Q2 2023 Lincoln National Corp Earnings Call
Good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the Lincoln Financial group's second quarter 2023 earnings webcast conference call.
If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again.
<unk> one on your telephone keypad.
Mr. Al Corporates Dino you may begin your conference.
Comments made during the call regarding future expectations, including those regarding deposits expenses income from operations share repurchases and liquidity and capital resources are forward looking statements under the private Securities Litigation Reform Act of 1995.
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 2022 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.
Combined our press release and statistical supplement which include a full reconciliation to the non-GAAP measures used on the call.
Including adjusted income from operations or adjusted operating income.
And adjusted income from operations available to common stock holders to the most comparable GAAP measures.
Presenting on today's call are Ellen Cooper, Chairman, President and CEO , and Chris <unk>, Our Chief Financial Officer. 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 Alan.
You al and good morning, everyone.
We entered 2023 with a clear focus on actions to support the rebuild of capital and to deliver long term profitable growth by building on our solid foundation.
We have a powerful franchise with the trusted brand deep relationships and a strong culture.
Our distribution leadership and broad diversified set of product solutions across our four businesses and differentiated customer experience position us well to execute against our strategy expeditiously and successfully.
Coupling these foundational tenants with a leadership team charged with steadfast execution gives us confidence as we reposition the company for sustainable growth enhancing value for our customers and our shareholders.
Over the past three quarters, we have demonstrated swift execution that is manifesting in our results.
This quarter's results benefited from the continued excellent contribution from our group protection business as well as company wide alternative investment income in line with our long term targeted returns Chris.
Chris will take you through the quarter's results in detail.
Before moving to our business unit highlights I will spend some time discussing our progress in executing our strategy to rebuild capital and advancing our strategic objectives to improve our long term free cash flow profile lower our capital sensitivity to market volatility and further diversify our earnings mix.
Expand on this we.
We are continuing to make headway with three of our four businesses.
Moody's retirement and group generating solid free cash flow for the company.
We continue to expect the group business to grow while sustaining margins over the longer term in the 7% range and become a larger part of our overall mix over time.
And the fourth business, our life business, which continues to pressure our financial results.
We'll generate improved cash flows following the close of the Fortitude re block reinsurance transaction, we announced in May.
This transaction is another important step in rebuilding capital and improving ongoing free cash flow as well as lowering our balance sheet risk.
We have previously stated that we expect the transaction to improve our RBC ratio by 15 points at closing and increase ongoing free cash flow by over $100 million per year.
We are awaiting regulatory approval and fully expect the deal to close in due course.
Another contributor to improving our ongoing free cash flow is our spark initiative.
Our enterprise wide expense program to enhance our business and drive efficiencies.
We are on track with the implementation of spark and we expect current expense headwinds to lessen somewhat when the level of investment declines in 2024 and increased run rate savings take hold.
Chris will provide further comments on our expenses more broadly.
Our new business approach is also taking hold as we shift to a product mix with more capital efficiency and enhanced value creation.
As we execute this strategic pivot towards an improved long term cash flow profile.
We continue to expect to deliver robust sales for the full year with a variety of product enhancements and targeted distribution efforts.
Our repositioned VA hedge program with an explicit capital hedge.
Importing our objective of reducing capital sensitivity to market volatility.
And lastly, we are continuing to evaluate additional actions to further improve the capital generation of our in force book.
Regarding our current capital position, our second quarter estimated RBC ratio was approximately flat sequentially with strength in our group business offsetting the headwinds we have previously discussed in our life business.
Overall, we are executing swiftly on our capital rebuild and capital generation efforts, while successfully positioning the businesses to deliver a more diversified earnings mix.
As we look ahead, we also highlight our goal of reducing financial leverage and building our capital to levels that are aligned with a prudent approach to capital return, creating long term sustainable value for shareholders now.
Now turning to sales highlights for each of our businesses.
And retail solutions.
Diversity of our product offerings and strength of our distribution franchise enables us to provide the right set of product solutions for our customers, while supporting our financial objectives.
In annuities second quarter sales declined 4% versus the prior year quarter. However.
Year to date sales versus prior year or up 6%.
Expect it to elevate sales levels in the back half of the year.
In index variable annuities, or <unk>, which is our rod lift product category.
Although sales were down 8% year over year, they were essentially flat sequentially.
