Q1 2025 Lincoln National Corp Earnings Call
Speaker Change: Good morning and thank you for joining Lincoln Financial's 2025 First Quarter Ernie's conference call.
Speaker Change: At this time, all lines are in a listen only mode. Later, we will open the call for questions and instructions we'll be given at that time. If you need assistance at any time during the call, please press the star key followed by the zero, and someone will assist you.
Speaker Change: Now I would like to turn the call over to Senior Vice President, Head of Investor Relations, Tina Madon. Please go ahead
Tina Madon: Thank you. Good morning everyone and welcome to our first quarter earnings call. We appreciate your interest in Lincoln.
Tina Madon: These documents include recommendations of the non-GAAP measures used on today's call, including adjusted income from operations or adjusted operating income, and adjusted income from operations available to common stockholders to their most comparable GAAP measures .
Tina Madon: Before we begin, I want to remind you that any statements made during today's call regarding expectations, future actions, trends in our businesses, prospective services or products.
Tina Madon: Income from Operations, Free Cash Flow, or Free Cash Flow Conversion Racios.
share repurchases, liquidity and capital resources.
Tina Madon: as well as any statements relating to the expected timing of the closing of the BAME Capital Transaction.
Tina Madon: and the expected benefits of in use of proceeds from the transaction are forward-looking statements under the Private Security's Litigation Reform Act of 1995.
Tina Madon: These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from our current expectations.
Tina Madon: 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 2024 Annual Report on Form 10K.
Tina Madon: quarterly reports on form 10Q and from time to time in our other filings with the SEC.
Tina Madon: 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.
Speaker Change: Presenting this morning, our Ellen Cooper, chairman, president, and CEO , and Chris Neczypor, chief financial officer. After they're prepared remarks, we'll address your question. Let me now turn the call over to Ellen.
Ellen Cooper: Thank you, Tina, and good morning everyone. We appreciate you joining our calls today.
Ellen Cooper: Before I discuss our first quarter results, I want to briefly touch on the macroeconomic environment we have been experiencing.
Ellen Cooper: Market volatility remains high, and the external backdrop remains uncertain. While these conditions are challenging, we are navigating this landscape with discipline and focus.
Ellen Cooper: The strategic actions we have taken over the past two years to portify our foundation,
Ellen Cooper: including strengthening our balance sheet, optimizing our operating model, enhancing our general account investment strategy, pursuing strategic reinsurance initiatives, and shifting to more diversified business mix.
Ellen Cooper: create greater flexibility and resiliency, better positioning us to manage through a period of market turbulence.
Ellen Cooper: Additionally, as we have previously highlighted, we are holding a capital buffer as a proactive safeguard in the event of a market downturn.
Ellen Cooper: have implemented hedging programs with explicit capital targets to improve capital stability.
Ellen Cooper: and have made progress in diversifying our business, for example, expanding group protection and growing spread-based businesses to reduce our sensitivity to equity market volatility and position our earnings mix for enhanced durability.
Ellen Cooper: We maintain a long-term investment strategy with a high quality and well-diversified investment portfolio that is tightly aligned to our liability profile Chris will elaborate on these points further in his remarks
Ellen Cooper: Now turning to our results, we delivered another solid quarter with adjusted operating income increasing by 14% over the past year, excluding the impact of significant items in the prior year period.
Ellen Cooper: This performance demonstrates our continued execution of the strategic initiatives underpinning our multi-year journey to reposition Lincoln to deliver sustained shareholder value.
Ellen Cooper: We have consistently advanced our vision, which is anchored upon three objectives, demonstrating a track record of delivering results with tangible impact. The first is Strong Foundational Capital.
Ellen Cooper: We continue to maintain an estimated RBC ratio well above 420 percent consistent with our goal to hold a buffer level of capital above our 400 percent target designed to provide a cushion in the event of adverse economic conditions.
The second is an optimized operating model.
Ellen Cooper: We have taken a number of actions to increase our operational efficiency
Ellen Cooper: and position our enterprise for future growth, including reducing expenses while strategically investing in technology, talent and infrastructure to further elevate our customer experience and enhance our ability to scale effectively.
Ellen Cooper: We also launched our Bermuda-based re-insurance subsidiary to support our financial objectives.
Ellen Cooper: and the third is delivering profitable growth and more stable cash flows by evolving the product mix and distribution strategies across our four businesses.
Ellen Cooper: We have made notable progress in growing our group business with disciplined margin expansion, evolving our annuity business towards a more balanced mix with a higher proportion of spread-based products.
Ellen Cooper: for the repositioning our life product portfolio and continuing to build upon the products and capabilities of our retirement business.
Ellen Cooper: Our recently announced long-term partnership with BAME Capital is expected to further enhance these actions and strengthen our foundation for effective execution.
Ellen Cooper: Through this partnership, Bain Capital will become a strategic investment manager for a portion of Lincoln's general account assets, enabling expanded scale and differentiated cross-platform access to private asset origination.
Ellen Cooper: Beyond investment management, Bane will also be a collaborative trusted partner engaged on broader value streams that underscore the competitive advantages of our retail and workplace brands.
Ellen Cooper: and leverage the unique strengths, experience, and discipline of both organizations to accelerate product innovation, broadener offerings, and deliver compelling customer value propositions to drive accelerated growth.
Ellen Cooper: Importantly, BAME Capital's Minority Investment in Lincoln will further align our interests, validate the strength of our franchise and provide us with even greater flexibility to adapt to evolving market dynamics.
Ellen Cooper: We're excited about these strategic and financial benefits and opportunities alongside the deep cultural fit and shared values that we believe will further differentiate us competitively.
Ellen Cooper: This represents another pivotal milestone in advancing our vision, positioning Lincoln to deliver sustainable, profitable growth, and create long-term value for all our stakeholders.
Ellen Cooper: In short, the disciplined actions we've taken over the last two years, not simply the events of any single quarter, are why Lincoln is more balanced, more resilient, and better positioned to navigate a normal, recessionary environment.
