Q2 2022 Lincoln National Corp Earnings Call
I always have with the right strategy and consistent execution.
Effective execution starts with leadership.
Ensuring we have the right people in place to drive the organization forward.
I am pleased to share that we have assembled an incredibly experienced and talented senior leadership team, including the recent appointment of Matt growth as head of individual life annuity and Lincoln Financial network.
Matt joined us with deep experience running retail businesses, including all aspects of individual life annuity and wealth management.
Bringing these businesses together enables us to leverage opportunities for synergies across product manufacturing best practices in force management optimization and enhancing the customer experience.
Additionally, we recently announced the addition of James Reed as head of workplace solutions, which includes group protection and retirement plan services.
James joined to Lincoln as an established group protection leader with Deep group experience, which is critical as we continue to deliver strong results and grow this integral part of our business Chris.
Chris NASA poor is our newly appointed Chief strategy Officer, and his organization is quarterbacking all aspects of the build out of our longer term strategic framework, Jason <unk> as our new Chief investment Officer and of course, our long standing CFO Randy Free Tag is a key.
We partner to me in this next chapter.
I am confident in our senior team and excited about Lincoln's future.
Regarding strategy.
We are on the right path to continue to deliver shareholder value in the near term and we are also focused on developing our longer term strategy to accelerate the pace of value creation for all stakeholders.
In addition to having the right people in the right roles. We also optimize our deployment of capital balancing capital allocated to build long term value to support new business investing in our future for example, direct investments and our spark program and of course, returning capital to shareholders.
And we also acknowledge the critical importance our investors place on cash flow generation and capital return as we evaluate deepening our strategic focus on distributable cash flow generation alongside our long standing goal of generating strong Roe.
And growing operating earnings and sales.
To that end, we have an excellent track record of setting strategy and executing against it as demonstrated in part by having delivered compounded underlying EPS of 11% over the past decade.
Despite the recent market headwinds as we look forward over the next few years, we continue to expect to grow underlying EPS in the 8% to 10% range.
I will touch on the key strategic initiatives that have and will continue to drive results.
First product strategy.
Sales remain robust as we continue to benefit from our reprice shift and add new product strategy.
<unk> sales are generating returns at or above targeted levels, while contributing to an ongoing strategic shift to a broader diversified mix of products that provide a range of customer value propositions and away from traditional long term guarantees.
This shift has also contributed to a more capital efficient new business mix as the capital per dollar of sales and overall capital to support new business have continued to decline.
Second spark.
We are on track and making substantial progress in the implementation of this enterprise wide effort.
In addition to the expense run rate savings of $260 million to $300 million. We expect to achieve spark is designed to accelerate delivery of results with increased agility and innovation.
We have made about one third of our planned direct investments and will continue to deliver.
To accelerate our execution capabilities modernize our technology improve operational processes and create expanded opportunities for our employees as well as further enhance our customer experience.
Third.
Protection margins, we are making excellent progress and in the quarter achieved an underlying six 8% margin and remain confident in sustaining the top end of our targeted 5% to 7% margin range through continued pricing actions improved.
Ames effectiveness and spark expense savings.
Fourth.
Balance sheet resilience.
As Randy mentioned in his remarks, we did see a decline in our risk based capital ratio in the quarter of about 15 points to approximately 400%.
Which was expected given the equity market downturn.
We maintain a solid balance sheet, including our high quality investment portfolio and remain comfortable with our RBC level.
Turning to the quarter's results despite market headwinds second quarter underlying earnings were solid and we are seeing positive developments improving group protection results.
Significant sequential decline in pandemic claims and a meaningful rise in interest rates year to date supporting future earnings growth and new business returns.
In annuities.
We saw flat sequential sales that included growth of index variable annuities and fixed annuities of 16, and 40% respectively offset by a drop in traditional <unk> not surprisingly during a stock market downturn the.
Combination of this downturn and higher interest rates are shifting customer preferences toward Ida and fixed product.
This marks the third consecutive quarter of sequential sales growth.
This change in consumer preferences has been boosting a strategic mix shift that has been underway at Lincoln for several years.
The eighth consecutive quarter more than 70% of total annuity sales of products other than variable annuities with guaranteed living benefits. This sales mix shift is in turn contributing to a shift in our account value mix as products other than <unk> with <unk>.
Represented 53% of our total annuity account values.
Five percentage points compared to the prior year period.
Retirement plan services continues to deliver as our proven strategy competitive product offerings and differentiated high touch high Tech customer experience model drove another quarter of excellent results.
Compared to the prior year period total deposits grew 6% and withdrawals improved 11%.
