Q4 2024 Lincoln National Corp Earnings Call
Good morning, and thank you for joining Lincoln Financial's 2020 for fourth quarter and full year earnings conference call. At this time all lines are in listen only mode. Later, we will open the call for questions and instructions will be given at that time, if you need assistance at any time during the call. Please press the starkey followed by it.
Ciena Madam: Zero and someone will assist you now I would like to turn the call over to senior Vice President head of Investor Relations Ciena Madam. Please go ahead.
Thank you good morning, everyone and welcome to our fourth quarter and full year earnings call. We appreciate your interest in Lincoln.
Ciena Madam: Quarterly earnings press release earnings supplement and statistical supplement can all be found on the Investor Relations page of our web site Www Lincolnfinancial dotcom.
Ciena Madam: These documents include reconciliations of the non-GAAP measures used on today's call, including adjusted income from operations or adjusted operating income adjusted income from operations available to common stockholders and free cash flow to the most comparable GAAP measures.
Ciena Madam: Before we begin I want to remind you that any statements made during today's call regarding expectations of future actions trends in our business perspective services or product future performance or financial results, including those relating to deposits expenses income from operations share repurchases.
Ciena Madam: <unk> liquidity and capital resources.
Ciena Madam: Our forward looking statements under the private Securities Litigation Reform Act of 1995.
Ciena Madam: These forward looking statements involve risks and uncertainties that could cause our actual results to differ materially from our current expectations.
Ciena Madam: These risks and uncertainties include those described in the cautionary statement disclosures in our earnings release issued earlier this morning as well as those detailed in our 2023 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.
Ciena Madam: C.
Ciena Madam: 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 today.
Ciena Madam: Presenting this morning are Ellen Cooper, Chairman, President and CEO and Christian as a poor chief financial officer. After their prepared remarks, we will address your questions.
Speaker Change: Let me now turn the call over to Alan Ellen.
Speaker Change: Thank you Tina and good morning, everyone. Thank you for joining our call today.
Speaker Change: I want to start by taking a moment to reflect on our significant progress in 2024 to further position Lincoln for sustained long term value creation.
Speaker Change: We delivered strong results with full year adjusted operating income increasing to its highest level in three years, we outperformed relative to the financial objectives, we established last year and built substantial momentum across our businesses further increasing our confidence in our longer term outlook.
Speaker Change: We also successfully advanced our strategy, which is anchored upon three objectives building.
Speaker Change: Building, a strong capital foundation to ensure enterprise stability across market cycles and support investment for future growth.
Optimize our operating model to advance a scalable framework to maximize our resources and.
Speaker Change: And deliver profitable growth to improve free cash flow and expand the franchise.
Speaker Change: Last year, we communicated our goal to build and maintain an RBC ratio of 420%.
Speaker Change: 20 point buffer over our 400% RBC target as we continue to take the necessary steps to strengthen our capital base.
Speaker Change: We closed on the sale of our wealth management business in the second quarter and increased our capital position throughout the year, ending 2024, with an estimated RBC ratio of over 430%.
Speaker Change: This is an important milestone and provides us with added financial flexibility as we continue repositioning our business for future growth and profitability.
Speaker Change: We also made meaningful headway in optimizing our operating model, we took targeted actions to reduce expenses across the enterprise, while investing in the operations technology and talent needed to build the infrastructure for growth and elevate the customer experience in each of our businesses.
Speaker Change: We further enhanced our investment strategy and launched a Bermuda based reinsurance subsidiary to support our financial objectives and increase our free cash flow overtime.
Speaker Change: Lastly, we advanced on our objective of delivering profitable growth.
Speaker Change: We grew our group business across products and market segments, while prioritizing profitability over topline growth.
Speaker Change: Our annuity business to a more balanced mix with a higher proportion of spread based products.
Speaker Change: Repositioned, our life business by optimizing our product portfolio and realigning our distribution model and build upon the products and capabilities of our retirement business.
Speaker Change: Since embarking on our multi year journey to transform Lincoln, we have demonstrated substantial progress as we evolve into an organization characterized by businesses market segments and products with more stable cash flows and higher risk adjusted returns.
Speaker Change: Now turning to our fourth quarter and full year results, which reflected strong execution of our strategic priorities.
Speaker Change: Highlights at the segment level included our group protection business, delivering a record fourth quarter with earnings more than doubling year over year, and a margin of eight 4% and a record year for sales earnings and margin.
Speaker Change: Annuities also delivered excellent results generating robust earnings growth for the quarter and full year and its highest full year sales in five years.
Speaker Change: Retirement plan services increased quarterly earnings by 13% year over year and generated full year deposit growth of 25% driving its 10th consecutive year of positive flows while our life insurance sales were essentially unchanged sequentially. We continued to expand our presence in the.
Speaker Change: Wrestle bull markets for accumulation and protection products with more risk Sharon.
Speaker Change: Now turning to our business results, starting with retail solutions, which includes annuities and life insurance.
Speaker Change: We continue to strengthen our annuities business positioning it for additional growth by emphasizing a more diversified product mix. We are a leader in this market and offer a broad set of products in both fixed and variable annuities.
Speaker Change: This is a key competitive strength, enabling us to be a holistic solutions provider that can adapt to customer preferences in various market environments.
Speaker Change: Total annuity sales of $3 7 billion in the fourth quarter capped a strong year in which full year sales increased 7% compared to the prior year and as I mentioned earlier reached the highest level since 2019.