Ellen Cooper: We are well prepared to fulfill our commitments to shareholders and policy holders despite the ongoing uncertainty.
Ellen Cooper: Now, turning to first quarter highlights, our group protection business generated excellent results delivering a 26% year-over-year increase in earnings and a 120 basis points of margin expansion.
Ellen Cooper: annuities achieve robust year-for-year sales growth supported by our ongoing focus on building and sustaining a diversified product mix.
Ellen Cooper: The underlying results in our life business continue to improve and year-over-year sales increased by 7% reflecting additional progress in emphasizing products with more risk sharing.
Ellen Cooper: Retirement Plan Services generated year-over-year first-year sales in line with the prior period and an 8% increase in total deposits.
Ellen Cooper: Now turning to retail solutions which includes our annuities and life businesses.
Ellen Cooper: We made additional progress in annuities during the quarter as total sales of $3.8 billion increased 33% from the prior year quarter and were also up-suppensually.
Ellen Cooper: Traditional VA sales sustain solid momentum while we benefit it from additional actions taken to support accelerated growth in our spread-based products, which comprised approximately 60% of the quarter's new business mix.
Ellen Cooper: These included enhanced product features, leveraging the strength of our distribution relationships, and optimizing our investment strategy. We also saw the momentum in Rylea and fixed annuities increase throughout the quarter.
Ellen Cooper: Within the fixed annuity category, sales levels were up sequentially by more than 50% as we applied the capabilities built over the last year to sustain a consistent and growing competitive presence in the fixed marketplace.
Ellen Cooper: Rila demonstrated another quarter of growth with sales increasing year-over-year and sequentially as the unique features of the second-generation Rila product we introduced last year continue to resonate with customers.
Ellen Cooper: We also benefit it from further leveraging our deep relationships with our distribution partners to drive additional market penetration and growth.
Ellen Cooper: Sales of our traditional variable annuities were also strong in the quarter with sales volumes up year over year. Our variable product suite offers robust features and benefits that meet customer needs and remain integral to our overall offering.
Ellen Cooper: It is worth mentioning that during periods of market volatility, we have typically seen customer demand for annuities shipped toward spread-based products with less demand for variable annuities.
Ellen Cooper: Giving the volatile market environment, our broad product portfolio enables us to meet customer preferences as they evolve.
Ellen Cooper: We are a leading provider in the annuity market, given the depth of our distribution and the breath and diversification of our product suite.
Ellen Cooper: This is a key competitive strength, enabling us to be a holistic solutions provider that can minimally adapt the customer preferences in ever changing market environments.
Ellen Cooper: Now turning to our life business. Life sales were 7% higher year-over-year as our product and distribution actions over the last year gained further traction.
Ellen Cooper: As I have previously mentioned, we are refocusing this business to deliver accumulation and protection products with more risk sharing. We are currently in these markets today and have been building out additional features to expand our solution set positioning us for future growth.
Ellen Cooper: Additionally, we optimized our wholesaler footprint last year to extend our customer reach and elevate our coverage to support the acceleration of our product shift over time.
Ellen Cooper: While repositioning our life business for profitable growth will continue to take time, we are confident that leveraging our product, distribution, and underwriting teams will increase our competitive differentiation and drive future growth.
Ellen Cooper: Next turning to Workplace Solutions which includes our group protection and retirement plan services businesses.
Ellen Cooper: As I mentioned earlier, Group delivered another excellent quarter reflecting continued momentum as the earnings increased by 26% year over year and margin expanded by 120 basis points to 7.4%
Ellen Cooper: These results highlight our strong execution in diversifying this business while prioritizing profitable growth.
Ellen Cooper: premiums were 7% higher than the prior year quarter driven by record sales growth last year and strong
Ellen Cooper: These results are supported by discipline pricing and ongoing investments to expand our offerings across products, capabilities and service quality.
Ellen Cooper: Our ongoing commitment to discipline pricing while growing also reflects the strength of our customer relationships and our ability to consistently deliver enhanced value.
Ellen Cooper: Group sales grew 9% year over year with all market segments contributing to this result. From a product perspective, we achieved robust growth in supplemental health, supporting a more balanced and diversified book of business.
Ellen Cooper: We built further momentum in each of our three target segments during the quarter. In our local market segment we are delivering integrated solutions that emphasize ease, access and efficiency.
Ellen Cooper: To grow market share in this segment, we are continuing to invest in our operating model, delivering quality service, and providing a robust product offering, including bundling multiple products.
Ellen Cooper: In our regional segment, we are maintaining a strong presence as we focus on strengthening key strategic broker partnerships to support our customers and their benefit decisions.
Ellen Cooper: We are making ongoing investments in enhancing the customer experience with more digital capabilities and providing a comprehensive product suite with an emphasis on supplemental health and leave management.
Ellen Cooper: In our national segment where we are a market leader, we are leveraging our disability and lead management expertise.
Ellen Cooper: and remain focused on enhancing our voluntary products such as supplemental health and providing customer engagement tools and processes to further differentiate our value proposition and generate profitable growth.
Ellen Cooper: We continue to raise the bar as we leverage our competitive advantages to further position this business to become a larger and more profitable contributor to our overall earnings mix over time.
Now turning to Retirement Plan Services or RPS.
Ellen Cooper: First-year sales were in line with the 2024 first quarter, which was a strong result and were broad-based across products and market segments.
Ellen Cooper: Sales in this business can be lumpy from quarter to quarter. However, our 2025 pipeline is robust. Reflecting new business momentum that we anticipate will translate into sales growth later this year.
Ellen Cooper: Year over year, total deposits were up 8% driven by growth in recurring deposits due to higher salaries and increasing levels of participant contributions resulting from our proactive engagement to improve retirement savings.
Ellen Cooper: We remain focused on solving the needs of our customers, whether they are employers, participants or our intermediary partners.