Inventory are focused not only on sales, but also persistency net flows were again favorable this quarter at over $900 million.
In our life insurance business.
Quarter life insurance sales grew 53% from the prior year period and 25% sequentially.
Sales of all product categories and sales across all major distribution channels were up compared to both the second quarter of 2021, and the first quarter of this year.
All products are priced to generate new business returns in line with or above target levels.
Following the introduction of seven new products and features in 2021, we continue to innovate and expand our offerings as part of our repriced shift and add new product strategy.
Lastly on group protection as I mentioned, our margin expansion efforts are gaining traction and I am pleased to report that group achieved strong earnings this quarter.
Premiums were up 7% driven by solid persistency organic growth and price increases.
Most importantly, we remain disciplined in our pricing approach and are meeting or exceeding our targets for both new sales and renewals.
In what is typically not a big seasonal quarter for sales sales were up 61% over the prior year period with increases across all products and key sizes. We are also achieving a healthy mix of both employee paid sales and sales to existing.
<unk>.
By continuing to focus on pricing discipline and claims management effectiveness and expense efficiency supported by our spark program I am confident that our margin expansion plan is on a solid path to achieve and sustain our margin expectations are.
Across these four businesses are broad and diversified set of products to meet a range of customer value propositions.
Spanned at digital capabilities to enhance the customer experience and industry, leading distribution strengths position us to continue to generate profitable growth in the quarters and years to come.
Moving to investment rebuilt.
Our credit performance and the quality of our investment portfolio remained excellent.
You may recall that we began derisking our portfolio well before the onset of the pandemic and today fixed income assets are comprised of 97% investment grade holdings.
Our credit outlook remains solid as net positive ratings migration continued for a fourth consecutive quarter and credit losses remain benign.
We recognize that the risk of recession has been increasing with the federal reserve tightening financial conditions.
One of the many benefits of our multi manager investment model is that we leverage our entire suite of managers to perform scenario analysis on a name by name basis across all asset classes in our portfolio.
Based on our current views, we would expect any potential credit impacts from a near term recession to have a modest impact on our balance sheet.
New money yields have risen sharply as we invested new money at a rate of four 2% in the second quarter up 90 basis points sequentially, and 20 basis points above our fixed income portfolio yield.
In fact, our total fixed income portfolio yield rose five basis points sequentially.
At these levels, we expect to see spread compression shift to spread expansion and support EPS growth over the coming years.
Briefly on our alternatives portfolio despite declines in the public equity markets during the prior quarter, our highly diversified alternative investment portfolio delivered a positive one 5% quarterly return.
In closing we are a financially strong organization that provides our customers financial security and peace of mind.
We have a long standing proven track record of <unk>.
<unk> and consistent execution and are committed to continuing to achieve strong financial performance. Our leadership team is excited and energized to continue to deliver on our strategy with action to continue to produce strong results. While we also develop our vision for the longer.
Term business of tomorrow, with the objective of accelerating growth and value creation for our shareholders customers and employees I will now turn the call over to Randy.
Thank you Ellen.
Last night, we reported second quarter, adjusted operating income of $391 million or $2 23 per share.
There were no notable items in the current or prior year corner.
However, this quarter's results included.
Pandemic related claims, which reduced earnings by $39 million.
23 per share.
Alternative investment income that was $19 million for 11 per share below our target return levels.
And unfavorable one time items of $14 million.
Or <unk> <unk> per share in the annuity segment.
Net income for the second quarter totaled $238 million.
Our $1 34 per share with.
What's the difference between net income and adjusted operating income primarily the result of hedge breakage.
The hedge program with 98% effective.
And what was a volatile quarter for the market.
With the increase we have seen the new money rates, we have reached the point where interest spreads have become a positive contributor to earnings growth.
These earnings accumulate over time, they will work to offset and eventually overcome the negative impacts we have seen for micro markets.
First two quarters of 2022.
Nine months into the implementation of the spark initiatives, we've already made about a third of the investments in <unk>.
Generated about 40% of the expected savings.
As previously disclosed spark is expected to achieve 260 to 300 million in run rate savings by the end of 2024.
It is expected to begin boosted EPS growth next year.
Touching on the performance of key financial metrics relative to the prior year.
On a consolidated basis.
Adjusted operating ROE came in at 11, 6%.
Adjusted operating revenues, not including resolution and alternatives were down 2%.
<unk> affected by the stock market decline.
G&A net of amounts capitalized declined 4%.
<unk> savings.
Lower incentive and deferred top expenses and ongoing expense management more than offset an increase in spark investments.