Speaker Change: Our diversified product mix supported this result, with approximately two thirds of full year sales attributable to spread based products.
Speaker Change: Additionally, all product categories supported our profitable growth goals by meeting or exceeding their risk adjusted return and capital efficiency objectives.
Speaker Change: Our wireless sales increased for both the quarter and the full year as we maintained a strong competitive position in this market and our second generation <unk> product resonated with customers.
Speaker Change: While our fixed annuity sales in the quarter were lower than the record prior year quarter. We are pleased with our full year sales level of $4 2 billion.
Speaker Change: We plan to continue leveraging the capabilities, we built to sustain a consistent competitive presence in the fixed market place, including investment strategy optimization and distribution expansion.
Speaker Change: We also expect to bolster our fixed products by utilizing our new Bermuda reinsurance affiliate.
Speaker Change: Finally, our traditional variable annuity sales nearly doubled year over year as our product offerings, coupled with the favorable market environment supported sales growth in variable products with and without guaranteed living benefits.
Speaker Change: Variable annuities remain integral to our overall product suite, producing strong risk adjusted returns, while delivering a compelling customer value proposition.
Speaker Change: In summary, annuities delivered robust results in 2024 for the quarter and the year and we continue to diversify the product mix looking ahead, our strategic focus on further optimizing our investment strategy.
Speaker Change: Leveraging capital efficient reinsurance solutions to accelerate spread based product growth and driving greater expense efficiencies positions. This business for continued strength and success.
Speaker Change: Now turning to life insurance.
Speaker Change: Last year was one of substantial transition for our life business as I. Previously mentioned, we are refocusing this business to deliver accumulation and protection products with more risk sharing.
Speaker Change: We are currently in these markets today and have been building out additional product features to expand our solution set and position us for future profitable growth.
Speaker Change: Additionally, we realigned our life distribution team to optimize our wholesaler footprint, which will support the acceleration of our product shift overtime.
Speaker Change: While we made solid progress in 2024, the impact of our actions will take time to be fully reflected in our results. We are confident that leveraging our product distribution and underwriting strengths, while investing in our customer centric service model and optimizing our expense.
Speaker Change: ANSI will increase our competitive differentiation and drive higher earnings growth overtime.
Speaker Change: Next turning to workplace solutions, which includes our group protection and retirement plan services businesses grip.
Speaker Change: Group had another excellent quarter more than doubling its earnings and margin over the prior year quarter for the full year the earnings and margin of this business were well ahead of our expectations with earnings increasing by more than 50% and the margin by 280 basis points when excluding the <unk>.
Speaker Change: <unk> of the annual assumption review.
Speaker Change: Over the past year, we have substantially advance this business, we executed our strategy to grow profitably with a targeted segment strategy to rebuild our local market presence and sustain our leadership in the national and regional markets.
Speaker Change: We also made meaningful investments in our operations technology and talent to enhance our customer experience and began to see the benefits of those investments and the results of the business.
Speaker Change: And what is typically group's highest sales quarter of the year sales increased 17% year over year, achieving a new fourth quarter record and for the full year sales were up 24%.
Speaker Change: These results reflect the disciplined execution of our objective to produce a well proportionate mix among our products and target segments supported by an increase in lines of coverage. So.
Speaker Change: We also delivered additional growth in supplemental health with annual sales, increasing 35% year over year and contributing to a more balanced and diversified book of business.
Speaker Change: Premium growth was up 3% for the full year driven by the execution of our pricing strategies for new business and renewals to support our margin expansion efforts.
Speaker Change: As we reflect on our success and our group business. In 2024, we also continued to benefit from our industry, leading position in disability as our solutions oriented approach and strong customer value proposition and leave management differentiate us competitively in this space.
We also made substantial progress over the last year to tailor our strategy to each segment and delivered margin improvement in all three market segments.
Speaker Change: Our local market segment, we invested in transforming our operating model and product portfolio to support customer expectations for ease and access.
Speaker Change: In our regional segment, we expanded our technology and service capabilities to support our partnerships with strategic broker relationships.
Speaker Change: And our National segment, where we are a market leader, we leveraged our disability and leave expertise continued to enhance our voluntary products, such as supplemental health and providing customer engagement tools and processes to further differentiate our value proposition and generate profitable growth.
Speaker Change: In summary groups performance this year exceeded our expectations driven by broad based execution to deliver profitable growth and supported by an ongoing favorable macro backdrop.
Speaker Change: As we continue executing our targeted segment and product strategies, we expect our group business to become a larger and more profitable contributor to our overall earnings mix overtime.
Speaker Change: Now turning to retirement plan services or Rps.
Speaker Change: Rps had a solid quarter with earnings growth of 13% year over year and continued new business momentum driving a 46% increase in first year sales for the full year first year sales grew by nearly 70% and total deposits were up 25%.
Speaker Change: As mentioned in last quarter's remarks, several known planned terminations impacted fourth quarter flows. However, rps delivered a 10th consecutive year of positive net flows.
Speaker Change: Throughout 2024, we executed our strategy to generate profitable sales growth by further differentiating rps in the retirement marketplace.
Speaker Change: We are focused on solving the needs of all of our customers, whether they are employers participants or our intermediary partners.
Speaker Change: We've enhanced our service offerings expanded the breadth of our product solutions with recent innovations and partnered to broaden our financial wellness suite to meet the needs of our customers.