Ellen Cooper: We are further enhancing the capabilities in our retirement business, expanding our products and services, improving our customer experience, and increasing operational efficiency as we further optimize our operating model to drive sales and earnings growth.
Ellen Cooper: In closing, our strong performance this quarter demonstrates our sustained momentum as we build upon our competitive advantages to grow profitably, advance operational efficiency, and build the capital flexibility of our franchise.
Ellen Cooper: As we move forward, we remain focused on disciplined execution, advancing our strategic priorities and delivering strong outcomes for our shareholders, customers, partners, and employees.
Ellen Cooper: While market dynamics may create some near term headwinds, if they persist, we are confident that the actions we are taking today are building a durable path to delivering sustainable long term value. With that, let me now turn the call over to Chris.
Chris Neczypor: Thank you, Ellen, and good morning everyone. Our first quarter performance marks the third consecutive quarter of year-over-year adjusted operating income growth, and another quarter of strong execution against our strategic and financial priorities, underscoring the momentum we are building across the enterprise.
Chris Neczypor: Each of our businesses continue to advance on their respective operating initiatives, as we position Lincoln to deliver more stable cash close and higher risk adjusted returns.
Chris Neczypor: This morning, I'll focus on three areas. First, I'll walk through our consolidated and segment-level performance for the first quarter. Second, I'll touch on our investment portfolio. And third, I'll briefly recap our recently announced transaction with BAME Capital.
Let's begin with a quick summary of the quarter's results
[inaudible]
Chris Neczypor: This morning we reported first quarter adjusted operating income available to common stockholders of $280 million or $1.60 per diluted share.
There are no significant items in the quarter.
Chris Neczypor: Our Alternative Investment Support Folio delivered roughly a 7.6% annualized return in the quarter, or $75 million.
Chris Neczypor: On an after-text basis, this amount was $18 million below our return target, or 10 cents per
Chris Neczypor: Normalizing for the below target alternative investment returns. Adjusted operating income was $298 million or $1.70 for
Chris Neczypor: Turning to net income product order. We reported a net loss available to common shareholders of $756 million or $4.41 per diluted share.
Chris Neczypor: The primary difference between the gap net loss and adjusted operating income was driven primarily by the negative movement and market risk benefits amid lower interest rates and lower equity markets.
Chris Neczypor: importantly, our hedge program, which explicitly targets capital and the present value of distributable earnings, continued to perform in line with expectations during the quarter.
[inaudible]
Now turning to our segment of results.
Chris Neczypor: Let's start with Group, which continued its strong momentum following a record 2024.
Chris Neczypor: Operating income was $101 million, up 26% from earnings of $80 million in the prior year
Chris Neczypor: and the margin was 7.4%, up 120 basis points for the same period due to the continued focused execution of the business driven by expanding our customer base, diversifying our book of business, and maintaining discipline in our pricing action.
[inaudible]
[inaudible]
The year-of-year improvement stems from three key drivers.
First, robust and profitable premium growth
Chris Neczypor: Higher new sales volumes and strong persistency delivered while maintaining outpricing discipline supported profitable growth.
Chris Neczypor: Put simply, we expanded our top line in a way that should continue to support healthy margins.
Chris Neczypor: Second, our disability results remain strong, supported by a tight labor market and a still supportive interest rate environment.
Chris Neczypor: Coupled with incidence levels near historic lows and sustained healthy long-term disability
Chris Neczypor: and third, our purposeful shifts toward higher margin business, including our supplemental health strategy continue to gain traction and the earnings contribution from this product diversification is becoming more meaningful each quarter.
Chris Neczypor: of note, while expenses grew versus the prior quarter, the increased reflected continued investments in digital capabilities, distribution, and claims management.
Chris Neczypor: Importantly, we continue to achieve margin expansion, demonstrating our commitment to profitably
Chris Neczypor: Now turning to group product line results for the quarter. The disability loss ratio was 70% improving by over 400 basis points year-over-year.
Chris Neczypor: The loss ratio remained favorable relative to our long-term expectations, with continued low LTV incidents rates, and strong return to work outcomes for our claimants.
Chris Neczypor: Additionally, our repricing execution contributed to the year-over-year loss ratio improvement.
Chris Neczypor: The group life loss ratio was 75%, roughly a 100 basis point improvement versus the prior year quarter.
Chris Neczypor: While mortality was modestly higher year-over-year, it remained in line with our expectations and was more than offset by continued growth and supplemental health, resulting in an overall year-over-year improvement in the loss ratio.
Chris Neczypor: As we look ahead, risk results have historically improved from first to the second quarter and we expect that seasonal pattern to repeat this year.
Chris Neczypor: That said, should macro conditions shift, particularly if unemployment were to rise, we would expect some easing and disability performance relative to today's levels.
Chris Neczypor: Even in that environment, our pricing discipline, product diversification, and operational execution, give us confidence in sustaining strong margins throughout 2025.
Chris Neczypor: Now turning to annuities. Annuities reported first-quarter operating income of $290 million, consistent with the prior year quarter, excluding the unfavorable significant items that impacted last year's results.
Chris Neczypor: Average account balances, net of reinsurance, ended the quarter 5% above the prior year period, supported by 20% growth in Ryla balances, which have experienced positive net flows over the past year.
Chris Neczypor: Sequentially, earnings declined from $303 million in the fourth quarter, reflecting two fewer fee days and lower average account bounces.
Chris Neczypor: Additionally, ending account balances, net of reinsurance, with 3 percentage points lower versus the prior quarter driven by the equity market decline and continued variable nudity net outflows.
Chris Neczypor: Volatility has continued in the second quarter, and if this volatility persists, we anticipate additional pressure on the income beyond the initial headwinds resulting from lower starting account balances.
Chris Neczypor: As a rule of thumb, we expect roughly a $15 million impact to annualize earnings for every 1% change in annuity AUM due to markets.