<unk> represented over a third of total annuity sales for the sixth consecutive quarter and we are capitalizing on opportunities to further strengthen our market position through recently released product enhancements that will expand customer choice and our value proposition.
In fixed annuities sales were down sequentially. However, on a year to date basis sales were up over 100%.
While some competitive pressure remains in the fixed annuity market, we have targeted actions with our distribution partners that are expected to increase fixed sales in the second half of the year.
Although traditional variable annuity sales were down year over year, they were up 19% sequentially at attractive returns. We recently enhanced our VA products and continue to develop innovative solutions that address evolving customer needs.
In life insurance sales.
Sales were down as we embark on our shift towards a more capital efficient product mix.
Indexed Universal life or <unk> sales were up slightly while we deemphasize certain segments in both term life and variable universal life or <unk>, where sales declined.
As we shift we are launching new relationships with field marketing organizations to ultimately grow more accumulation sales.
And our money guard suite of products, where sales were slightly down this quarter versus the prior year period, we continue to focus on expanding our distribution reach into new channels, particularly with our variable money guard hybrid product.
Finally executive benefit sales are primarily large deals that can be variable in their placement timing period to period and were down in the quarter.
In our two retail businesses annuities and life insurance, the new business shift underway will take some time to fully gain traction that we are benefiting from a diversified product mix that is meeting our capital efficiency targets and exceeding our new business returned targets.
We expect the new business from both annuities and life to be important drivers of future capital generation and profitable growth.
In our workplace solutions businesses, where we serve more than 50000 employers and close to $14 million employees, our differentiated product offerings and service capabilities have generated high customer satisfaction scores and strong retention and we are beginning to see the result.
<unk> of ongoing investments in technology, the customer experience, our distribution franchise and our claims organization.
With group and retirement under one roof, we are uniquely positioned in the market and we expect our workplace solutions businesses to be key cash flow and earnings growth engines for the company going forward.
In group protection.
Premiums grew 6%.
A direct result of the strong relationships, we have with our customers and a reflection of the value proposition, we are delivering across each of our focused market segments.
And what is not as seasonally large sales quarter sales were down approximately 24%. However, following a strong first quarter of sales on a year to date basis sales were down approximately 3% as we execute on our plan to drive profitable growth important.
Lee we continue to see strong momentum in employee paid sales representing 55% of total group sales up six percentage points year over year.
This strong result was largely driven by supplemental health products, where sales rose, 52% and where we see continued opportunities to grow.
Lastly in retirement plan services, we achieved another quarter of positive net flows with very strong retention helped by our digitally enabled high touch customer experience.
First year sales were down as compared to an exceptionally strong prior year quarter that included one of our largest stable value sales on record and up sequentially. As we are seeing strength in our core full service product offerings.
Finally recurring deposits rose, 4% as we see an increasing number of participants and higher contribution rates.
Our workplace solutions businesses continued to meet or exceed capital efficiency and new business return targets, we continue to.
To enhance our customer focus strategies and expect our actions will lead to long term sustainable growth.
Turning briefly to investments our high quality portfolio with over 97% investment grade Holdings continues to experience net positive credit migration and our commercial mortgage loan portfolio, including office is performing well.
Actively monitor the loans have no material modified or restructured loans no near term maturity concerns and are not experiencing forced extensions Christopher will provide details on the mark to market accounting loss related to the fortitude re transaction that is largely a matter of timing and has no capital.
Impact in summary, our investment portfolio is performing well and we would expect manageable capital impacts under a variety of economic and credit scenarios.
In closing, we are making consistent progress executing against our priorities and delivering on our commitments.
We remain highly focused on strengthening our balance sheet and improving our ongoing free cash flow.
We are generating capital efficient sales with returns at or above targeted levels and our investment portfolio is well positioned all of which gives me great confidence as we move forward.
I will now turn the call over to Chris to take you through the financials in more detail.
Thank you Ellen and good morning, everyone. We appreciate everyone dialing in and listening to our call.
I'm going to discuss three things this morning.
<unk> will provide a recap of the quarter, including an update on capital.
Second we will go through the segment level financials, and lastly, we'll finish with an update on our investment portfolio.
So let's start with a recap of the quarter.
Last night, we reported second quarter adjusted operating income available to common stockholders of $343 million or $2 <unk> per diluted share. There were no notable items in the current or prior period.