Speaker Change: We also increased our efficiency by optimizing our operating model, allowing us to accelerate sales growth while supporting earnings growth.
Speaker Change: In closing we achieved strong results in 2024 that were ahead of our expectations.
Speaker Change: We demonstrated our continued momentum to build a solid capital foundation increase operational efficiency and deliver profitable growth positioning Lincoln for long term value creation.
Speaker Change: Our success to date increases our confidence in achieving our longer term financial and strategic objectives. As you will hear from Chris shortly the strength of our broad based execution sets the stage for future advancement in positioning Lincoln for sustained profitable growth, we will continue to leverage our competitive advantages.
Chris: Including our powerful franchise distribution leadership broad product portfolio and trusted brand to serve our customers and build for the future. We look forward to updating you on our continued progress with that I will hand, the call over to Chris.
Chris: Thank you Elena and good morning, everyone. Our fourth quarter results reflected another quarter of solid progress across our businesses, concluding a year of strong financial performance and disciplined execution of the strategic objectives, we introduced last year.
Chris: We have built substantial momentum across the enterprise and are well positioned to continue delivering on our strategic and financial priorities.
Chris: I'm going to focus on three areas. This morning, first I'll review, our fourth quarter results, including our segment level financial performance.
Chris: Second I'll touch on our investment portfolio.
Chris: And third I'll provide an update on capital free cash flow and our execution against our multi year outlook.
Chris: So let's start with a review of the quarter.
Chris: This morning, we reported fourth quarter adjusted operating income available to common stockholders of $332 million or $1 91 per share.
Chris: There were no significant items in the quarter.
Our alternative investments portfolio delivered over an 11% annualized return in the quarter were $105 million on.
Chris: On an after tax basis. This amount was $8 million above our return targets or five cents per share.
Chris: Excluding the impacts of our annual assumption review and each year full year 2020 for adjusted income from operations was over $1 2 billion.
Chris: A 16% improvement compared to 2023.
Chris: As earnings growth in our group and annuities businesses more than offset the headwinds in our life business.
Chris: Turning to GAAP net income for the quarter, we reported net income available to common stockholders of $1 7 billion or $9 63 per diluted share.
Chris: The difference between the net income and adjusted operating income was predominantly driven by two factors.
Chris: First there was a favorable impact of $1 $2 billion within nonoperating income, primarily driven by a net positive movement in market risk benefits, resulting from a higher interest rates in the fourth quarter.
Chris: Our hedge program continues to perform in line with expectations.
Chris: And second there was a $587 million game, primarily driven by the change in fair value of the GAAP embedded derivatives related to the fortitude re reinsurance transaction, we completed in the fourth quarter of last year.
Chris: This change was primarily driven by the impact of higher interest rates on available for sale securities and the funds withheld portfolio backing the fortitude agreement with a corresponding offset flowing through accumulated other comprehensive income or <unk>.
Chris: Now turning to our segment results.
Chris: Let's start with group, which had a record fourth quarter.
Chris: Group reported operating income of $107 million and a margin of eight 4% more than doubling from $52 million and a margin of four 1% in the prior year quarter.
Chris: The dynamics that drove our results throughout the first three quarters of 2024 were also drivers in the fourth quarter further supporting its year over year earnings improvement.
Chris: Strong execution of our strategic priorities, including disciplined pricing actions on new business and renewals diversification into higher margin market segments and products and strong operational performance was the primary driver of our earnings growth this quarter and throughout the year.
Chris: Second the favorable macroeconomic conditions, which remains supportive throughout the year continued to be reflected in our fourth quarter LTV incidents rate further supporting the strength of our disability results.
Chris: And lastly, while mortality results can vary this quarter, they were favorable relative to our expectations, leading to our lowest life loss ratio in over two years.
Chris: Now turning to group product line results for the quarter.
Chris: The disability loss ratio was 75% improving by over eight percentage points year over year.
The loss ratio remained favorable relative to our expectations as incidence rates remained low and when coupled with strong LTV recoveries enabled positive return to work outcomes for our claimants.
Chris: The group life loss ratio was 65% a two percentage point improvement versus the prior year quarter as lower incidents more than offset slightly elevated severity.
Chris: As a reminder, mortality results were seasonally higher in the first quarter of each year, which we anticipate will drive a sequential increase in the life loss ratio.
Chris: Now briefly touching on full year results.
Chris: Group reported operating income of $426 million and a margin of eight 3% compared to $275 million and a margin of five 5% in the prior year, excluding the impact of the assumption review in both periods.
Chris: Given the strategic emphasis we placed on growth diversification and improving the profitability of the group business I want to provide a few updates on its trajectory heading into 2025.
As I noted in my comments on group's fourth quarter results strong strategic execution was the primary driver of its earnings growth in 2024 and will continue to support earnings next year.
Chris: However, as I discussed last quarter, the favorable macro tailwind, which contributed roughly 100 basis points of the margin expansion group delivered in 2024 are unlikely to persist indefinitely.
Chris: And as a result, we anticipate some moderation of the record low disability incidents we experienced during the spirit to occur in 2025.
Chris: When adjusting for the normalization of macro tailwind, we expect year over year margin expansion driven by the benefits of our strategic actions and ongoing improvement in mortality.
Chris: These actions should help us to sustain a similar level of earnings in 2025 compared to 2024.