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Turning the spreads.
Chris Neczypor: Spread income continues to grow with spread-based products now representing 28% of total account balances, net of reinsurance of three percentage points year-over-year.
Chris Neczypor: Ryla account balances increased 11% over the prior year quarter and now represent 21% of total balances, also not every insurance, making Ryla the primary driver of spread growth.
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Chris Neczypor: Stepping back, while the recent market declines could be a headwind to fee income, our strategic emphasis on diversifying our product mix to increase the proportion of spread-based products coupled with disciplined expense management, position annuities to remain a steady contributor to earnings and free cash flow throughout 2025.
Chris Neczypor: The time and plan services posted first quarter operating income of $34 million compared with $36 million a year ago driven by a one time operational loss related to a plan termination.
Chris Neczypor: Excluding this impact, earnings were essentially unchanged as growth from equity markets offset the impact of stable value outflows.
Chris Neczypor: Our base spread increased to 103 basis points, two basis points above the fourth quarter and one basis point above the prior year period.
We continue to expect spreads to stabilize at current levels.
[inaudible]
Chris Neczypor: Net Outflows were $2.2 billion, stemming from a previously announced large-plan termination.
Excluding this termination, net flows for positive
Chris Neczypor: Sales momentum remains strong, while total deposits grew 8% driven by a 13% increase in recurring deposits.
Average account balances 10% year-over-year to 113 billion
Chris Neczypor: and of period bounces were 109 billion, down 3% sequentially, reflecting both market volatility and the large case termination.
Chris Neczypor: As a rule of thumb, we expect roughly a $2 million impact to annualize earnings for every 1% change.
in Retirement AUM Due to Markets
Chris Neczypor: Although year-over-year headwinds could persist in the interim, we are focused on transforming this business by prioritizing initiatives that will lead to sustainable earnings growth over time.
Wesley, turning to life insurance [inaudible]
Chris Neczypor: Light reported a first quarter operating loss of $16 million, compared to an operating loss of $35 million in the prior year quarter. Improved mortality and lower net GNA expenses were partially offset by lower alternative investment returns.
[inaudible]
Chris Neczypor: Turning to mortality. Despite the seasonal headwinds typical of the first quarter, mortality improved sequentially with claim incidents in severity better than our expectations.
Chris Neczypor: Severity in particular normalized meaningfully after the elevated impact from a handful of large claims in the prior quarter.
Now touching on expenses.
Chris Neczypor: Net GNA expenses declined $11 million or 8% versus the prior quarter reflecting the targeted actions we've taken to align our cost structure with our product and distribution repositioning.
Chris Neczypor: We expect these actions to remain a key driver of year-over-year earnings growth in 2025.
Thank you. Have a great day. Bye.
Moving on to Alternative Investment Returns
Speaker Change: As a reminder, the majority of our alternative support folio is allocated to our life business supporting the long-duration nature of these liabilities.
Speaker Change: During periods of market volatility, returns may vary both positively and negatively
Speaker Change: Despite recent variability, we've achieved alternative investment returns averaging over 10% annually during the past five years.
Speaker Change: Looking ahead to the second quarter, while continued market volatility could create additional near-term pressure on returns, over time we anticipate these returns will converge toward our historical averages, ultimately providing a meaningful tailwind to earning growth in
Speaker Change: Overall, first quarter results reflect mortality experience that improved sequentially and return to levels more in line with our expectations, while also realizing the benefits of operating with a streamlined expense base aligned with our focus on profitable growth.
[inaudible]
Now for a brief update on Capital.
Speaker Change: We again ended the quarter with an estimated RBC ratio, well above 420%, consistent with our strategy of maintaining a capital buffer above our 400% target.
Speaker Change: As we previously indicated, we considered this 20 percentage point buffer a cushion to help manage through a normal recessionary environment. Additionally, de-levering remains a strategic priority for the organization, and we made additional strides in reducing our leverage in the quarter.
Speaker Change: We ended the quarter with a leverage ratio of 27.5%, a sequential improvement of 30 basis points.
Speaker Change: predominantly driven by organic equity growth. In compared to the prior year quarter, our leverage ratio has improved over 250 basis points.
[inaudible]
Speaker Change: Now shifting to our investment performance in the quarter. Overall performance remained solid in the first quarter, a reflection of our high quality and well diversified portfolio, and our ongoing emphasis on optimizing our investment strategy.
Speaker Change: Our alternative investment portfolio delivered a 1.9% return in the quarter, modestly below our 2.5% target.
Speaker Change: As I mentioned earlier, given the current market backdrop, near-term results could continue to be volatile, but we remain well-positioned to deliver returns in line with our historical performance over time
Thank you.
Speaker Change: Lastly, I'd like to recap the strategic partnership we announced a few weeks ago with Wayne Capital for those who are unable to join our call.
First, a brief overview of the transaction
Speaker Change: Bane Capital will be taking a 9.9% common equity stake in Lincoln at $44 per share, a 25% premium to the 30-day volume-weighted average price as of April 8, with total cash consideration of roughly $825 million.
Speaker Change: Those shares carry a three-year lockup, after which Bane may sell one-third at each subsequent anniversary after the third year.
Speaker Change: At the same time, we will enter into a non-exclusive investment management agreement focused on targeted asset classes that include private and structured credit, residential mortgage loans, and private equity among others.
Speaker Change: We will commit $1.4 billion of AUM shortly following the close of the transaction, growing to at least $20 billion by the end of year six.
Speaker Change: 2nd, as it relates to some of the key terms, it's important to understand that the IMA is a 10-year contract, though with the expectation of a much longer partnership.
Speaker Change: The ultimate investment management fees are in line at an asset class level with the fees we are currently paying today and there's no exclusivity to any of the asset classes allowing us to maintain our multi-manager framework which was critical to us.
