefits as well and so that's another opportunity. There. So I think across the board. There are a number of areas that are providing overall opportunity from.
From a macro and an external perspective, the other thing that I'll add is that we have done so much in terms of product innovation over the last couple of years that we are seeing that we have more and more attractive financial product.
I mentioned in my script that we introduced 13, new products last year in 2021, and so we're seeing that the expansion of product, it's appealing to expanded demographics.
Very much so is part of why we also view this as a favorable environment.
Thank you and then on group and the pricing actions, you're taking can you give any more detail on how much.
Right.
<unk> been.
Looking to get and if you've seen any impact on persistency.
So.
We have mentioned previously that we've seen year over year overall pricing increases in about the mid single digits and that really has been a combination of <unk>.
Pricing as it relates to new business.
As well as overall persistency and then also organic growth and Randy I don't know if theres anything you want to add.
Brian I think you really see that in our results also so just as a reminder, mid single digits about a third of our book re prices.
You do the math the upshot of that discrepancy about.
13th tender somewhere between $10 million to $15 million of benefit in our financial statements. It's part of that margin improvement story and I would expect you would see that over the next couple of years also.
Great. Thank you.
Okay.
Thank you and next we'll go to Alex Scott with Goldman Sachs. Your line is open.
Hi.
First one I have is on annuities.
The ROA this quarter came in a little bit lower than sort of the 75 to 80 I think you guys have talked about over time and I was just interested in.
The market decline probably play some role in that and just if you still have confidence.
Even in a more volatile market that you can kind of get back up into that range and how interest rates effects that overtime.
Alex first thing on the <unk> 74, and I tried to point it out my squirrel did pointed out in my script, it's actually up over the first quarter of last year. So it was 72 basis points last year to 74 basis points. This year. So there is seasonality.
Inside of the ROA.
Mentioned, it's about $8 million, if you look at the first quarter compared to sequentially the fourth quarter. So.
That is an impact.
To be fair when the markets go down you get less fee income and that influences ROA. So I think whether we're at that high <unk> range will somewhat depend if the markets.
Stabilize and start to move back up right. It isn't so much volatility in the markets that drive our ROA, it's whether they go down and stay down you get less fee income and then towards the top line and that will give you all a modestly lower ROIC I think when you look over the look the broad sweep of time markets will.
Stabilize we believe markets will start to move back up and in that environment. We would fully expect to move into that 75 to 80 basis point range again.
Thanks for that and the second question.
Just given where rates are moving up in equities going down to sort of the macro inputs moving in different directions for annuities I was interested if you could just provide an update on the wind bar in the diarrhea, how is the hedge program and just.
Any update on the hedge performance and if you could provide an update on the capital position, there and how that changed.
Our capital position is still very strong we have sugar dividends.
From Limbaugh, and the first quarter I believe it was $85 million, we've averaged taking annual dividends out of Lindbergh roughly a $125 million over the last five years. So we took $85 million in the first quarter. We did have breakage in the first quarter that followed a few quarters of really good results last year I would say the program.
Didn't have.
I think over the whole year I think it was about $120 million of breakage, which is which is a good year.
So it was elevated in the first quarter I think that was really driven.
Bye.
Two things if you breakout breakage into the two big buckets, one fund basis when it went against us in the quarter. So it was about a third.
I would say of the excess breakage.
As a reminder fund basis is one of those things, where we can go back over any extended period of time, it adds up to zero, but it can move up and down so.
That hurt us this time.
The other two thirds was really all about the volatility in the markets that we saw in the first quarter.
The total amount the hedge target traveled over the over the quarter was about twice what we saw.
On average last year.
And when you see that sort of volatility two things happen we have to trademark.
And you get some second order breakage. So I think it was one of those quarters, where we will have a little elevated breakage I think when you look when we go out a couple of years and look back what you'll see is that it'll be averaged out with some good quarters, and we'll get back to that long term expectation.
Some level of breakage.
Thanks, Alex.
Yes.
Okay.
All right next we'll go to <unk> Kamath with Jefferies. Your line is open.