Net income available to common stockholders was $502 million.
Or $2 94 per diluted share.
The difference between net and adjusted operating income for the quarter is predominantly driven by three factors.
First higher equity markets in the second quarter, coupled with an increase in interest rates.
<unk> impacted market risk benefits, resulting in a non operating increase to our net income.
Second and again driven by the increase in equity markets and interest rates during the quarter, our hedge instruments declined in value.
As Alan mentioned, our repositioned hedge program continues to work as intended with an explicit capital hedge supporting our objective of reducing capital sensitivity to market volatility.
And third as a result of the reinsurance transaction, we announced in May with 42, three we impaired securities down to fair market value as of June 30, resulting in an after tax realized loss of $493 million.
Pursuant to applicable accounting guidance those impairments only included assets that were in an unrealized loss position.
The remaining assets associated with the transaction were in an unrealized gain position totaling $374 million after tax as of June 30th back.
That gain along with any subsequent change in fair value of the assets included in the transaction will be realized at closing of the transaction as Ellen mentioned the timing dynamic on this impairment has no impact to statutory capital this quarter.
Lastly, I want to convey our continued confidence in closing the transaction with fortitude re.
Given the size of the transaction regulatory approval takes time and we expect the deal to close in due course.
Before turning to capital I want to highlight one housekeeping item regarding the quarterly pattern of the preferred stock dividend.
For the second quarter, the dividend was roughly $11 million. This will increase to roughly $34 million in the third quarter, which reflects the timing of when the semiannual portion of the dividend is payable this decreases back down to roughly $11 million in the fourth quarter before again, increasing in the first quarter.
As Alan noted, we expect the RBC ratio to increase by approximately 15 points at the close of the 42 transaction.
Like with every quarter there are headwinds in tailwind with this quarter strengthened group, helping to offset continued pressure in our life business and the realization of modest credit losses related to the bankruptcy of first Republic Bank.
Yes.
We are continuing to hold capital above our target level at Lindbergh were pleased with the performance of our repositioning edge program with actual performance being better than expected. So far this year. However markets have been relatively calm year to date and thus we continue to believe it is prudent to allow more time to pass before resuming regular lindbergh dividends to the holding company.
Yeah.
Now turning to the segment results.
Let's start with group, which was once again the highlight in the quarter.
Before we get into the numbers I'd like to step back and say three things.
First the continued growth in this business and the teams focus on restoring the profitability of the platform is critical to the overall long term strategy of Lincoln.
Over the past year, you've heard Allen talk about our strategic objectives growing our free cash flow decreasing our capital sensitivity to market volatility and diversifying our earnings.
At the risk of stating the obvious a bigger more profitable well run group protection business helps to accomplish each of these objectives.
The margin this quarter was eight 6% or 450 basis points higher year over year.
While the earnings in this business are benefiting from very strong execution and the strategic steps we've taken over the last year with new management in place. There is also a favorable industry backdrop at the moment and second quarter tends to be seasonally strong.
So it's a good story, but we would not expect the margin this quarter to be reflective of the run rate third as we look out over the next few years, our group business will continue to become a bigger part of our story.
While there are obviously, many moving pieces to the overall earnings profile group contributed almost a third of our operating earnings this quarter not something we've experienced in recent history. We would expect that mix shift to continue over the long term as we execute on our strategic objectives turning to the numbers. This quarter group reported operating income of 100.
$9 million.
Compared to $49 million in the prior year quarter.
The improvement was broad based as both life and disability results continued to show progress.
Our disability loss ratio was 71% in the second quarter, an improvement of 800 basis points year over year. These results are driven by strong execution of our group strategy, including continued investments to support our claimants and their return to work journey and a favorable economic environment, resulting in lower new claims.
We are also seeing improved results from our life product with a loss ratio of 72% down from 81% the prior year.
The lower loss ratio reflects lower mortality trends consistent with U S working age population mortality.
Turning to expenses the expense ratio increased over the prior year from 12, 5% to 13, 6% a reflection of our investment in talent and focus on strengthening our operational organization.
While expenses are higher we are seeing strong returns on our investments, allowing us to provide optimal outcomes for our customers.
Overall, we are very pleased with the progress we are making in the group business, which is contributing in a meaningful way to both GAAP earnings and free cash flow.