Speaker Change: and then third, as it relates to the rationale for the deal, I would think of three key drivers. First, we've talked a lot about our strategic priority of growing spread-based products, RILA, fixed annuities, and FABN as key examples.
Speaker Change: Finding a strategic partner to help scale the asset sourcing needed to be successful in a bigger way there was critical. With Bane's ownership stake, then providing the appropriate alignment to support shared success.
Speaker Change: 2nd, the equity capital provided will allow us to accelerate that growth over the next few years while maintaining the flexibility around deployment in other areas such as optimizing our legacy life portfolio or future capital returns to shareholders.
Speaker Change: and then third, if you step back, the insurance industry has been going through an evolution over the past decade as alternative investment firms have been able to add considerable value to the insurance universe. You're seeing it in general account investing in product development in distribution and in capital sourcing.
Speaker Change: With this transaction, Lincoln and Bane Capital have committed to working together to grow existing products and explore the development of new ones.
Speaker Change: This is a partnership that reflects an innovative mindset that we believe will further differentiate us competitively and generate superior value for our shareholders, customers, distribution partners and other stakeholders over time. We couldn't be more thrilled to enter this long-term strategic partnership with Bane Capital.
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Ellen Cooper: Before I conclude, I'd like to expand briefly on Ellen's earlier comments regarding the current market environment.
Ellen Cooper: downturns and markets can impact our earnings similar to many of our peers, with potential examples including lower AUM impacting C income, higher volatility impacting hedge costs, and the potential for elevated credit losses should the economy enter a recession.
Ellen Cooper: However, it's once reiterating the steps we've taken over the past two years to better insulate Lincoln from the impacts of the slowdown as we potentially head into a period of more uncertainty around the economy.
Ellen Cooper: While we've discussed these in the past, it's important to re-emphasize some of the strategic initiatives that have been guiding the steps we've been taking.
First, it's Foundation of Capral. [inaudible]
So where it's historically Lincoln targeted a 400 RBC ratio.
Ellen Cooper: As a reminder, over the past two years, we've taken steps to build a buffer over that 400 level. With the 20 points of RBC on top of the 400, designed to provide some cushions should we enter a prolonged downturn in the economy, with one cue now representing the fourth quarter in a row of RBC in excess of that 420 level.
Ellen Cooper: The second has been working toward minimizing the volatility of that capital. Examples here include the incremental hedge programs we've deployed and certain legacy variable blocks.
Ellen Cooper: Just continuing some of the variable life products with outsized capital volatility and the general focus on increased risk sharing and certain products of targeted growth.
Ellen Cooper: then lastly we've talked a lot about the deliberate goal of diversifying our source of earnings and growing businesses with less equity market sensitivity and a great example has been the strategic emphasis of growing our group business. [inaudible]
Ellen Cooper: which went from contributing less than 10% of our operating earnings mixed pre-COVID to over 25% today.
Ellen Cooper: Overall, while we are monitoring the market headwinds that emerged at the start of the second quarter and the potential impact those may have on a broader economic environment, we are confident the steps we have taken will position us for growth.
Ellen Cooper: We are pleased with another solid quarter of strong execution against our strategic and financial priorities and we remain focused on disciplined execution and remain confident in our ability to generate long term shareholder value. With that, let me turn the call back over to Tina.
Tina Madon: Thank you, Chris. Let me now turn the call over to the operator to begin the Q&A operator.
Speaker Change: Thank you. The floor is now open for questions. If you have dialed in and 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.
Speaker Change: If you're called upon to ask a question and are listening via loudspeaker on your device please pick up your handset or use a headset with microphone and ensure that your phone is not on mute when asking your question.
Speaker Change: Your first question comes from the line of Ryan Krueger of KVW. Your line is open.
Thank you.
Ryan Krueger: Hi, thanks. Good morning. My first question was on the Bayon partnership, when you announced.
Speaker Change: This you guided to an improvement in 2027 free cash flow per share. Can you give us a little bit more color on the key components that you expect to drive that and also is it mostly driven by
Ryan Krueger: An expectation of higher free cash flow in dollars or is there also a component of potential dairy purchase that we give you to that?
Ryan Krueger: Good morning, Ryan. Thanks for the question. So embedded in the
Ryan Krueger: comments around accretion is purely the deployment of the capital and the things that we talk to help so.
Ryan Krueger: You know, growing our spread based earnings in things like fixed annuities and institutional spread like FABN, then thinking about, you know, deploying into the legacy life block where, you know, if we see opportunities either on the reinsurance side or from repositioning.
the acid portfolio, but there wasn't an expectation.
Ryan Krueger: Purely around using any of those proceeds for sharey purchases, which is not to say that, you know, we wouldn't contemplate that outside of the bane proceeds, but when we look at the 800 million coming in.
Ryan Krueger: You know, and we think about accretion delusion. It's purely relative to what our baseline was and how we're going to deploy those proceeds and the things that we talk about.
[inaudible]
Speaker Change: So it's a good question. I mean, as you saw, we really did have, you know, better underlying
Ryan Krueger: for the light business this quarter, and in fact, if you normalize for-
Ryan Krueger: The Underperformance on Elts, it was almost break even. First quarter tends to be seasonally higher as you know I think you're alluding to and so you know there's two things going on when you look quarter over quarter as well. For fourth quarter we had significant.
Ryan Krueger: expected, and then first quarter broke the other way. So I think, you know, we're not going to get into A to E in specifics as it relates to dollars, but it, you know, it certainly was a favorable mortality on the retail life side.
and on the Feudanality Week, I think.
Ryan Krueger: Hey, Ryan, just real quick on the seasonality in the outlook that we had given.
Ryan Krueger: about a year ago, we had given some sensitivities as it relates to the seasonality. I would probably point you back to some of the pluses and minuses there. Obviously that, you know, can change a little bit over time depending on how things move, but, you know, that should give you a good rough justice sense for the seasonality. Thank you very much.
Thank you.