Thanks.
Wanted to start I am assuming this is Dennis as last call. So just wanted to wish him well as he transitions.
My question was on indexed VA down I think almost 30% year over year I think in the script you had mentioned some maybe product changes that you've made so I was just curious if you could talk about that but also.
The competitive environment, just given what <unk> seen so many.
Annuity players enter that particular product.
Absolutely. So thank you for the question so yes as it relates to indexed VA.
It is it is an important talent and so the first thing is that while you are correct that <unk> sales year over year were down 30%. What we saw is that in the first half of 2021, you may remember that.
We saw rates come down pretty significantly and market volatility also come down and so it required.
As to really do a pretty significant re pricing in that particular time to be able to meet our overall target returns and so we did that and we actually led the rest of the industry down and so we knew at the time that we did that because we will not offer product out on the shelf that is not meeting or exceeding our target returns.
New when we did that that we were going to see a pullback in sales and thats exactly what happened and so the third quarter really.
<unk> bottomed out in terms of our overall sales and then we started to see sequential rebound and so you saw if you look at the trends you can see.
Fourth quarter was a bit better and then when you look at first quarter.
It's up sequentially from where we were in the fourth quarter and actually even inside of there.
We saw with momentum building. So January was a little lower February was a little bit higher from that end March with even higher so we feel good in terms of where we are.
In terms of the overall competitive environment, yes.
Yes, there are quite a few entrants now in this space and we know that there are a number that are coming in as well in 2022.
We feel really good about.
Our broad product offerings in addition to.
And competitive with the rest of the market, we have a couple of new and.
And really proprietary index options that we have offered as well as new product features that are unique to our particular product so between that and the power of our distribution.
Feel very good in terms of our overall share of IEA and continuing to sell and really.
Sustained that momentum that we're seeing.
Got it.
Yes, sorry.
Well first of all thank you for the nice comment I appreciate very much.
And I'd just like to.
Thank you everybody on the phone.
Further interest in <unk>.
Thank you and over the last 15 years I've been CEO .
Callout to yourself and the other sell side analysts, who do such good work for the industry and <unk>.
Asking the right questions during the right work.
Don't always agree with every.
Opinion, but.
You guys all add valuable.
Input.
Our perspective on the industry. So thank you all for that.
And then I'll turn it back to Houston.
Thanks for that Dennis.
My second question was just on the VA flow reinsurance deal that you guys announced I think that has an end date of June of this year. So just curious one how much of the $1 5 billion have you used and then too.
What have you learned from that transaction and is this something that you think you could pursue kind of going forward in terms of incremental such structures. Thanks.
Yes, So you are correct.
The VA flow deal that we did which which really if you all remember in just to set some context here we.
We did this deal with <unk> and it is effective through the end of June and it is a flow deal and basically.
But what it did is it really effectively substantiated that.
The cost or the price that we're charging for our guarantees as appropriate and for US overall it has the benefit of increasing overall Roe.
Also very supportive from an overall capital perspective, because we're effectively passing through a significant amount of the guarantee so it's worked well.
We are pretty.
Close to.
Really the capacity of that particular deal as we round out to the end of the quarter on the second quarter just to give you a sense by the way when.
When we talk about da with with guaranteed living benefits in terms of overall sales and we mentioned 25% in the quarter. When we look at the net so the pass through of the reinsurance for the quarter that 25 drops to about 18% and we're evaluating the potential to come.
Do you need to extend it as we always do with all of our partners. So we'll let you know as we continue to look at it but it's worked out extremely well on both sides and we.
We're very.
Grateful for the partnership that we have with telcos.
Got it thanks Alan.
Okay.
Okay.
Thank you for anyone who has not been able to participate in today's Q&A session management will follow up later this afternoon I'll now turn the call back over to al <unk> for any additional or closing remarks.
Thank you all for joining us. This morning as always we are happy to take any follow up questions that you have you can email us at Investor Relations at LFG Dot com. Thank you all and have a great day.
This concludes today's conference you may now disconnect.
Okay.
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