Chris: As we look towards 2026, we expect continued premium growth alongside underlying earnings improvement to be supportive of a margin at or above 8% grew.
Chris: Group's 2024 results reflect strong progress on our strategy to expand this business into a larger and more profitable part of the enterprise.
Chris: Now turning to annuities.
Chris: <unk> reported fourth quarter operating income of $303 million compared to $279 million in the prior year quarter, which included the favorable impact of $14 million from a model refinement.
Chris: Excluding this item annuities earnings increased 14% year over year.
Chris: The year over year growth was driven by higher account balances and increased spread income partially offset by higher expenses.
Chris: Turning to account balances average account balances were up 12% versus the prior year quarter, and 2% sequentially as market growth offset net outflows in variable annuities.
Chris: Touching briefly on expenses.
Chris: As I noted in my third quarter remarks, this year, we anticipated elevated expenses in the fourth quarter.
Chris: This increase was driven by a reduced benefit from external reinsurance expense reimbursements. A result of this year's fourth quarter sales moderating compared to last fourth quarter record levels.
Chris: Turning to spreads.
Chris: The increase in spread income continue to be driven by the growth of our <unk> account balances, which now represent 21% of total account balances and are up 25% compared to the prior year quarter.
Chris: As we work towards shifting our business mix to increase the proportion of spread based products as a percentage of our overall account balances were pleased to announce that we received approval for our first internal flow agreement with our Bermuda based affiliated reinsurer alpine focus on fixed annuities.
Chris: With an internal flow agreement now in place with alpine optimizing our internal and external reinsurance mix is a key focus for 2025 with the net benefit being the growth of spread based account balances and earnings overtime, all while maintaining a required product returns.
Chris: Annuities delivered strong results in 2024, reinforcing its importance as a key driver of earnings and free cash flow for the company.
Chris: While ending account balances were down $2 billion sequentially, which when combined with two fewer fee days will result in lower earnings in the first quarter relative to the fourth quarter. We believe the momentum in our annuities business will support continued success in 2025.
Chris: Now turning to retirement plan services, which reported fourth quarter operating income of $43 million compared to $38 million in the prior year quarter, a 13% increase.
Chris: Similar to the third quarter, the improvement was driven by lower net G&A expenses and higher equity markets, partially offset by elevated participant driven stable value outflows over the last 12 months, resulting from the higher interest rate environment.
Chris: Our base spread for the quarter was 101 basis points eight basis points lower year over year.
We expect the base spread to stabilize at current levels throughout the first half of 2025, followed by modest expansion in the second half of the year.
Speaker Change: Net outflows for the quarter were $732 million and as I noted in my third quarter remarks. This was driven by the impact from several known plan terminations, partially offset by continued sales strength.
Speaker Change: Net flows for the year were favorable representing rps's 10th consecutive year of positive net flows.
Speaker Change: However, as we look ahead, we expect flows in 2025 to be pressured from a known large plant termination in the first quarter.
Speaker Change: Now turning to account balances.
Speaker Change: Average account balances for the quarter increased 18% year over year and end of period account balances were nearly $113 billion up 11% versus the prior year quarter.
Speaker Change: Overall, Rps had a solid year, despite pressure from stable value outflows and spread compression as.
Speaker Change: As we look towards 2025 moderating spread compression higher account balances and continued expense discipline will support modest earnings growth in this business.
Speaker Change: Lastly, turning to life insurance life reported a fourth quarter operating loss of $15 million compared to an operating loss of $6 million in the prior year quarter.
Speaker Change: Elevated severity in the run rate impacts of Fortitude re transaction were partially offset by above target alternative investment income and lower net G&A expenses.
As a reminder year over year comparisons will no longer be impacted by the fortitude re transactions starting in 2025.
Speaker Change: Turning to mortality.
Speaker Change: This quarter, we experienced elevated mortality driven by large claims leading to an outsized impact from severity.
Speaker Change: While volatility like this can occur from time to time. This was an unusual quarter and we would not expect this level of severity on a go forward basis.
Speaker Change: Net G&A expenses were down $14 million or 10% versus the prior year quarter, reflecting the effect of the targeted actions we took throughout 2024.
Speaker Change: We expect this trend to continue into 2025 and be a key contributor to year over year earnings growth.
Speaker Change: While lifes operating income remained pressured in 2020 for the actions we took throughout the year to rightsize the expense base and target growth in products with more risk sharing have strengthened the underlying fundamentals of the business.
When coupled with normalized mortality trends and continued spread expansion. These actions reinforce our confidence in achieving and sustaining positive earnings for this business that will grow over time.
Speaker Change: Moving to investments.
Speaker Change: Overall performance remained solid in the fourth quarter, a reflection of our high quality and well diversified portfolio and our ongoing emphasis on optimizing our investment strategy.
Speaker Change: Throughout 2024, we focused on capturing opportunities in less liquid structured asset classes. We also improved the overall quality of portfolio assets year over year through our high quality purchase strategy and solid credit performance with upgrades outpacing downgrades throughout the year.
Speaker Change: The portfolio remained at 97% investment grade demonstrating our ability to balance yield.
Speaker Change: Diversification and quality.
Speaker Change: Our general account optimization efforts, where we are leveraging our multi manager platform delivering increased value to the organization continue to drive additional incremental yield through a targeted shift in our asset mix toward investment grade private assets and high quality structured products.