Going forward growing the group business will continue to be important as we remain focused on executing against our enterprise strategic objectives.
Now, let's turn to annuities.
Annuities delivered another solid quarter with operating income of $271 million <unk>.
Compared to $294 million in the prior year quarter.
The decrease was primarily due to higher expenses and lower prepayment income, partially offset by higher spread income sequentially.
Sequentially earnings improved $8 million, when excluding the $11 million favorable tax item from the prior quarter, primarily due to higher fee income.
Of note the year over year impact from lower prepayment income on earnings were mostly subside in the second half of the year as the decrease in prepayment income began in the third quarter of last year.
Turning to spreads as I noted earlier annuities earnings benefited from higher spread income relative to the prior year quarter, but sequentially, we experienced some temporary headwinds driven by fluctuation in option costs impacting our interest credit deadline.
Looking ahead, we expect annuity spreads to decline for one more quarter before leveling in the fourth quarter and rebounding in 2024.
Lastly, as a reminder, fixed annuities make up less than 10% of our overall in force annuities block.
Meanwhile, surrender rates have increased due to the higher interest rate environment. The results were generally in line with expectations for this type of rate environment.
Additionally to reiterate a comment I've made in the past we have reinsurance in place both for new business and on our in force block.
When you look at our reported numbers. It is important to remember that those numbers are on a gross basis and then there is an offset as it relates to the ceded surrenders that flows through on the account value line.
So while theres always some noise quarter to quarter in our block verifies the annuity business. Once again delivered a solid result, and significant free cash flow for the company. We continue to see long term upside and are excited about the growth in this business.
Let's now turn to retirement plan services.
Retirement reported operating income up $47 million <unk>.
Compared to $55 million in the prior year quarter.
The decline was largely due to lower prepayment income and higher expenses.
As in the annuities business the year over year impacts on our retirement business from lower prepayment income will mostly subsided in the second half of the year.
Two items, partly offset the headwinds, but first is higher base spreads, which expanded by 24 basis points relative to a year ago. As I mentioned previously spread expansion will not be linear our expectation is that we end the year with spread expansion in the mid single digits for retirement.
Second positive net flows combined with favorable equity markets led to a 4% growth in average account values compared to the prior year.
As we noted last quarter, while we continued to anticipate higher expenses for the remainder of the year the tailwind from higher account values, coupled with a stable spread environment should result in continued strength for the retirement business.
Lastly, let's discuss life insurance.
Life insurance reported operating income of $33 million compared to $63 million in the prior year quarter.
The decrease was primarily driven by the run rate impact from last year's assumption reset partially offset by higher alternative investment income. Additionally, seasonally improved mortality and better alternative investment income drove the sequential improvement in life earnings.
Turning to mortality.
Our total underlying claims were mostly in line with expectations. This quarter. However, the term block experienced lower frequency of claims while universal lifestyle products experienced higher severity.
Note that under L. DTI term products will see less net reported variability around mortality in any given quarter given that the liability for future policyholder benefit reserve for LSP be smooth the variability and overtime. However.
However for Universal life type products that could be higher volatility quarter to quarter as the reserving mechanism did not change and yet there is no longer an offsetting change in DAC amortization tied to quarterly profits.
Shifting to spreads base spreads were 113 basis points in the quarter down 12 basis points from the prior year quarter due to the continued impact of certain duration extension programs put in place during the low rate environment. This coupled with the long duration nature of the block has delayed the benefits of the higher rate environment.
We continue to anticipate spreads to bottoms slightly lower than current levels before expanding in 2024.
The benefits of seasonal mortality supported the sequential improvement coupled with alternative investments performing in line with expectations, but there is still more work ahead of US we remain focused on improving the earnings power and free cash flow profile over time.
First is investment in our business with new management over the last year. There has been a lot of diligence on what strategically we need to do to grow our businesses and really take a fresh look at the need for some strategic projects and so part of this is nonrecurring once you start looking out to 2024 and beyond but more importantly, some of that expense will be ongoing and will translate into.
Better overall profitability.
Second thing to note is that there are some cost in the system as a result of the challenges we faced over the last year overtime that these expenses will decline.
And then the largest driver obviously is an increase in base expense and the impact of the current inflationary environment.
Beyond these expense pressures, we remain committed to implementing the benefits of the spark initiative, which will support both our earnings growth and capital generation objectives, Youll begin to see that spend dissipate next year, coinciding with increasing benefits from the initiative.