[inaudible]
Speaker Change: Your next question comes from Ryan of Suneet Kamath of Jeffries. Your line is open.
Sunit Kamath: Thanks, Morning. I wanted to go back to the Bane agreement as well. I understand the strategic rationale for why you did the transaction, but I guess I'm.
Sunit Kamath: Wondering the rationale for issuing new equity as opposed to, you know, bane just buying stock in the open market. And the reason I ask is you've mentioned many times on this call that your RBC is robust.
Ryan Krueger: You have the Bermuda solution, so I was not in my head I wasn't thinking that there was a capital need at the company, but I just was hoping you could discuss that a little bit. Thanks.
Speaker Change: Yeah, thanks for the questions, Suneet. So, look, I think that the important thing is that when you enter into a transaction like this, creating alignment, right? And so, you know, we've talked about all the strategic benefits.
Speaker Change: And, you know, at the end of the day, you know, having Bain as a partner is really going to help us to accelerate some of the things that we've been talking about as our strategic priorities, notably growing our spread-based earnings.
Speaker Change: You know, as it relates to, so first of all, it's trying to buy 10% in the open market. It's not really...
Speaker Change: You know, a realistic scenario, I would argue, more important was the idea that I...
Speaker Change: purchasing capital at the hold co we're able to then utilize that capital for growth in areas that are going to accelerate some of the things that we've been talking about.
Speaker Change: So over the past two years, we've generated a lot of capital. We've used it to invest in the business. We do contemplate returning capital to shareholders over the next couple of years after we've gotten the leverage ratio back to
Speaker Change: You know, the levels that we've talked about, we've made big improvements there and continuing to invest in the business. So, you know, we can see, you know, continued momentum and improvement in the businesses, what the, what the equity capital that they will.
Speaker Change: You know, provide for the system really does is allow us to step on the accelerator and some of the things that we've been talking about.
Speaker Change: So, you know, as it relates to our strategic priorities and diversifying the business, you've seen a lot of momentum in group.
Speaker Change: You know, we've been able to remove some inefficiencies there and then reinvest back into the business. You're seeing it come through in margin expansion.
Speaker Change: You've heard us talk about building a buffer as it relates to capital. When we sold LFN last year, that really helped to get us to the point where we now feel comfortable from a foundational capital perspective. And then the third thing we've talked a lot about is really growing spread based earnings. And then the third thing we've talked a lot about is building a buffer as it relates to capital.
Speaker Change: and products in order to diversify, in particular, the acne risk in our newties.
Business. So, you know, that can take time.
Speaker Change: but you know if you have incremental capital to deploy into things like
Speaker Change: Fixed Anuities, and Ryla, and FABN, then you should be able to seek growth accelerate. So everything that we've done over the past two years has really been about executing on the strategic priorities that we've talked about, and we feel the partnership with Bain is a big step forward for that as well.
Thank you for that, and then I guess...
Speaker Change: on the annuity business. The ROA has been kind of coming down over the past couple quarters and I'm assuming some of that is just a business mix, but give like a sense of where you think that could stabilize as we look forward. Thanks.
Speaker Change: So your spot on Suneet, it's really the mixed shift that's happening
You know, we're
V.A. is just a higher our way.
on an average basis relative to- Um, um,
Speaker Change: Ryla and fixed annuities and so forth, and so as we emphasize growing Ryla and fixed annuities and you see outflows which have been happening for a while in the NBA, you will see that our way come down over time, but importantly the risk-adjusted returns.
Speaker Change: Over time, as we grow the spread part of that, we'll generate better overall, you know, sort of through the cycle returns. So, I don't have a target for you as it relates to where that stabilizes, but you can kind of do the math if you think about some of the R.A.s. in B.A. relative to what you might get in Rila and Bexd.
Speaker Change: Roll that forward a couple of years. And again, you know, back to the main point as we've got capital to really step on the accelerator for emphasizing that growth and spread. You know, you will see that continue to move.
[inaudible]
Okay. Thanks for the answers.
Speaker Change: Your next question comes from a line of West Carmichael of Autonomous Research. Your line is open.
Wes Carmichael: Hey, good morning. First question, just on the RBC ratio. There's maybe a slight decline there, but could you maybe provide a little bit of color on the quarter and just give them macro volatility? Is there any way to think about the sensitivity of RBC to equity and interest rate volatility?
Speaker Change: Yes, I wouldn't read anything into the disclosure. That's the same disclosure that we've given the past couple of quarters except for the fourth quarter where we actually file our financial statements on the RBC. You know, what we've been saying, you know, for four quarters now.
Speaker Change: except for fourth quarter, is that we're in excess of the 420. So I wouldn't look at it as any material changed to capital. We're still in that same range that we've been in that 425 to 435 level. [inaudible]
Speaker Change: Any given quarter, there will be timing differences, things like seasonality or higher preferred dividends, one quarter versus the next, or taxes that have to be paid for the whole co.
Speaker Change: but I wouldn't read anything into the disclosure of the material change.
Speaker Change: Big picture from a capital perspective, I would say it's the same drivers, free cash flow and earnings and so forth as we talked about. Group was better than expected. Retail life mortality was better than expected and all of us were just a little bit worse.
Speaker Change: Got it, that's helpful Chris on the disclosure. And then just thinking about your prepared remarks, Chris, you mentioned about group disability and macro conditions or employment deteriorate a little bit. You might see some easing and performance. There's a way to think about in a recessionary environment, how much pressure you might see on the disability loss ratios or rule of thumb to that.
Chris Neczypor: So it's a good question, Wes. You know, I guess what I would point you to is the conversation we had during the fourth quarter call.
Chris Neczypor: where we spiked out the improvement in the margin year over year in 2024. And what we said was, you know, there was called 300 basis points of margin improvement relative to 2023 last year, of that 300.
Chris Neczypor: 200 was from free pricing, execution on our strategy, growing supplemental health, et cetera. And then we had estimated about 100 basis points of the margin improvement, just due the fact that the macro is very supportive and disability incidents was below.