Shares outstanding declined 10%.
And book value per share excluding <unk>.
$29.49.
Up 5% and an all time high.
Now turning to segment results starting with annuities.
Operating income for the quarter was $256 million compared to $323 million in the prior year quarter.
The decline was driven by a drop in average account values lower variable investment income and a $14 million of unfavorable one time items I noted upfront.
The decline in the equity markets during the quarter increased our net amount at risk for living benefits and death benefits.
254% of our Companys, respectively.
We expect these figures to remain at the low end of peers.
G&A expenses net of amounts capitalized declined 11% from the prior quarter, leading to a 30 basis point improvement in the expense ratio.
Looking at return metrics annuities return on assets was 67 basis points compared to 78 basis points in the prior year period.
Turn on equity was 18% compared to 25% in the prior year.
During what was a tough quarter for the markets the annuity business delivered over $250 million of earnings.
The result that we would expect to improve as the market stabilized and returned to growth.
Retirement plan services reported operating income of $54 million compared to $62 million in the prior year quarter.
With the reduction driven by lower variable investment income.
Average account values declined 4% compared to the year ago quarter to $91 billion.
There is one and a half billion of positive flows.
Of an offset by market headwinds.
G&A expenses net of amounts capitalized were down $4 million or 6% versus the prior year period.
Interest spreads excluding variable investment income expanded three basis points versus the prior year corner.
Those are ongoing crediting rate actions continue to take hold and the benefits of higher new money investment yields emerge.
Looking forward, we expect expansion to continue.
The retirement business continues to produce profitable new business growth and to manage expenses effectively.
While also benefiting from an improved interest rate environment.
This combination positions the retirement business to deliver long term growth.
Turning to life insurance.
We reported operating income of $114 million compared to $255 million in the prior year quarter.
The drop was primarily due to lower alternative investment income when compared to the year ago quarters record results.
And $10 million of reduced earnings associated with the resolution block deals.
And then related claims impacted results by $18 million.
So out of the pandemic mortality was in line with expectations.
Average account values, excluding the impact of last year's block reinsurance deal fell 1%.
Reflecting the impact of lower equity markets.
While total in force face amount grew 11% driven by strong term sales.
G&A expenses net of amounts capitalized decreased 9% from the prior year quarters.
Contribute to an understanding of the long term benefit of alternative investments we've added a new item in our steps up.
Which shows that when using our 10% annual target helps returns.
Less spreads have stabilized on a year over year basis.
Strong sales growth good underlying mortality experience and stabilizing spreads.
And the life business for future growth.
Group Protection reported operating income of $59 million up from $46 million in the prior year quarter.
By strong topline growth.
Improved underlying profitability and lower pandemic related claims.
And then related claims were $21 million substantially improved from the first quarter.
And representing the smallest impact on the group business.
<unk>.
This includes $13 million in our group life business and $8 million in group disability.
Excluding pandemic claims and adjusting for below target alternative investment income the group margin was six 8%.
On the same basis and further excluding unfavorable items in the prior quarter.
Our total loss ratio of 75, 9% improved 130 basis points sequentially.
As an improvement in disability results more than offset it tick up in the life loss ratio.
Moving to the product lines and excluding pandemic impacts.
The life loss ratio of 77% Rose 370 basis points from the prior year period, and 400 basis points sequentially driven.
Driven by an increase in the number of larger claims.
Looking at results over an extended period of time, we are confident this past quarters experience was an outlier and.
And not likely to repeat in the third quarter.
Group disability loss ratio of 75, 2% improved 230 basis points from the prior year quarter and.
520 basis points sequentially.
We benefited from our typically our seasonally strongest disability quarter.
A new disability claims that returned to within a range of historical levels.
Driven by our strong topline growth expense ratio of 12, 5% was down 50 basis points compared to the prior year quarter.
While we are excited about the progress we have made in improving the group's profitability. We are well aware that there is still more to do.
Continued pricing actions.
Improvements in claims management and executing on spark or all components.
It will allow us to deliver on our long term goals for this business.
Turning to capital and capital management.
We ended the quarter with $9 $6 billion of statutory surplus and estimate our RBC ratio at approximately 400%.
Our cash at the holding company stands at $756 million.
The approximate 15 point sequential decrease in the RBC ratio in.
In line with our expectations.
Driven by weaker equity markets.
Non economic limitations on the deferred tax asset.
Taking into account the strength of our capital position.
Our high quality investment portfolio, and an improved view of potential credit losses, we intend to continue to repurchase our stock in the third quarter.
Yeah.