We maintained disciplined underwriting and rigorous ongoing monitoring processes with no material loan modifications and no forced extensions and we have no direct real estate equity or transitional loan exposure.
Within our CML portfolio office represents 20% of the holdings down 500 basis points from three years ago. As we continued to proactively shift our portfolio away from office, both from a mix perspective and on an absolute basis.
In total office represents just two 5% of our overall invested assets.
A key area of focus in office remains near term maturities in the second half of 2023, we have only $17 million of remaining maturities. We have a further 163 and $188 million of maturities coming due in 2024 and 2025, respectively.
Office loans with near term maturities are conservatively positioned and continue to perform well with an average debt service coverage ratio of three three times.
Now turning to our alternative investment performance we generated.
<unk> a return of two 5% this quarter on our alternative investment portfolio in line with our long term targeted return, reflecting the strength of our portfolio construction and diversification across investment strategies that can perform well in a wide variety of economic environments. Additionally, the portfolio is benefiting from having only small allocation.
<unk> debenture capital and real estate.
Lastly, on our investment portfolio more generally and to reiterate a point I made on our all last quarter, our total investment portfolio and the asset listings in our statutory filings include assets, both for Lincoln as well as those from certain of our reinsurance agreements on which we do not have the economic risk.
As a result, the information I just discussed related to our investment portfolio excludes the assets related to those reinsurance agreements.
<unk>, let me reiterate three points.
We know we have more work to do but we're pleased with the progress we're making and this quarter was a step in the right direction.
Our investment portfolio continues to perform well and our exposure to recent areas of market concerns very manageable.
<unk> rebuilding capital remains a top priority and I am confident in our teams as we execute on our plan and work to create long term sustainable value for shareholders.
We appreciate everyone, taking the time to listen today now we look forward to taking your questions with that let me turn the call back to al.
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.
Yeah.
Yeah.
At this time I would like to remind everyone in order to ask a question press star.
Star then the number one on your telephone keypad.
Well pause for just a moment to compile the question and answer roster.
Yeah.
Your first question comes from the line of Ryan Krueger from <unk>. Your line is open.
Hi, Thanks, good morning.
Chris I think last quarter, you talked about.
One area that you could potentially.
Work on to improve free cash flow balance sheet structure can you give any update on your progress there and how to think about maybe the timing of when that could occur.
Thanks for the question Ryan I would say spin.
Specifically.
We are focused on closing the 402 transaction that remains the top priority.
But you're right there are a number of other projects that we're looking at.
Yeah.
And.
We've gotten the question around free cash flow and capital so maybe it might be helpful to just step back and.
I'm talking about not only that but the broader.
View and so.
Last year, we communicated a range of $300 million to $500 million of free cash flow.
This year RBC as we mentioned.
A moment ago has been flat year to date, and so having returned $150 million to shareholders in the first half of the year via the dividend that would imply that were in the range communicated may be tracking towards the low end and.
And keep in mind Thats with two to three RBC points from credit pressure from the handful of original banks that we took some losses on them.
So the back half of the year.
We will have some positive some negatives so we'll see what that looks like over the next two quarters, but I would point out that we're tracking right in the range of what we communicated last year, despite having to take some some losses on the on the banks.
And if you then look out beyond this year to your question I would reiterate a few things.
Alright, so we highlighted last quarter as you think about improvement.
First is basically timing alright, so the legacy life blocks, we've discussed we're dealing with some reserve and capital needs over time that will lessen and to be cleared up the gradual improvement, but our expectation is that each year going forward there'll be some improvement. So we're at a trough as it relates to that and that will lessen over time.
The other dynamic around timing as we have some blocks that are relatively young.
There are no.
Modest earnings in earlier says you pay acquisition expenses and build reserves, but then as those blocks grow and mature you see a significant improvement in free cash flow.
Then the last point on timing as we would expect to return to more regular lindbergh dividend depending on markets. As you think about the go forward the.
The second driver to increase free cash flow.
Management actions and we talked about that last quarter, but that's really running the business more efficiently with a focus on profitable growth and so I think the group business. This year is a good example of that.
We touched on expenses in the comments.
Without getting into too much of that today I would say that even beyond Sparks I think theres more to do there and then really just being more efficient with the way that we deploy capital relative to the goal of maximizing long term distributable earnings that's a big lever.