Chris Neczypor: sort of what we would think of in a more normal environment.
Chris Neczypor: Now what I would say is, you know, first quarter we obviously exceeded what we had thought we would do and, you know, partly, you know, continued execution on the team's part but also because the macro environment is supportive. [inaudible]
Chris Neczypor: and what I would say, frankly, is April continues to look pretty good, but we're obviously all watching what happens from an economy perspective. But to the specific question around the tailwind from the backdrop, I would point you to the fourth quarter call in some of the details we went through there.
[inaudible]
Thanks, Chris.
Speaker Change: Your next question comes from the line of Tom Gallagher of Evercore, L.S.I. Your line is open.
[inaudible]
Tom Gallagher: Good morning. First question is just on the life insurance segment. Chris, I heard what you said about the underlying claims experience, so that was good to hear, that that got better.
Tom Gallagher: I know I don't want to geek out on you too much here, but if you look at the components of the gap P and L, it looks like the re-measurement experience was a lot better, and the benefits were elevated. So, you know, maybe can you kind of like...
Tom Gallagher: I guess explain those differences and are there claims experience flowing through both of those or are there longer term assumption changes that are influencing the re-measurement gains? And I guess just relatedly, how is the statutory?
Tom Gallagher: Results for Life Insurance, with those also better from an underlying performance standpoint.
Tom Gallagher: So I'm always happy to geek out with you Tom and we can take some of the accounting stuff and follow up the afterwards but I'll answer your questions.
Tom Gallagher: Big Picture. So on a stat basis, yes, favorable mortality translates to both. All translates to both.
Tom Gallagher: You get a little bit of a cushion on the staff side as relates to all because you're holding so much capital against those all and so there's you know a little bit of the offset but for all intents and purposes, you know the better mortality will impact. Um.
you know, across the board.
Tom Gallagher: So as it relates specifically to the policyholder remeasurment, there's an offset in benefits from release and reserves to cover the claims, and so with mortality coming down the first quarter, the policyholder remeasurment for life was a positive. So it's one of those things where you get the
Tom Gallagher: You get the liability on products like G.L. and Term and the reserve is accrued over time and then cash flows change from expected There's a cash flow mount for how much reserve accrual should have changed historically and that's really what that line is designed to capture you
[inaudible]
Speaker Change: Gotcha, that's that's helpful. And then I guess my follow-up is just on RPS. The was there a one-time that that large planned termination in the quarter that affected things? Was there a one-time earnings impact and will the run rate improve or is that now a reasonable run rate to think about calling forward?
Speaker Change: Yeah, Tom, so there's two things there. One, we had a large case termination which we had talked about last quarter and the quarter before because we knew it was coming and so we tried to set expectations there and that was the impact that created the large. [inaudible]
Speaker Change: As specifically as it relates to the one-time item that we called out, that is actually due to a different plan, which is much smaller. You get plans late from time to time. And that was a one-time issue. So I think we quantified it looking at the docs around $2 million and so we would adjust for that.
Um
Speaker Change: You know, for the quarter. Now that being said, you know, from a run rate perspective, you know, I think that the trends that we've seen over the past couple of quarters continue. You know, we've seen market support.
Speaker Change: AUM on full service side, but offsetting that has been stable value outflows, really driven by the fact that markets were up and interest rates were up and so people move into other products.
Speaker Change: That could reverse or mitigate depending on what happens with markets is too early to tell, so we'll see what the run rate actually looks like, but at the end of the day specifically to the one-time item, you know that won't recur again.
[inaudible]
Okay, thanks.
Speaker Change: Your next question comes from a line of Joel Herwitz of Dalleling and Partners. Your line is open.
[inaudible]
Joel Hurwicz: Hey, good morning. First, I want to see if you could just provide an update on your expense initiatives. The expenses in the quarter look pretty favorable relative to last year, particularly in life. I don't know if there's some timing noise or if it's all just simply the benefits of some of these initiatives emerging in earnings.
Joel Hurwicz: Yeah, no, I mean, Joel, it's the emergence of the things that we talked about last year that we're going through.
Joel Hurwicz: Recall in the first quarter, we had a company-wide action where we had looked at some operational efficiencies.
Joel Hurwicz: and what we'd said at the time was, you know, there's a lag when that comes through, right, because there's a severance impact and...
Joel Hurwicz: some benefit issues and so forth and so we really expected to start to see that across all the segments in 2025 and then you know we also called out in the fourth quarter that we took more targeted action on the life side and that you would start to see the benefits of that flow through starting this year as well.
Joel Hurwicz: So the good news is it is coming through and so you're starting to see it and so it's your specific question around the run rate.
Joel Hurwicz: You know, we would expect that to continue. And then, you know, just to highlight the point that I made earlier around a group as an example in some of the businesses where we see big opportunities for growth, we're reinvesting those savings.
Joel Hurwicz: and so when you look at the group expenses as the example, they're actually up, but what's happening is we're investing in the business claims management.
Joel Hurwicz: Digital Capabilities, Distribution, and so forth, and that's driving the margin expansion. So, where we see the opportunity to deploy those savings, we will deploy it, and then there are, you know, other areas in the company where we think that we can continue to sharpen the pencils, but generally speaking you're seeing the impacts from the actions we took last year.
Speaker Change: Okay, that makes them helpful. And then just going back to group disability, you called out the continued lower incidence but also the strong recoveries. Can you just help?
Joel Hurwicz: I mentioned how much of the improvement in results over the past couple of years in long-term disability has been driven by lower incidence versus an improvement in recovery rates.
So I think they...
Joel Hurwicz: You know, I don't think we're going to get into the specific numbers for them. What I would say is, you know, there's somewhat linked but also partly driven by the on the recovery of the investments we've been making in the business and the actions we've been taking disability, you know, is driven by things like
Joel Hurwicz: You know, pricing and the backdrop and the environment. So, you know, there's some correlation between the two, but at the end of the day, you know, I don't think we're going to start to spike out the individual drivers, but they both have been very supportive and, you know, the benefits of a lot of hard work in the team.