We look forward to getting together with you next month for a holistic discussion about the impacts of LPTA.
Not to front run that discussion as we continue to assess the impact.
I will note that as of 630, we would currently expect to see only a modest impact from that.
<unk> under global book value.
In closing.
In the face of a challenging equity market environment.
Our second quarter earnings performance remains solid.
We are confident in our balance sheet and pleased to be continuing buybacks.
And the current market environment.
Finally.
We see continued opportunity for earnings growth through our group protection margin expansion efforts and the spark initiatives.
With that.
Let me turn the call back over to al.
Thank you Ellen 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.
To ask a question press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press star one for optimal sound quality. Please do not use a speaker phone. Please speak directly into your receiver argues a wired attack the microphone.
Your first question is from Elyse Greenspan of Wells Fargo. Please go ahead. Your line is open.
Hi, Thanks. Good morning. My first question is on share repurchase Randy you said that you guys will continue to buyback stock in the third quarter. Typically you know you point to 250 million I know that Q2, you had said would be.
Little bit light of that and came in at 100 million. So how should we think about the third quarter level of buybacks that you guys are targeting.
Please.
Thank you good morning, Thank you for that question Alan.
Alan mentioned to me that this is topical last night from Nicole. So I've spent a lot of time thinking about this the short answer to your question is up to $100 million.
But I think it would be helpful to give you a little more context.
Around how we think about that.
We have obviously like every company, we have a philosophy around.
How we allocate capital.
Philosophically, we believe that buybacks are primarily.
And I'll close.
Both capital generation and really should reflect.
The facts and the circumstances around capital generation in any given period.
Good way to think about this is if you look at last year.
There were a few outside influences are abnormal influences in the last years.
In 2021.
On one hand, we paid out about 642 million of pandemic claims that's a real user use of capital on the other hand, we.
<unk> had record <unk> performance.
And the equity markets that were up over 25% you sort of added those things together and it put us back at 605 million buybacks, which are right in line with what <unk> seen for a few years.
Now when you look at 2022.
The facts and circumstances of what we see this year or.
I wont get all of them, but at a high level.
The pandemic is receding.
We expect as you look forward that will continue to receive but the reality is in the first quarter, we had $150 million.
Cash used for the pandemic.
At $39 million this quarter.
Project that out.
Roughly speaking just round numbers, let's call it $250 million of pandemic related claims this year.
The equity markets were down 21 points at 630.
And the reality is we expect this in all of our models, but when that happens we get some reserves of pop up across your organization.
Primarily in the life business, which is being valued under PBR and PBR reserves are more sensitive to the movement from the capital markets also in the capital markets move up and down by the way. So it's not just one sided.
So that was an impact this year.
As Ellen mentioned.
This is the peak year are I've mentioned, the Netherlands has mentioned this is the peak year for spark investments when you look at the long term benefits of spark.
260 to 300 million run rate benefits, just a huge IRR on those investments so anybody with we'd look at that and say that's a that's a wise thing to be doing.
At a time like this on the other hand once again.
Ellen mentioned credit performance is just tremendous this year, so better than our expectations and that's supportive of capital generation.
And I had mentioned with the powerful benefit of interest rates, but I also noted that interest rates are something that sort of accumulates over time, you don't get the sort of immediate impact of the equity markets sort of add all those things together.
From our standpoint, 100 drilling we did last quarter.
After 100 million, we just talked about for the third quarter, we will talk about the fourth quarter. When we get there it's just very reflective.
Of what we see this year I'd also remind you.
Ms of capital generation, and how we use that capital.
We'll also pay out $300 million of over $300 million of shareholder dividends. This year and will continue to allocate.
Capital, roughly 1 billion and a half to new business.
We've talked about the very strong returns, we're getting on new business, which is ultimately the lifeblood of cash flows in the future. So I think that this year.
It is very reflective of what we see this year, but I don't think it says anything about where you might see in a normal year.
But it says everything about.
What we're seeing this year, we remain committed.
To returning capital to shareholders, we've kind of tremendous amount of it over years that doesn't mean, it's been a level of amount every year, but.
The reality is the least over an extended period of time and thats been fairly level over time, we've bought over 50% of our shares back very proud of that something we'd expect to continue looking forward. So hope that helps.
And then my follow up can you what are your expectations for dividends that you expect to take off the balance of the here and with that come from Elena <unk> from from the captive.
We took a.
The dividend from <unk> back in the first quarter I believe it was roughly $125 million.
In the second quarter, we took a dividend out of.