And then the third tailwind will be structural solutions right and I would highlight the 4% to two transaction is an example of that and then specifically to your question really where are there other balance sheet or inorganic levers that we can look at to accelerate the capital builder improved free cash flow. So long way of saying Ryan we're focused today on closing the previously announced transaction.
You should expect us to continue to look at a wide array of other projects, but taking all of that together, we do think that as we communicated.
Alright, and obviously just wanted to reiterate again and Chris mentioned this in his upfront comments.
We know that we're not done we're we're going to continue to work on improving the in force business.
It's clearly under pressure and also wanted to be clear that we are confident and actually feel really good about the new business that we're putting on the books.
I spoke in my upfront remarks around from a new business perspective, and as we are focusing on capital efficiency and in particular in the lifeboat we're shifting away.
From some of the products that we've talked about such as the Commoditized term.
And into more of the accumulation type products and.
This is a this really is an effort that's being supported by our distribution, it's being supported by the development of new products, new channels and new segments and so we really believe in the longer term value from a new business perspective, as well as continuing to work on all of the improvements.
We have talked about and shared with you in the past as it relates to the in force.
Thank you.
Your next question comes from the line of Erik bass from Autonomous Your line is open.
Hi, Thank you can you provide an update on how you see the cadence of spark expenses and savings coming through and is this the same on a GAAP and cash basis are there differences there.
Yes, so Eric as it relates to overall spark and I want to reiterate that we continue to be on track with the original guidance and expectations that we provided to you. So if you think about the fact that at the end of year and 'twenty two and we were about 80.
18 months in any overall net savings rate at that point was about $22 million of run rate savings as we moved into 'twenty three.
We have provided guidance that in 'twenty three that the net savings impact would be in <unk> in the $60 million to $100 million range and we are tracking exactly for that.
As we move into 'twenty four that will increase to 200 to 240 <unk> again. This is net of the upfront expenses and by year end 'twenty for the ongoing run rate at that point would be in between $260 million to $300 million.
As part of this net run rate of course are some direct one time investments that are needed to be made in order to achieve the savings and the total investment that we have made is $400 million and we're about 63% into that so you may recall that in the first.
The overall <unk> expenses were.
A little lower than what you see this quarter and we're expecting that that total direct investment in 'twenty three to be in around the $150 million range just to give you a sense of what we're thinking in the back half of the year.
So again very much on track and yes. These are expense saves that will have a similar effect as it relates to GAAP and distributable earnings ongoing.
Okay.
Thank you.
And then pivoting to group.
The eight 6% margin this quarter, so well above target levels and very strong performance.
And clearly there is some of the macro factors that are helping underwriting right now, but do you think even as that normalizes. The changes you've made in the business gotten it to a point, where you should be kind of running at that 7% level going forward or are there still more expense.
<unk> and other things that are going to come through.
So Eric our long term margin.
Expectation.
It continues to be in the 7% range and.
You may recall that as we were coming into this this year, our margins were well under even a 5% range. So.
This is a significant improvement in terms of a longer term trend. So we recognize right now exactly as you said that we've got a favorable macro economic environment and we're seeing low unemployment, we are seeing elevated wage growth.
Rising interest rates all of which are very much supporting and we're seeing this across the board.
For many carriers.
We are also seeing.
That.
When it comes to renewals for us that we are very much remaining disciplined in our approach, we're being very intentional around the balance of achieving rate increases and maintaining relationships with our existing customers and so we really believe that we're going to be able to achieve rate increases in persist.
Since the levels that we need to grow our business and at the same time, we're enhancing some of our offerings in particular around supplemental health.
And we know that price is important here and so we're remaining price disciplined while we're focusing on profitable growth.
And importantly, differentiating ourselves as it relates to customer service.
Really critical to retaining the business. So we take all of those factors, which are very much management actions and management led which we believe will sustain and macroeconomic environment. As you know we will see from a pricing perspective.
While the market right now has remained largely rational that at some point, we could see some competitors.
Start to make changes to respond to that or the macro environment starts to change underneath of all of that we have executed on all the management actions that will enable us and again with a lot of confidence to sustain margins in the 7% range.
Thank you I appreciate the color.
Okay.
Your next question comes from the line of John Barnidge from Piper Sandler Your line is open.
Yeah.