Thank you for watching!
Okay. Thank you.
Speaker Change: Your next question comes from Ryan of Alex Scott of Barclays. Your line is open.
Alex Scott: Hey, good morning. First one I had for you is just a competitive environment and the nudies,
Cures of yours in the public-leach-rated market.
your head.
Alex Scott: A little more pressure on my guess sales and FIAs were a little down year over year as well and just from commentary we've heard it sounds like the market's getting a bit more competitive in terms of pricing.
Alex Scott: I know that may differ depending on which distribution you're talking about, so I just wanted to see if you get a pine on the competitive environment, maybe what you see in your various forms of distribution.
Absolutely, so good morning, Alex, and-
Alex Scott: So, first of all, if I just take a step back and you look at the overall annuity sales for us for the quarter, 3.8 billion, and the fact that we continue strategically to be focused in more spread-based.
Businesses, and additionally as Chris talked about.
Our long-term partnership with Bane Capital also will support us.
Alex Scott: really continuing to accelerate with additional growth capital our ability to continue to grow and expand our spread-based businesses.
Alex Scott: So having said all of that, we're focused, of course, on RILA and FIX while also recognizing that traditional VA is an important part of our overall solution set.
Alex Scott: So while the environment itself, first of all, continues to remain competitive as it always has.
for us.
Alex Scott: One of the things that we've said repeatedly is that we are really focused on profitable growth as opposed to top line growth so what's critical for us is that we are achieving our returns, our 12% plus targets as it relates to all of these products.
Alex Scott: and some of the ways that we're doing that, and I'll just go through some of the things that we've talked about in the past.
Alex Scott: So, first of all, as it relates to Fixed and Ryla,
Alex Scott: We've got broad distribution capability and in particular in fixed when we built the capabilities there.
Alex Scott: Some of what we really focused on were really two things. One was our ability to be on what we've called Waldgarden, so the ability to be able to compete
on a shelf with a smaller number of competitors.
Alex Scott: You also see as it relates to the Ryla product, which we also think of as a spread-based product and you know that we've seen a number of competitors that have come into that space and
and it's been significantly more competitive.
Alex Scott: but they're also the introduction of our new product about a year ago.
Alex Scott: Some of what we focused on there was utilizing our distribution sales space and expanding, but also the the idea of introducing unique product features and so indexed crediting rates product features that aren't on anybody else's platform. And so that's what we're going to talk about.
Alex Scott: have enabled us to be competitive and then the final thing that I'll add is that
Alex Scott: You know, as it relates to the long-term strategic partnership with Bain Capital
Alex Scott: Part of what we recognize as an important competitive advantage to have is to be able to have unique sourcing and unique differentiation as it relates to our asset strategy as well. So we spent the better part of the last year talking to all of you about optimizing our investment strategy.
Alex Scott: and the long-term partnership with Bane Capital will enable us to accelerate that while still maintaining our competitive position and ultimately being able to grow in these spaces.
[inaudible]
Speaker Change: That's really helpful, thanks. It's a follow-up. I wanted to ask one more on the on the Bane Partnership, you know, is...
Speaker Change: Pursued is part of it with the fund distribution and
Speaker Change: FABN. Is this it, or is there potential for the product launches and expansion into, I guess, businesses that are adjacent, but potential opportunities for growth?
Speaker Change: Absolutely, so one of the things as we have continued to, first of all,
strategically execute on all of our objectives.
Speaker Change: One of the things that we have looked at are ways that we can expand and grow in adjacent markets, leveraging where we have competitive advantage. So I do think that the announcement that we had about six weeks ago, where we will be launching private funds and partnership with Fame Capital and also with Partners Group.
Speaker Change: is an example of that. And so part of what we're doing is we are leveraging our distribution, our LFD distribution leadership, first of all, the second thing is that we recognize that
Speaker Change: One of our competitive advantages is our ability to be able to position with clients, customer solutions that are long-term in nature and also complex.
Speaker Change: So the idea of a private fund that may have some complexity orientation to it but also as long duration is very much complementary for us and then importantly as we as we looked at this opportunity.
Speaker Change: finding the right partners and finding ultimately the right economics. And we feel that in the introduction of these two products that we've done exactly that.
Speaker Change: From our perspective, we are focused on getting these up and running and launched.
Speaker Change: and there's a lot of work going on from that perspective.
Speaker Change: and then from there we will see additional potential opportunities over the longer term. The other thing that I will add is that the other competitive advantage that we have is that
Speaker Change: in our variable funds right now. We have a whole series of mutual funds.
Speaker Change: and so we have a lot of overall experiences it relates to running a mutual fund complex and so the idea of a retail fund also is directly related to a competitive advantage and a deep experience skill set there as well.
Alex Scott: and Alex the only other thing I would add is it relates to the broader conversation around
Speaker Change: is, you know, you're seeing the intersection of private asset management insurers across a lot of value streams. So to your point, I mean, we've
Speaker Change: to the conversation. I wanted to say that we've looked at this from a distribution perspective. The general count value add is very straightforward and we think that there's a lot of upside there and that will help to grow spread products as I said, but you're also seeing the.
Speaker Change: The relationships between insurers and asset managers on the private equity side and things like retirement, capital sourcing, side cars, there's just a lot that's going on and so we think that with the partnership that there's going to be a lot of value that we can create over the next couple of years.
Thank you.
[inaudible]
Speaker Change: This concludes today the Q&A session. For those that were still in Q, we will follow up with them after the call. I'll now turn the call back over to Tina Madon for closing remarks.
Speaker Change: So thank you for joining us this morning, and we're happy to address any follow-up questions you have. Please email us at investorrelationsatLFG.com
This concludes today's conference call. You may notice or not.