<unk> of roughly $280 million. So I think that we have plenty of dividend capacity, we're very comfortable with where RBC is today. So I would expect that the majority of dividends would come out of <unk> over the remainder of the year.
We have had a couple of quarters of breakage and Lindbergh, let's think about that in the context that we manage that entity and we manage that entity to maintain a very robust capital also so I think.
A lot of capacity it'll come out of Illinois will be supportive of.
The buybacks, we've talked about the shareholder dividends we've talked about.
Corporate needs, what that interest expense et cetera.
Thank you.
Your next question is from Eric Pan of Autonomous Research. Please go ahead. Your line is open.
Hi, Thank you Ellen in your script, you mentioned wanting to deepen our focus on cash flow generation can you expand on what you're thinking about here and its increasing the free cash flow conversion ratio over time, a strategic priority.
Absolutely and Eric Thank you and good morning, and and yes, clearly our priority and.
I wanted to just spend a moment really stepping back and make a couple of comments to be able to address your question. The first one is that I.
I spoke about our near term strategy you all know that I've been part of the senior management team for a decade.
So I'm very comfortable about.
All that we are focused on as it relates to near term strategy and also that we are well on the path in terms of delivering results around that.
And at the same time now with the new team in place. We are focused on our longer term strategy and of course. This is all going to take some time.
And as Al and is all new.
And some of the overall objectives that we continue to focus on here are around how we accelerate growth and how we enhance shareholder value and a big part of that we believe is around a further emphasis around distributable cash flow generation of course around.
Capital returned to shareholders and and to have those in combination with our long standing focus is around ROE and EPS growth.
When we think about that and just to make it a little bit more tangible.
And in a big piece as well is to really think longer term around how we continue to diversify our sources of revenue and earnings. So let me make it a little bit more tangible for you in terms of somewhat we're thinking so when we talk about product strategy and our REIT price shift and.
At noon.
A large piece of what we're doing there is really focusing on making our products more capital efficient and I mentioned that in my script as well and Randy talked about the fact that we.
Allocated for example, $1 5 billion of capital to those new sales enrolled generating returns.
They're at or above our targets.
That is in as well looking at capital efficiency. There I would expect that we're going to look at ways to really accelerate that capital efficiency as we look at our overall product suite.
The second area is really around looking at our overall in force and how we can further maximize the value there and really maximize our present value of distributable earnings at the end of the day under a range of economic scenarios. So so here as an example, you know that we have.
Been very much involved historically and doing transactions. We did one in the third quarter of 2021, we have we have a team that is fully dedicated and stepped up their note. There are no commitments here there are no timeframe, but if something was to be the right opportunity.
The right price.
Certainly.
Look to do something here.
And then the other piece of this is really looking at the optimal long term business mix and so an example here is that some years ago, we talked about the fact that we were focused on increasing our source of earnings mix and looking at getting our mortality and morbidity source of earnings to 30%.
We were able to achieve that by acquiring liberty business and putting that together with our existing group business and so I would expect as we think about longer term debt and we have James Reed coming onboard who I mentioned to the deep group expert that we're going to look at ways that we can continue to grow that business and our work.
<unk> solutions business overall in general.
And then we have other opportunities where we believe that there also could be sources of earnings and revenue there could be further ground and example of that is that we haven't managed account business. We haven't really talked about it very much. It has grown to $30 billion in assets under management and we are strategically looking at over the longer term, whether or not there's <unk>.
Opportunity there.
And then the final pillar that I mentioned is really around what I would call emerging trends and so here and there.
And I talked about how can we accelerate innovation and agility and the Sparc program is a perfect example of enterprise wide a foundation around how we're doing that and we're going to be looking at other opportunities here that potentially over the long term could be enhancing value. So you put it all together.
And we will have a further emphasis on distributable cash flow generation as we do it we're going to focus on capital efficiency, we are going to be strategic as we always are it's going to take some time, we will be back to all of you with more as we work through this with the new team at the moment we are in process.
Really strategically evaluating all of our businesses and really looking for those growth opportunities, where we're leveraging current capability. So I hope that addresses your question.
Yes. Thank you for all the color and then.
My second question is just around your <unk> exposure.
And I was hoping you could talk a little bit about your current lapse assumptions for the block and maybe provide any color on how they compare to the industry or maybe how they've changed over time.
Eric Thank you for the question.
<unk>.
I think this question is probably more.
Trying to get at.
Third quarter assumption reviews. So let me take your question.
Expand and start with just.
In general Eric.
The assumption review process is very robust it's got a huge number of controls around it or don't have really been honest with people that are involved in that process I am not going to front run that work will go through our assumption review, we'll talk about it on our next quarter's call.