Speaker Change: New money in 2024 was invested at a six 4% yield approximately 140 basis points above the yield on comparably rated public bonds 50 basis points higher than our yield pick up last year.
Speaker Change: The prevailing interest rate environment will continue to influence our new money yield, but as we look ahead, we see incremental opportunity to take advantage of higher yielding assets within our overall risk appetite.
Speaker Change: Touching briefly on our commercial mortgage loan portfolio. The portfolio remains high quality is well diversified and continues to deliver stable results within our expectations. We recognize office is still in a longer term transition and we continue to monitor our portfolio closely.
Speaker Change: However, we feel good about our high quality mortgage loan portfolio and the positioning of the office portfolio additional information can be found in our quarterly earnings supplement.
Speaker Change: Lastly, our alternative investments generated another strong quarterly return of two 8% in the fourth quarter above our expectation of two 5%.
For the full year, our annualized return was eight 9%.
Speaker Change: Overall, the performance of our alternative investments in the quarter and throughout 2024 benefited from our diversified investment approach with positive contributions from all underlying asset categories.
Speaker Change: Lastly, I'd like to provide an update on our financial outlook, focusing on capital free cash flow conversion and expected growth.
Speaker Change: Ill address this across three key Timeframes first the progress we made in 2024.
Speaker Change: Second how we are positioned heading into 2025.
Speaker Change: And lastly, an update on our expectations for 2026 and beyond.
Speaker Change: As we look back on 2024, we made significant progress toward our strategic priorities, we outlined a year ago.
Speaker Change: At the heart of our efforts to restore long term value was a commitment to building a strong capital foundation, optimizing our operating model and our strategic shift towards products and market segments that will deliver profitable growth and improve our free cash flow.
Speaker Change: Throughout the course of 'twenty 'twenty four we invested in our group business and executed on our growth strategy, resulting in nearly 300 basis points of margin expansion on a full year basis, when excluding the impacts of the assumption reviews.
Speaker Change: We took action on expenses, both from a total company perspective, as well as targeted actions in our life business, increasing our operational efficiency.
Speaker Change: We also executed on large strategic initiatives such as the sale of our wealth management business and the launch of our Bermuda reinsurance affiliate.
Speaker Change: The net result of these actions allowed us to end the year with RBC above 430% grow adjusted operating earnings to its highest level in three years. Despite a loss of $100 million in life earnings from afforded to transaction and increase our free cash flow conversion from 35% in 2023% to 39% in 2024.
Speaker Change: As we look to 2025, we expect another year of investment helping to drive continued momentum in the business.
Speaker Change: This year will continue to be a combination of growing our franchise, increasing the profitability of our businesses and optimizing legacy blocks to grow earnings and free cash flow.
Speaker Change: Some examples include launching and beginning to scale, our F&B and program.
Speaker Change: Recalibrating, the optimal mix of internal and external flow reinsurance.
Speaker Change: <unk> targeted expense actions.
Speaker Change: Optimizing certain hedge programs and continuing our efforts to optimize our general account new money strategies.
Speaker Change: Some of these initiatives are a continuation or acceleration of the progress we made last year some of our new initiatives and some will be a multi year effort.
Speaker Change: As we look out to 2026, we have increased confidence in the outlook laid out this time last year.
Speaker Change: As you can see on slide four in our Investor deck, we made two changes to our 2026 outlook. The first being a widening of the upper bound of expectations for free cash flow conversion from 45% to 55% in last year's outlook of 45% to 60% and.
Speaker Change: And the second being an improvement in expected leverage down from a range of 25% to 28% in last year's outlook to 25% to 26, 5% in this year's outlook.
Speaker Change: There are risks to our outlook as always given the assumption for a relatively constructive economic backdrop as well as the reliance on our ability to continue to execute on our strategic initiatives, particularly within group protection and retail life, but.
Speaker Change: But given the success, we've been able to demonstrate over the last two years and the continued underlying momentum we see today, we feel confident in achieving our goals.
Speaker Change: We thank everyone for listening and with that I'll turn it back to Tina. Thank you, Chris Let me now turn the call over to the operator to begin the Q&A operator.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again for optimal sound quality. Please do not use a speaker phone. Please speak directly into the receiver are usually wired headset with a microphone.
Speaker Change: Your first question comes from the line of Ryan Krueger from K B W. Your line is open.
Speaker Change: Hey, Thanks. Good morning. My first question was just going back to the raising the top end of our free cash flow outlook for 2026 can you give a little bit more color on what led to that and.
Speaker Change: I guess any kind of sense of kind of how to think about free cash flow in 'twenty five as you move towards that 2006 target.
Speaker Change: Sure Good morning, Ryan It's Chris.
Speaker Change: Good question so.
Speaker Change: Let me step back and just highlight a couple of key points around our free cash flow and it maybe reiterate some of the things that I just said on the call at a high level. So you know as you look back at 2020 for and really 2023 as well you know we've made a lot of progress on the strategic priorities that we've talked about.
Speaker Change: And at the heart of it is really been this commitment to building a strong capital foundation optimizing the operating model and our strategic shift towards products and market segments that are going to produce profitable growth and improve our free cash flow alright, and you're seeing that come through in 2024. So as you know we've talked about we invested in our group business.
Speaker Change: And executing on the growth strategy, there, resulting in a 300 basis points of margin expansion.
Speaker Change: We took action on expenses as we've talked about we sold earlier than we'd want to Bermuda.