Good morning, and thank you.
No group did.
We did really well on the earnings perspective perspective. This quarter. It was a third from the contributor might not be that high going forward, but it's definitely a growth area can you maybe talk about where you think that that.
And over time not from a.
Actual dollar amount, but more from a percentage perspective.
In general we can tell you is in and our comments reflected this is that we are focused as it relates.
The group business first of all we think that the long term sustainable margin outside of this very positive macroeconomic environment that we're experiencing is in the 7% range at the same time, we really believe that we can continue to grow and you saw that we had year over year, 6% premium growth.
Speaking also to strong retention and very much supportive of our relationships and everything that we're doing and additionally, some of what is in there is our continued focus on employee benefits and so employee paid and supplemental health, which we believe is going to be a bigger piece. So I think that there are two.
Parts to the equation here there is the sustained margin and then there is growing the overall business and we have every intention of continuing to grow the overall business across all segments.
And we're making as we've communicated we're making a lot of investments in order to do that so no specific numbers for you today in terms of that long term group.
Great. Thanks for the answer.
Your next question comes from the line of Jimmy <unk> from Jpmorgan Chase Your line is open.
Hi, Good morning, So first question on your sales and retail products, specifically annuities and.
Individual life, they were down a lot in both product lines and I'm wondering if it's because of you shifting your product mix and it takes a while for that to run through the distribution channels versus maybe.
I'm, assuming you're not seeing any pushback in terms of.
Pushback from the distributors and wanting to cellular products.
Maybe if you could talk about what's driving the beat sales and retail products.
So Jimmy I wanted to be really clear that we are not seeing any pushback from anybody as it relates to the sale of our products. So let me just start with.
Our overall strategy and the pivot that we're making as it relates to our new business approach. So we are doing exactly what we intended to do we are shifting to a product mix with more capital efficiency and enhanced value creation and as we've talked about we're seeing improvement as it relates to sales per dollar.
Of capital as well as our new business present value of distributable earnings and we have talked about the fact that as we are doing this pivot that we are expecting about $300 million less in our allocation to new business capital this year.
So if you take annuities for example, we saw that in the second quarter overall sales declined by 4%. However, if you look at year to date sales and you compare to last year sales were actually up 6%.
And importantly, we expect to.
Full year sales growth for the full year of 2023.
We are launching a range of product enhancements, we have a number of actions coming with our distribution partners all of which are expected to elevate sales in the back half of the year as it relates to annuities and align with our capital efficiency goals.
On the life side.
Where we did see overall sales were down year over year, 36%.
We talked about the fact that executive benefit is lumpy and we saw that this quarter.
We expect to see that be higher as we look at the second half of the year. If you take out the lumpiness of the executive benefit.
And you look also at term term was also significantly down we have previously communicated that we have stepped away from the commoditized portions of term so where we are selling term is exactly where we want to be in terms of our overall proportion.
And then if you look at the three other product segments at <unk> at <unk> and at <unk> and you compare that year over year were about 9% down and again part of what we're seeing there is the beginnings of our shift which will take some time into more accumulation product.
And we talked about the fact that we've entered into.
New distribution agreements with with completely new channel as it relates to <unk>.
Marketing organizations, which should support that and I want to emphasize also that as it relates to our distribution we have a proven track record of pivots.
I think you all know the importance of our distribution leadership broad diversified across a whole range of channels. We are continuing to invest in the distribution franchise.
In terms of data intelligence into the value add content.
In terms of really supporting our firms and our clients with with really understanding value propositions and being solutions providers as opposed to product pushers.
We're continuing to build relationships.
As as an anecdote I have had the opportunity to visit with our distribution team over the summer with our financial advisors directly with some of our channels directly with.
We continue to receive really significant brand and recognition and there really has been a lot of energy around the strength of our brand and reputation and franchise in general.
As it relates to our clients. So we're going to continue to do everything that we're doing feel good about where we are.
And most importantly focus on capital efficient sales as it relates to the retail business and the workplace business.
Okay.
This concludes our question and answer session. Mr. Alco Pacino I turn the call back over to you.
Thank you for joining us. This morning, we're happy to take any follow up questions that you have you can email us at Investor relations at <unk> Dot com. Thank.
Thank you and have a good day.
This concludes today's conference call you may now disconnect.
Okay.
Yeah.
Yeah.