So I think what I can tell you is that at a high level the setting of assumptions.
Something that gets better the more data you have to be.
Talented people you have.
And as a leading player in the life business.
We have a lot of data that data gets incorporated we've been adjusting all of our assumptions every year, reflecting that data.
We did participate.
In a study an additional study this year by the way, we do that all the time around assumptions, but there was a.
Particular study this year focused on <unk>, we participated in that so we have that.
That study and I'm sure the team or incorporate any new things they can learn.
From that process.
And when it comes to lapses I am not going to specifically discuss Gol, but I think there have been some things that have.
Occurred over the last couple of years have been discussed across the industry. So, let's just remind ourselves of what those were.
The pandemic raised in the minds of consumers the value of life insurance.
And almost immediately with the onset of the pandemic you saw lapse rates fall across every product.
Every type of life insurance.
And then after about.
Three four quarters, you started to see them pick back up and that's what you've seen.
They haven't recovered all the way back to pre pandemic levels, but they have come back up so at a high level I think that hopefully that gives you some context around what it's been up a pretty interesting couple of years in terms of lots of experience and how you should think about the future for instance will it recover back to pre pandemic levels will level out at some point.
I think those things all go into the pot, but Eric.
Eric at a high level we.
We have a lot of data we seek any data we can and we incorporate that into our assumptions every year.
Thank you.
Thanks.
Your next question is from Jimmy <unk> of Jpmorgan. Please go ahead. Your line is open.
Hi, So just another question on your RBC ratio decline in <unk> than in <unk>.
And in Tokyo, as well how much of that is purely because of higher required reserves with the market going down which might potentially reverse as the market recovers versus other factors.
Such as hedge breakage that might or might not necessarily come back.
Hey, Jamie we started the year at about 427 as I mentioned, we're at roughly 400 about two thirds of that is.
It's really it shows associated with capital markets, driven reserves that pop up.
About.
25% is associated with a little bit of limitations, we experienced in.
And our DPA. So our non admitted DTA went up a little bit there was probably six or seven points. So those are the drivers of the decline in the surgery.
Okay, and then as you think about buybacks.
You mentioned up to a 100 million I don't know was that comment more about <unk> or was that more about the rest of the year or just generally near term for the next several quarters.
The comment was specifically about the third quarter and then we'll talk about the fourth quarter when we get the echo.
Okay, and then is it fair to assume if your RBC.
Fair to assume that unless the RBC recovers.
Given what's going on then your view would not change too much on the upside in terms of buybacks.
Okay.
I'll just go back to my answer with a lease it really be.
Controlled by the facts and circumstances that we see over the back half of 2022.
Okay and then just lastly on RBC is there a level that you want to let it not go below 400 debate you'd want to keep it at or how do you think about.
How far down would you.
Be comfortable having a drop.
Think as Elena I mentioned were both very comfortable.
400, where we are today just a couple of additional points around that if this was last year 400 would have been 420, <unk> because the seaborne factors lowered it about 20 points, but didn't change the actual economics of our we think about appropriate capital. So.
400, this year is on a relative basis stronger.
Then it would have been last year.
The other sort of once again philosophy, when we think about capital is why we don't talk about a single target.
Philosophically, we believe that the.
Right amount of capital is something that moves over time or the right RBC ratio is something that moves over time at a very high level.
Immediately after a full blown stress, we expect to be below our sort of average travel rate, maybe 50 to 70 points below and if you get it exactly right. The day before you have a full blown stress youll be probably 50 points or so above your youre.
Average travel right and so.
Over time, we think about.
Right and then you have got air quotes I'm, making here in the room.
Number as being sort of a bit changed over time, but where we sit today 400, I think we're very comfortable at that level.
Okay.
Your next question is from John Barnidge of Piper Sandler. Please go ahead. Your line is open.
Thank you very much and good morning.
The NAA IC is considering increase RBC charges on investments and <unk> to address what is arguably the capital arbitrage metaphor.
What are your views on the proposal and can you discuss the potential impact of the proposal will maybe require capital and the RBC ratio.
Maybe if when and what would that would do to the appetite for CLO assets. Thank you.
We're actively engaged as we are with the FDIC on other topics I think it really is a good partnership and relationship that Lincoln and the industry is with <unk> as they work through these projects.
Just as with any project gets big I feel very good about how we're positioned I think youre well aware, our CLO holdings skew very high from a rating standpoint, so it's a high quality portfolio.
Don't see.
Yes.
A material impact in terms of.
Anything they might do with Clo's, yes.