Speaker Change: When you look at 2024 the.
Speaker Change: The net result of these actions we were able to end the year with.
Speaker Change: RBC in excess of 430 operating earnings continue to grow.
Speaker Change: The free cash flow conversion year over year.
Speaker Change: Spaniard as well now there's a lot of puts and takes underneath the surface as you would expect.
But when you look towards 2025.
Speaker Change: You know as I said I think this is going to be another year of investment along with continued momentum.
Speaker Change: So we launched our F&B and program in January that went really well, we would expect to scale back.
Speaker Change: Bermuda is up and running as I mentioned, we have our first flow deal there.
Speaker Change: <unk> focused on fixed annuities.
Speaker Change: And then you know we think that there's more to do on the expense side.
Speaker Change: And as it relates to some of the hedging programs that we've talked about looking to optimize we think we'll see some progress there we've talked about the expensive hedges that we have to put in place relative to be variable life block.
Speaker Change: In 2022, and then lastly to reiterate we do think that there is continued upside as we think about optimizing our new money strategies on the investment side.
Speaker Change: So then when you look out to 2026.
Speaker Change: As you mentioned in the Investor deck we.
Speaker Change: <unk> expanded the upper end of the range right and so 45 to 55 moved to 45 to 60.
Speaker Change: And I think of it really is coming from three buckets. So the first is just this ongoing mix shift right. So as you grow group protection as an example that has the highest free cash flow conversion rate, that's going to help company wide free cash flow conversions, you've seen that this year.
Speaker Change: Is really thinking about optimizing the capital efficiency of new sales, while continuing to grow earnings and here again in Bermuda will help and you know while we have the fixed.
Speaker Change: Deal in place and that will continue to to grow throughout the next two years, we think that there's other things to do there as well.
Speaker Change: We're studying opportunities for example on the retail life side.
Speaker Change: And then third as we've talked about in the legacy blocks. We think there are actions that we can take in projects that are in flight that will help to accelerate that free cash flow conversion I.
Speaker Change: I mentioned hedging and expenses, there's things you can look at with captives or better investment yields and if you think about the enforce book and then just over time, there's a natural improvement given the reserve pattern.
Speaker Change: So as I mentioned, we had a two year pattern of proving we can execute on our priorities. Obviously, there's risks to our outlook, but we do see momentum and we're confident in achieving the goals that we laid out.
Speaker Change: Great. Thank you and then.
Speaker Change: The I guess.
Speaker Change: Related question is just the leverage ratio being lower is that more a function of.
Speaker Change: Higher equity growth or does that contemplate.
Speaker Change: Reducing the dollar amount of leverage and then I guess somewhat related how are you thinking about uses of cash.
Speaker Change: Capital above and beyond your RBC target.
Speaker Change: The next couple of years.
Speaker Change: Yeah, So I think when we talked about our leverage ratio.
Speaker Change:
Speaker Change: Last year, we had some.
Speaker Change:
Speaker Change: Conservative conservatism in there just as we wanted to see how some of the actions that we were embarking on wood wood progressed as I mentioned 2024 came in better than expectations on most of the key metrics and projects that we're working on so now as we roll the clock forward and look at the plan.
Speaker Change: We just feel more confident that the.
Speaker Change: The numerator will continue to grow and just bringing that down over time and a little bit of a quicker way. There is some contemplation as we think about the different options that we have available to us as it relates to delevering.
Speaker Change: Good and bad news is that as we've been able to execute on our plan and our spreads have come in and so the opportunistic.
Speaker Change: You know repurchasing is.
Speaker Change: Is less attractive than it was a year ago, but it's still something that we think we can do as you grow your equity that's going to bring that down.
Speaker Change: And then well obviously continue to look at different ways to be thoughtful about the leverage and then on the question as it relates to deploying of excess capital.
Speaker Change: I would say a couple of things one is.
Speaker Change: As we talked about before.
Speaker Change: The idea of returning to share repurchases at some point it is important to us.
Speaker Change: The constraints that we've talked about our growing free cash flow to a level that is sustainable and so you know I would think about the conversation. We just had as it relates to free cash flow in 2025, and 2026, we're certainly getting back to a level by 2026.
Speaker Change: It feels more reflective of our underlying earnings power and then leverage you know we've talked about wanting that to come back down to the 25% level.
Speaker Change: We are continuing to outperform relative to our expectations, which is good.
Speaker Change: We have another year of investment and hard work to do but we see momentum and things are.
Speaker Change: Things feel good at the moment.
Speaker Change: Yeah.
Speaker Change: Great. Thanks, a lot.
Speaker Change: Your next question comes from the line of <unk> <unk> from Jefferies. Your line is open.
Speaker Change: Great. Thanks, good morning.
Speaker Change: Wanted to circle back on Alpine excuse me should we think about alpine is primarily.
Speaker Change: Helping with new sales strain or are you considering opportunities to take some of your in force business and potentially internally reinsurer to alpine.
Speaker Change: So I think for 'twenty five and beyond to me, it's really about thinking around maximizing the capital efficiency of new business.
Speaker Change: We would look at incremental enforced deals, but but the goal really is to make sure that we are deploying all the tools in the toolkit as it relates to being competitive in the key markets that we're.
Speaker Change: We're operating in where an economic capital framework is table Stakes. So I think of it as fixed annuities like we talked about I think there are some big opportunities on the retail life side of things, we're going to study that over the course of the year and longer term, we'll see but at the moment as we've talked about we really think of Bermuda as being a key.