John I would just add that yes, we have always been very actively involved in all of the ACI efforts.
And and in particular also around capital and see one. We also were very much involved in the first round, we have our chief risk officer that is sharing the second round to Randy's point as it relates to CLO. The majority of all of our Clo's that are.
Ours are single a and above their predominantly triple a.
We were really at the end of the day, we're really working across the industry as we always do to ensure that there is a good model that appropriately.
Really correlates the losses with the capital.
And recognize that given the growth of Clo's on insurance company balance sheets that it is good to take a fresh look at that and ensure that the capital levels are appropriate.
Appropriate.
Okay, Great and then my second question you talked about a recent new hire James Reed Couldnt help but notice. He was previously working into place that had a sizable dental and vision exposure.
As you talk about.
Increasing some of that group business should we be thinking about that over time.
And even vision to becoming a larger portion of Lincoln's group story. Thank you.
So great questions and as James comes on Board and we look broadly at group in General we do believe first of all that this is a really important strategic business for Lincoln.
And we think first of all that putting the old Lincoln and Liberty businesses, together really gave us breadth in terms of size and market and so we are in the smaller markets and we're in the larger markets and we also have introduced a range of new product.
So we know that traditionally we have been in the life areas and in the disability areas. We have been increasing our focus on supplemental health for a variety of reasons and in there last year, we introduced a new product testing indemnity, we do have a dental business right now it is fairly small as it really.
Rates to the overall.
Business over in on the group side I would expect that as James comes in and gets his arms around our current business and our current capabilities and we think about the long term value of the business certainly the types of products that we're offering and where we're doing business is going to be part of that overall strategic.
Review that I mentioned earlier and so it will be back to you with more in terms of whether or not those are areas that we believe that we can build scale and then and then therefore participate in or if it'll be someplace. Some other direction. Most importantly, we recognize the importance strategically of this property, we're going to do everything.
What we can to continue on the path around restoring our margins and looking to grow this part of our business.
Yeah.
Thank you.
<unk>.
Yeah.
Your next question is from Josh Shanker of Bank of America. Please go ahead. Your line is open.
Okay.
Yes. Thank you.
I think frankly for the comment about the modest impact from the change.
Al DTI numbers, obviously, you guys use that accounting for your own book do you have a lot of internal goals, but.
<unk> is going to cause more volatility in GAAP outcomes and whatnot would.
Would you spend any more money on derivatives in order to manage GAAP expectations following <unk>.
Or is it or would you describe it as a cosmetic.
To your risk management procedures.
Josh when I'm in.
In my script I used the word holistic so I think when we get together later in September .
I think we will discuss.
A lot of topics, including.
The hedge program.
Look at it at a high level we have.
Super robust and expansive bench program today. It has a significant amount of expense and I wouldn't expect those costs to change alright, but thats all about what we do today, which we spent a lot of money.
To create this world class hedge program.
I don't expect a material change, but it's going to be a great discussion look forward as I mentioned to getting together with you.
At least virtually.
Around the end of September .
Alright, I'll just leave it at that one thank you.
Mhm.
Your next question is from Tom Gallagher of Evercore ISI. Please go ahead. Your line is open.
Yeah.
Good morning, just just coming back to the <unk> question, and how Youre thinking about things now.
And Randy I'm, not going to ask you to front run.
The balance sheet review, but I'm, just trying to think about.
Capital implications because pru mentioned.
But their charge also result, GAAP charge also resulted in a corresponding statutory charge I think in the past.
You've indicated you feel very good about statutory reserves for <unk>, but.
But I've always taken that to be an interest rate comment not not on mortality and lapse rates. So.
Any any.
What would you say about overall your current view of capital adequacy and potential impacts there because I.
If there is a GAAP balance sheet review charged them and they're worse ACH Tory impact I presume that would impact your ability to keep buying back stock, but anyway long winded question, but anything you could comment on would be appreciated.
Okay.
Tom a few comments.
So I think about the topic so.
Cacciatore reserving is primarily formula based.
<unk> develops.
Reserves at a high level are meant to be conservative right into solvency based reserving standards. So feel very good about.
How about that.
That's very supportive of the sufficiency of reserves.
<unk> itself, then has some separate tests right and we've talked about these over the years. They go buy the monikers HC.
And those are the things that we've talked about in the past.
Sure.
If we were to see any impact on statutory capital that would've come through those subtests.
You can go back gosh, a number of years and we've talked about if rates drop to a certain amount.
We saw a potential risk, which has declined over time right. It's declined over time, because the base reserves continue to grow so inside of HC.