Speaker Change: Key input into growing our spread based earnings and being more capital efficient as a company.
Speaker Change: Okay got it and then on the expenses, obviously, noting that the expenses were down year over year, but if I look at that excuse me expense ratio on slide 12 of your supplement it looks kind of flattish for most of the quarters in 2024.
Speaker Change: Do you have a target or where should we expect that to kind of slide two over the next year or so.
Speaker Change: So <unk> I would say a couple of things I think you know you'll see the actions that we took this year start to flow through.
Speaker Change: More so in 2025 right because.
Speaker Change: First the second quarter, we had the company wide action and then in the fourth quarter and spend starting in the third quarter. There was some of the more targeted actions and so if you just think about the way the.
Speaker Change: The expenses flow through in terms of the reduction.
Speaker Change: When you have actions like that there is a lingering cost.
Speaker Change: That doesn't come through in one quarter or so.
Speaker Change: You'll continue to see that benefit on the net G&A side flow through in 2025, and then I think depending on the business as we've talked about.
Speaker Change: So depending on the business segment as we've talked about where we're able to find savings if.
Speaker Change: If we think there's opportunity to invest for growth and increased margins in group is a great example, youre going to see that and so you know what I would say is if you think about the group.
Speaker Change: Operating margin just G&A margin just use that as the example, you should continue to see improvement there over time, but it may not necessarily translate to lower net G&A expenses, which was fine because what youre doing is youre growing the overall margin and you're investing in the business.
Speaker Change: Okay. Thanks.
Dan Bergman: Your next question comes from the line of Dan Bergman from TD Cowen Your line is open.
Dan Bergman: Yeah. Thanks, Good morning, I guess the star there, obviously is a very strong quarter overall for group protection, but it looks like the premium growth was a little bit subdued and that line at around 2%, which is I think a little below where it had been running plenty update to what youre seeing in terms of the competitive pricing environment, there and any thoughts on what level of topline growth.
Dan Bergman: We should expect over the coming year.
Dan Bergman: Sure Dan so far.
Dan Bergman: First of all we are incredibly pleased with our overall results and progress that we've made in in the group protection business and and broadly speaking across the enterprise. When you look at our quarterly premium growth. You are correct that you see 2% premium growth. However, if you look full year and we think the full year is.
Dan Bergman: As important what Youll see is that the annual premium growth is more around the 3% range. Now if you think about some of what we have continued to talk about message as it relates to our overall strategy. We are positioning to grow profitably and we are prioritizing that over top line growth. So.
Dan Bergman: We are less focused on the overall premium growth. Although we are very pleased with 3% and more focused on ensuring that the business that goes onto our books is achieving the appropriate margins to be able to sustain some of the results that we have talked about around our longer term objectives. So when.
Dan Bergman: When you look at that 3% premium growth a couple of things one is that the new business that we put on the books, which is priced at appropriate margins is part of that.
Dan Bergman: Secondly, what youll see is that a piece of that is around renewal pricing that has higher margins than what we've had in the past and importantly, what you will also observe is that we have also shared that we continue to experience expected.
Dan Bergman: Levels of persistency that are simply lower because we have business that is rolling off and not renewing with us.
Dan Bergman: As we continue to put the price increases through and and then just a couple of other comments here. So you will continue to see as we continue to invest in this business that we expect to win more than our fair share and a piece of this is around of course, having appropriate pricing and having the margins, but also all of the.
Dan Bergman: Investments that were doing in the business to be able to have all of the infrastructure all of the technology all of the capabilities to be able to meet our customers where they want to be met in our targeted segments with the appropriate.
Dan Bergman: <unk> technology operations et cetera.
Dan Bergman: Okay.
Dan Bergman: Right.
Dan Bergman: Got it Super helpful. Thank you and then maybe just shifting gears a little but.
Speaker Change: You saw a big increase in variable annuity sales this quarter, particularly those with living benefits and I know you touched on some of the prepared remarks, but I was just hoping you could give a little bit more color on what you saw in the quarter and how should we we should be thinking about the outlook for our VA sales going forward and given I guess, some others have seemingly deemphasize these products any color on the kind of competition would be great.
Speaker Change: Absolutely. So as you all know we have been a leader in the annuity market for really for decades, and we view our annuity business as a real competitive strength and when we think about annuities for US. We've spent a lot of time really building out the broad product categories.
Speaker Change: So we have always been a strong variable annuity with guaranteed living benefit rider.
Speaker Change: Also offer variable annuities without any kind of guaranteed living benefit and then of course in 2018, we went into the <unk> business and then we also talked about that about a year ago, and we built the capabilities to be able to have a consistent competitive presence in.
Speaker Change: In the fixed annuity space.
Speaker Change: So when you look across all of those we we are very intentionally offering a holistic range of product solutions for our clients and this really enables us to be able to adapt to customer preferences in various market environments and you align that of course with the strength of our of our distribution organization.
Speaker Change: So we are nothing has changed in our strategic focus on growing our presence in spread based products and we consider that again to be fixed annuities and reiland. We also at the same time, we continue to be a leader in the a and that's both with and without product guarantees and we are please.
Speaker Change: And as we mentioned in our remarks, we're pleased with the overall level of sales and importantly, the mix for 2024. So we had total sales for the year of $13 7 billion. That's the highest that we've had in five years from an overall level perspective, that's up 7% versus where we were a year ago.