Each test a little different but we're able to make big assumption changes you do those inside those models also modestly impact.
But once again at the end of the day.
We've seen the potential impact from <unk> decline over the time, we haven't even talked about it.
For for at least a year near as I can remember.
So at a high level I feel good about their but throughout is in those tests to the extent you change your assumptions about the future you reflect those changes into those tests also.
Okay.
Got it.
That does.
Okay and then my follow up is just on VA hedging in Linde bar any.
Just based on the performance you saw in <unk> and overall capital levels any.
Any chance you either have to make contributions in the wind bar or do you feel good about those capital levels or.
Yes, we took a dividend out early in the year historically, we've been sort of one time of year. So I don't think I wouldn't expect.
Couple other comments around limber itself. It does have earnings right. So we tend to talk about the breakage, but it does have a level of earnings that is meant to cover sort of a normal level of breakage.
And build capital over time, so that's how the entity structure just like any.
Ongoing enterprise I'd also point out that if you look back at last year, we came into the year in a pretty good place because we really didn't have.
Elevate a breakage last year I think.
And remember in the middle two quarters of last year added up to actually do a small positive. There was there was no break so we came into the year in a pretty good spot.
Two quarters in a row of Alameda breakage I would.
We have to think about that that's real capital that's a real use of capital.
And we'll have to we'll have to manage around that.
The reality of that outcome, but once again I think we came into the year in a pretty good place. The entity has ongoing earnings we've taken our dividend up for the year.
The earliest we would contemplate doing another David over the next year and then we'll have to see what the reality of these first two quarters and the reality of the back half of the year brings with brings to us.
Okay. Thanks, Randy.
Yes.
Sure.
Your next question is from Mike Ward of Citi. Please go ahead. Your line is open.
Hey, Thank you guys good morning.
Just had one question I was wondering if you could comment on what youre seeing in terms of wage inflation.
This has been a topic, but I think the growth for higher wage earners has been a little bit more recent.
I think this is of course, a product of inflation in general, but just wondering if you're if you're seeing that in the higher wage earner demographic and how that might be impacting how you're thinking about the kind of near term outlook.
So Mike I'll start and comment and then I'll hand, it over to Randy.
I suspect that when you talk about wage inflation that you're really thinking in terms of how that might impact in terms of our overall employees and we have been seeing in in this war for talent and in attrition and in general just in a lot of movement that we've seen here at Lincoln and attracting a lot of new people we.
Have overall.
<unk> two <unk>.
Really keep pace with what we're seeing as it relates to wage inflation and so when when you see our overall numbers and Randy talks to you about our overall expenses for the last I would say probably 12 to 18 months, we have been in terms of our hiring we have been increasing wages in terms of our higher performers.
Inside and we have been increasing wages and also we have been looking at appropriate market adjustments to be able to keep pace and then the other comment that I'll make is that we also see a benefit as it relates to overall wage inflation in our workplace businesses as well, so we know and I talked about.
In my remarks earlier that we have seen overall.
Broad based increase in terms of deposits on the Rps side, we've seen broad based increases as it relates to employee paid and the group protection business and we believe that one of the contributors there is more dollars in the employee's pocket and Theyre able therefore to allocate more to savings and also to protection Randy.
Why don't I hand, it over to you.
Hello, Alan I think you did a great job, Mike we've been responding to higher wages.
For over a year now so sort of in the numbers.
I always remind people that quarter.
We're like any company right you don't you don't think about things in a vacuum right. When you see wages go up a little but I can tell you as a management team you dig a little harder to get a little more productive so.
I tend to think about.
Wages is just a part of the overall expense pie and as I talked about we had really good expense performance, which includes somewhere in there the element of inflation actually just from a societal thing I think you mentioned, specifically evaluate juniors I think one of the.
Really good things about the inflation, we've seen this spread across the spectrum. So I think the increases we've seen have not just been about higher wage earners, it's really been across the spectrum and actually you can argue that the lower wage earners are actually seeing more of the outsized growth.
Mike I hope that helps.
Absolutely guys I was actually focused on the potential positive impact to the top line and maybe margins without super helpful. Helpful perspective.
And yes, I was I was pointing to the idea that I was looking at the growth in wages and it looks like more recently.
It started to tick up for the higher wage earners, which is a key demographic, but I appreciate it guys. Thanks.
Thanks, Mike.
Lincoln Financial group will follow up later this afternoon for those remaining in the queue I will now turn the call over to al <unk> for closing remarks.
Thank you all for joining us. This morning as always we are happy to take any follow up questions that you asked you can email investor relations at LFG Dot com.
You all and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.