Speaker Change: And then importantly to your question the mix spread based products rattler and fixed they represented two thirds of the sales for the year N V. A with guaranteed living benefits represented less than 25%. So and then importantly of course all products that are achieving their risk adjusted returns. So and then I'll just add that with our fixed annuity sales being lower that we just did.
Speaker Change: Broadly see that industry data was suggesting a decline in fixed annuity across the board. So we recognize that this is not unique to Lincoln as we go forward. You know just a couple of comments you will see us continue to focus on growth in our overall annuity business.
Speaker Change: You will also see us continue to strategically focus on our spread based businesses going forward, while also recognizing that D. A.
Speaker Change: Is and has always been an important part of our overall.
Speaker Change: <unk> products, and and also offering holistic product solutions for clients.
Speaker Change: Got it thanks, so much.
Our next question comes from the line of Nick <unk> from Wells Fargo. Your line is open.
Nick: Hey, good morning, I, just wanted to touch back on the F. A point and I appreciate.
Speaker Change: But it tends to be volatile quarter over quarter, but.
Nick:
Nick: Any outlook or commentary that you could provide on the use of flow I guess kind of.
Nick: How we should be thinking about sales going forward the flow the flow agreement with Bermuda.
Nick: So good question, Nick I think what I would say is that if you think about the use of Bermuda overtime.
Nick: And combined with <unk>.
Nick: Having a more optimized investment.
Nick: Strategy on the new money side, we continue to see strength in fixed annuities from a sales perspective, as we look out over the next two or three years the way that were.
Nick: Thinking about.
Nick: Our our planning obviously industry dynamics will play a role.
Nick: And so we'll see what happens but at the end of the day as you think about Bermuda.
Nick: The other key component is just think about what we were what we said on the call which is that there's also the ability for us to optimize the mix between internal and external so reinsurance so sales are going to.
Nick: Ebb and flow, we think there's upward trajectory relative to where we were in 2020 for we're taking action to continue to improve our competitiveness in the market but.
Nick: But at the same time as we've talked about what Bermuda allows us to do is be more capital efficient and ultimately to be able to retain more earnings as we decrease our reliance on the external quota share now theres, an optimal mix between those two things we think that the.
Nick: External reinsurance flow deals are very attractive and can help overall returns with finding that right optimal mix is really the goal in Bermuda allows us to do that.
Nick: And just as a reminder, when we built the capabilities for fixed annuities. There were three things that we focused on the first was really expanding our distribution presence to be able to have fixed annuities on shelves. The second was the flow agreement and the third was to begin the optimization.
Speaker Change: Of our investment strategy as we look forward to Chris's earlier point, we now have the opportunity to be able to optimize that reinsurance between the flow agreement and also.
Speaker Change: Our Bermuda affiliate and so we do expect that that will support all of our objectives going forward.
Speaker Change: Thanks, That's really helpful. And then I guess just switching towards group I think it seems like the guide is.
Speaker Change: Basically 8% or above going forward so.
Speaker Change: Just wanted to see if there was anything much structural changing in the business that youre seeing or it's just more a matter of of Lincoln internal actions.
Speaker Change: So just to clarify it if you look at what we said in the call. When we talked about 8% that was specific to 2026 right. What we said about.
Speaker Change: The margin expectations, reflecting on 2024, well and actually if you just step back I mean.
Speaker Change: Keep in mind. This was a business that you know in.
Speaker Change: <unk> 2022, I think had a 1% margin.
Speaker Change: 23 was five 5% margin and this year is coming in at $8 three right. So those have been significant execution on that team's part.
Speaker Change: To really redefine the strategy grow earnings and focus on improving earnings.
Speaker Change: ROE margins and so what we said about 2024 was that when you think about the eight 3% margin that we did we think about 100 basis points of that is due to a very favorable backdrop right. So if you if you dial the clock back what we said last year was we were at five five and we.
Speaker Change: <unk> 50 to 100 basis points of improvement 2024, so that would put you at about six five so we came in at $8 three and we're saying 100 basis points of that was due to the favorable backdrop, which tells you that the other 100 basis points, plus or minus or just due to us being able to execute better than we had envisioned at the time. So when you look at 2025.
Speaker Change: <unk>.
Speaker Change: But the point that we made in the in the prepared comments was that we would expect earnings to be relatively flat relative to 'twenty four.
Speaker Change: Given the expectation that that 100 basis points uplift from the favorable backdrop.
Speaker Change: Not persist right. So we'll just have to see how it goes but at the end of the day, our disability loss ratios are lower than what we would expect overtime.
Speaker Change: And we think that there's a role that's being played by the economic backdrop I think you've heard this from some of our peers.
But underneath the surface the point as we continue to execute execute on our priorities. We continue to reprice. The business. We continue to add more products for our customers and we continue to be more efficient on the expense side. So when you roll forward to 2026, you can see that margin getting above 8%.
Speaker Change: So hope that helps but I wanted to clarify just the the comments that we made on the call.
Yeah, it's really helpful. Thank you.
Speaker Change: And there are no further questions at this time I will now turn the call back over to Tina Madden for closing remarks.
Tina Madden: So thank you for joining us this morning, and we're happy to address any follow up questions. You have please email us at Investor Relations at <unk> Dot com.
Tina Madden: This concludes today's conference call. Thank you for your participation you may now disconnect.